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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission File:
December 31, 1999 0-23131
People's Preferred Capital Corporation
(Exact name of registrant as specified in its Charter)
Maryland 95-4642529
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5900 Wilshire Boulevard, Los Angeles, California, 90036
(Address of principal executive offices, including zip code)
(323) 938-6300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
9.75% Noncumulative Exchangeable Preferred Stock, Series A:
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
filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
All 10,000 shares of Common Stock were held by People's Bank of California
at December 31, 1999; therefore, no Common Stock is held by non-affiliates.
Documents incorporated by reference Part of Form 10-K
in this Form 10-K which incorporated
None --
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PART I
Page
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Item 1 Business........................................................ 2
- General....................................................... 2
- General Description of Mortgage Assets and Other Authorized
Investments; Investment Policy................................ 4
- Management Policies and Programs.............................. 6
- Servicing..................................................... 12
- Federal Income Tax Considerations............................. 18
- Taxation of the Company....................................... 18
- Taxation of United States Stockholders........................ 23
- Taxation of Foreign Stockholders.............................. 25
- Information Reporting Requirements and Backup Withholding Tax. 27
- Other Tax Consequences........................................ 27
Item 2 Properties...................................................... 28
Item 3 Legal Proceedings............................................... 28
Item 4 Submission of Matters to a Vote of Security Holders............. 28
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters ..................................................... 28
Item 6 Selected Financial Data......................................... 30
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 31
- Description of Portfolio...................................... 31
- Financial Condition........................................... 37
- Results of Operations......................................... 37
- Allowance for Loan Losses..................................... 38
- Liquidity Risk Management..................................... 38
Item 7A Quantitative and Qualitative Disclosures About Market Risk...... 40
Item 8 Financial Statements and Supplementary Data..................... 41
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 55
PART III
Item 10 Directors and Executive Officers of the Corporation............. 55
Item 11 Executive Compensation.......................................... 58
Item 12 Security Ownership of Certain Beneficial Owners and Management.. 58
Item 13 Certain Relationships and Related Transactions.................. 59
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K. 59
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PEOPLE'S PREFERRED CAPITAL CORPORATION
PART I
ITEM 1: BUSINESS
General
General. People's Preferred Capital Corporation (the "Company") is a
Maryland corporation which was incorporated in June 1997 to acquire, hold and
manage mortgage assets. The Company operates as a real estate investment trust
("REIT") for federal income tax purposes under the Internal Revenue Code of
1986, as amended (the "Code"). As a REIT, the Company is not subject to federal
income tax on net income and capital gains that it distributes to the holders of
its common stock and preferred shares, including the Series A Preferred Shares.
The Company is a wholly owned subsidiary of People's Bank of California (the
"Bank"), a federal savings bank organized under the laws of the United States.
The Company commenced its operations in October 1997 upon consummation of
a public offering of 1,426,000 shares of its 9.75% Noncumulative Exchangeable
Preferred Stock, Series A (the "Series A Preferred Shares"), at a liquidation
preference of $25.00 per share. All shares of common stock are owned by the
Bank. The Series A Preferred Shares are traded on the Nasdaq National Market
under the symbol "PPCCP." The Company purchased from the Bank its initial
portfolio of residential and commercial mortgage loans ("Mortgage Loans") at an
aggregate purchase price of $71.3 million. The Company has purchased additional
Mortgage Loans from the Bank from time to time.
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets and Other Authorized Investments (as defined herein) that will
generate net earnings for distribution to stockholders. All of the Company's
Mortgage Assets may be acquired from the Bank or purchased from unaffiliated
third parties as whole loans ("Mortgage Loans") secured by first mortgages or
deeds of trust on single-family (one- to four-unit) residential real estate
properties ("Residential Mortgage Loans") or by multi-family residential and
commercial properties (collectively, "Commercial Mortgage Loans"). Although the
Company has the authority to acquire an unlimited number of Residential Mortgage
Loans and Commercial Mortgage Loans from unaffiliated third parties such as
other financial institutions and mortgage banks, all of the Company's Mortgage
Assets through December 31, 1999 were acquired from the Bank. With respect to
Mortgage Loans which were purchased by the Bank from unaffiliated third parties,
the Bank evaluated the documentation relating to each purchased loan and
management believes that each such loan was originated in a manner that was
consistent with the underwriting standards of the Bank. During 1999, the Company
acquired forty-three single-family residential mortgage loans which were
originated by the Bank with an aggregate principal balance of $16.5 million. The
Company has no present plans or expectations with respect to purchases from
unaffiliated third parties.
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Dividend Policy. The Company expects to distribute annually an aggregate
amount of dividends with respect to its outstanding shares of capital stock
equal to approximately 100% of the Company's "REIT taxable income" (excluding
capital gains). In order to remain qualified as a REIT, the Company is required
to distribute annually to stockholders 95% of its "REIT taxable income"
(excluding capital gains). See "Federal Income Tax Considerations--Annual
Distribution Requirements."
Dividends will be authorized and declared at the discretion of the Board
of Directors after considering the Company's distributable funds, financial
requirements, tax considerations and other factors. Because (i) the Mortgage
Assets and Other Authorized Investments are interest bearing, (ii) the Series A
Preferred Shares represent only approximately 50% of the Company's
capitalization and (iii) the Company does not anticipate incurring any
indebtedness, the Company currently expects that both its cash available for
distribution and its "REIT taxable income" will be in excess of amounts needed
to pay dividends on the Series A Preferred Shares, even in the event of a
significant drop in interest rate levels. Accordingly, the Company expects that
it will, after paying the quarterly dividends on the Series A Preferred Shares,
pay dividends to holders of its Common Stock in an amount sufficient to comply
with applicable requirements regarding qualification as a REIT. There are,
however, several limitations that are described in the following paragraph that
restrict the Company's ability to pay dividends on the Common Stock.
First, no cash dividends or other distributions may be paid on the Common
Stock unless and until (i) the Company has paid full dividends on the Series A
Preferred Shares for the four most recent Dividend Periods (or such lesser
number of Dividend Periods during which the Series A Preferred Shares have been
outstanding) and has declared a cash dividend on the Series A Preferred Shares
at the annual dividend rate for the current Dividend Period, and (ii) the terms
of all other stock of the Company ranking senior to the Common Stock have been
complied with. Second, the Maryland General Corporation law ("MGCL") provides
that dividends and other distributions may not be paid by a corporation if,
after giving effect to the distribution (i) the corporation would not be able to
pay its indebtedness as it becomes due in the usual course of business or (ii)
the corporation's total assets would be less than the sum of the corporation's
total liabilities plus, unless the articles of incorporation of the corporation
permits otherwise (which the Articles of Incorporation of the Company do not),
the amount that would be needed, if the corporation were to be dissolved at the
time of the distribution, to satisfy the preferential rights on dissolution of
stockholders whose preferential rights on dissolution are superior to those
receiving the distribution.
The Office of Thrift Supervision ("OTS") prompt corrective action
regulations prohibit thrift institutions such as the Bank from making "capital
distributions" (defined to include a transaction that the OTS or Federal Deposit
Insurance Corporation ("FDIC") determines, by order or regulation, to be "in
substance a distribution of capital") unless the institution is at least
"adequately capitalized" after the distribution. There can be no assurances that
either the OTS or the FDIC would not seek to restrict the Company's payment of
dividends on the Series A Preferred Shares under this provision if the Bank were
to fail to maintain its status as "adequately capitalized." Currently, an
institution is
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considered "adequately capitalized" if it has a total risk-based capital ratio
of at least 8.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a
leverage (or core capital) ratio of at least 4.0%. At December 31, 1999, the
Bank's total risk-based capital ratio was 11.96%, its Tier 1 risk-based capital
ratio was 11.08% and core capital (or leverage) ratio was 6.78%. The Bank
currently intends to maintain its capital ratios in excess of the
"well-capitalized" levels under the prompt corrective action regulations.
However, there can be no assurance that the Bank will be able to maintain such
capital levels.
Each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") for one newly issued Series A preferred share (the "Bank
Preferred Shares") of the Bank, if the appropriate federal regulatory agency
directs in writing that an exchange of the Series A Preferred Shares for Bank
Preferred Shares occur because (i) the Bank becomes "undercapitalized" under the
prompt corrective action regulations established pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991, as amended ("FDICIA"), (ii) the
Bank is placed into conservatorship or receivership or (iii) the appropriate
federal regulatory agency, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term (an "Exchange Event"). In the event of the
Automatic Exchange, the Bank Preferred Shares would constitute a new series of
preferred shares of the Bank, would have the same dividend rights, liquidation
preference, redemption options and other attributes as the Series A Preferred
Shares, except that (i) the Bank Preferred Shares would not be redeemable upon
the occurrence of a Tax Event and (ii) the Bank Preferred Shares would not be
listed on a national stock exchange or national quotation system, and would rank
on an equal basis in terms of cash dividend payments and liquidation preference
with any shares of preferred stock of the Bank outstanding at the time of the
Automatic Exchange.
If the Automatic Exchange were to occur, then the Bank would likely be
prohibited from paying dividends on the Bank Preferred Shares. In all
circumstances following the Automatic Exchange, the Bank's ability to pay
dividends would be subject to various restrictions under OTS regulations. In
addition, in the event of a liquidation of the Bank, the claims of the Bank's
depositors and of its creditors would be entitled to a priority of payment over
the dividend and other claims of holders of equity interests such as the Bank
Preferred Shares issued pursuant to the Automatic Exchange.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
federal regulatory authorities will have the authority to issue an order that
restricts the ability of the Company to make dividend payments to its
stockholders.
General Description of Mortgage Assets and Other Authorized Investments;
Investment Policy
Residential Mortgage Loans. The Company may from time to time acquire both
conforming and nonconforming Residential Mortgage Loans. Conforming Residential
Mortgage Loans comply with the requirements for inclusion in a loan guarantee
program sponsored by either the Federal
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Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage
Association ("FNMA"). Under current regulations, the maximum principal balance
allowed on conforming Residential Mortgage Loans ranges from $252,700 for
one-unit residential loans to $485,800 for four-unit residential loans.
Nonconforming Residential Mortgage Loans are Residential Mortgage Loans that do
not qualify in one or more respects for purchase by FNMA or FHLMC under their
standard programs. A majority of the nonconforming Residential Mortgage Loans
acquired by the Company to date are nonconforming because they have original
principal balances which exceed the requirements for FHLMC or FNMA programs or
generally because they vary in certain other respects from the requirements of
such programs other than the requirements relating to creditworthiness of the
mortgagors. A substantial portion of the Company's nonconforming Residential
Mortgage Loans is expected to meet the requirements for sale to national private
mortgage conduit programs or other investors in the secondary mortgage market.
Each Residential Mortgage Loan is evidenced by a promissory note secured
by a mortgage or deed of trust or other similar security instrument creating a
first lien on single-family (one- to four-unit) residential properties.
Residential real estate properties underlying Residential Mortgage Loans consist
of individual dwelling units, individual condominium units, two- to four-family
dwelling units, planned unit developments and townhouses. All of the Residential
Mortgage Loans acquired to date by the Company are fixed rate Mortgage Loans.
However, the Company may from time to time acquire adjustable rate Residential
Mortgage Loans.
Commercial Mortgage Loans. The Company may from time to time acquire
Commercial Mortgage Loans secured by multi-family properties of five units or
more, industrial, warehouse and self-storage properties, office buildings,
office and industrial condominiums, retail space and strip shopping centers,
mixed use commercial properties, mobile home parks, nursing homes, hotels and
motels ("Commercial Properties"). Substantially all of the Commercial Mortgage
Loans that the Company acquired are secured by real estate located in
California. Unlike Residential Mortgage Loans, Commercial Mortgage Loans
generally lack standardized terms. Commercial Mortgage Loans also may not be
fully amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. Moreover, commercial properties, particularly
industrial and warehouse properties, generally are subject to relatively greater
environmental risks than non-commercial properties, giving rise to increased
costs of compliance with environmental laws and regulations. There is no
requirement regarding the percentage of any commercial real estate property that
must be leased at the time the Company acquires a Commercial Mortgage Loan
secured by such commercial real estate property nor are Commercial Mortgage
Loans required to have third party guarantees.
The credit quality of a Commercial Mortgage Loan may depend on, among
other factors, the existence and structure of underlying leases, the physical
condition of the property (including whether any maintenance has been deferred),
the creditworthiness of tenants, the historical and anticipated level of
vacancies and rents on the property and on other comparable properties located
in the same region, potential or existing environmental risks, the availability
of credit to refinance the Commercial
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Mortgage Loan at or prior to maturity and the local and regional economic
climate in general. Foreclosures of defaulted Commercial Mortgage Loans
generally are subject to a number of complicating factors, including
environmental considerations, which are not generally present in foreclosures of
Residential Mortgage Loans.
Mortgage-Backed Securities. The Company may from time to time acquire
Mortgage-Backed Securities representing interests in or obligations backed by
pools of Mortgage Loans ("Mortgage-Backed Securities"). The Company intends to
acquire only investment grade Mortgage-Backed Securities or those issued or
guaranteed by agencies of the federal government or government sponsored
agencies. The Mortgage Loans underlying the Mortgage-Backed Securities will be
secured by single-family residential, multi-family or commercial real estate
properties located throughout the United States. The Company does not intend to
acquire any interest-only, principal-only or high-risk Mortgage-Backed
Securities. The Company will not be precluded from investing in Mortgage-Backed
Securities when the Bank is the sponsor or issuer. At December 31, 1999, the
Company did not hold any investments in Mortgage-Backed Securities.
Other Assets. The Company may invest up to 20% of the total value of its
assets in investments other than Residential Mortgage Loans, Commercial Mortgage
Loans, Mortgage-Backed Securities eligible to be held by REITs, (i.e., qualified
real estate assets under the Code), cash, cash equivalents (including
receivables) and government securities (collectively, "Other Authorized
Investments"). Although the foregoing assets must constitute at least 75% of the
value of the REIT's total assets under Section 865(c)(5)(A) of the Code, up to
25% of the value of a REIT's total assets may be comprised of
non-mortgage-related securities as defined in the Investment Company Act of 1940
(the "Investment Company Act"). Under the Investment Company Act, the term
"security" is defined broadly to include, among other things, any note, stock,
treasury stock, debenture, evidence of indebtedness, or certificate of interest
or participation in any profit sharing agreement or a group or index of
securities. The Code requires that the value of any one issuer's securities
(other than those securities included in the 75% test) may not exceed 5% of the
total assets (by volume) of the REIT and the REIT may not own more than 10% of
the voting securities (other than those securities included in the 75% test) of
any one issuer. At December 31, 1999, the Company did not hold any such
investments.
Management Policies and Programs
General. In administering the Company's Mortgage Assets and Other
Authorized Investments, the Advisor (defined below) has a high degree of
autonomy. The Board of Directors, however, has adopted certain policies to guide
administration of the Company and the Advisor with respect to the acquisition
and disposition of assets, use of capital and leverage, credit risk management
and certain other activities. These policies, which are discussed below, may be
amended or revised from time to time at the discretion of the Board of Directors
(in certain circumstances subject to the approval of a majority of the
Independent Directors) without a vote of the Company's stockholders, including
holders of the Series A Preferred Shares.
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Underwriting Standards. The Bank has represented to the Company that all
of the Residential Mortgage Loans and Commercial Mortgage Loans acquired by the
Company (including those that were originated by unaffiliated third parties)
were originated in accordance with the underwriting policy customarily employed
by the Bank during the period in which the Residential Mortgage Loans and
Commercial Mortgage Loans acquired by the Company were originated.
The underwriting standards applied at origination of the Residential
Mortgage Loans included in the Company's Portfolio were intended to evaluate the
borrower's credit standing and repayment ability, and the value and adequacy of
the underlying mortgaged property as collateral. Generally, each prospective
borrower was required to provide a loan application and other supporting
documents describing assets and liabilities, the borrower's income and expenses,
as well as, to the extent required by applicable state law, an authorization to
apply for a credit report which summarized the borrower's credit history with
merchants and lenders and any record of bankruptcy.
For any prospective borrower, an employment verification was obtained from
the borrower's employer wherein the employer reported the length of employment
with the employer, the employee's current salary, and whether it was expected
that the borrower would continue such employment in the future or the borrower
submitted such other evidence of employment (such as pay stubs) satisfactory to
the Bank. For a self-employed prospective borrower, the borrower generally was
required to submit copies of personal and business federal income tax returns
for the previous two years. For certain prospective borrowers, the borrower
authorized verification of all deposits at financial institutions at which the
borrower had demand or savings accounts.
After the credit report and the employment and deposit verifications were
received by the underwriting officer considering the loan application, a
determination was made as to whether the prospective borrower had sufficient
monthly income available (i) to meet the borrower's monthly obligations on the
proposed Residential Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the home
(such as property taxes and hazard insurance) and (ii) to meet other financial
obligations and monthly living expenses. In certain instances, exceptions may
have been made to the Bank's underwriting policies (including those applied in
originating the Mortgage Loans acquired by the Company) in cases deemed
appropriate by its underwriting officers.
In determining the adequacy of the property as collateral, an appraisal
was made of each property considered for financing. Each appraiser was selected
in accordance with predetermined guidelines established for appraisers. The
appraiser was required to inspect the property and verify that it was in good
condition and that construction, if new, had been completed. If the appraiser
reported any exceptions to the verification, then the Bank or its agent
determined that such property had been substantially completed to its
satisfaction. The appraisal was based on the appraiser's judgment of value
giving appropriate weight to both the market value of comparable properties and
the cost of replacing the property and other factors as appropriate. The Bank's
underwriting standards
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also required a search of the public records relating to a mortgaged property
for liens and judgments against such mortgaged property, as well as customary
title insurance.
The loan underwriting procedures and guidelines utilized by the Bank in
connection with the origination of the Commercial Mortgage Loans acquired by the
Company were intended to assess the value of the related mortgaged property, the
ability of such mortgaged property to be used by the borrower or its agents and
the financial condition of the borrower, including its ability to service the
Commercial Mortgage Loan.
The underwriting guidelines took into account such factors as suitability
of the mortgaged property for its proposed use; the availability, rental rates
and relative value of comparable properties in the relevant market area and the
anticipated growth or decline in both the immediate and broader geographic areas
in which the mortgaged property is located; the current or projected occupancy
or leasing ratios, if relevant; the condition and age of the mortgaged property;
the management ability of the borrower, including its business experience and
financial soundness; and such other economic, demographic or other factors as in
the judgment of the Bank might affect the value of the mortgaged property and
the ability of the borrower to service the Commercial Mortgage Loan. Each
proposal for a Commercial Mortgage Loan was presented to the appropriate lending
personnel of the Bank, which analyzed the proposed transaction focusing on
economic assumptions and the feasibility of the loan, identified and evaluated
potential risks and made a recommendation to approve or disapprove the loan. The
proposed transaction was then presented to appropriate credit officers of the
Bank for approval.
After a loan proposal was approved, a loan commitment was issued by the
Bank to the proposed borrower, subject to, among other things, an appraisal
report and, if deemed appropriate or required, environmental engineering
reports. The Bank contracted with approved firms to prepare certain required
reports for the account of the Bank.
Asset Acquisition and Disposition Policies. The Company anticipates that
from time to time it will purchase additional Mortgage Loans from the Bank on a
basis consistent with secondary market standards pursuant to its Mortgage
Purchase Agreements with the Bank, out of proceeds received in connection with
the repayment or disposition of Mortgage Loans or the issuance of additional
shares of Common Stock and Preferred Stock. The Company anticipates that
additional Mortgage Loans purchased from the Bank will be purchased on terms
that are substantially identical to those that could be obtained by the Company
if such additional Mortgage Loans were purchased from third parties unaffiliated
with the Company. The Company has no present plans or intentions to purchase
Mortgage Loans from unaffiliated third parties. The Company currently
anticipates that additional Mortgage Loans acquired by the Company will be of
the types described in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Description of Portfolio,"
although the Company may purchase additional types of Mortgage Loans and is not
limited as to the type or the amount that may be purchased. In addition, the
Company from time to time may acquire Mortgage-Backed Securities representing
interests in or obligations backed
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by pools of Mortgage Loans that will be secured by single-family residential,
multi-family or commercial real estate properties located throughout the United
States as well as a limited amount of Other Authorized Investments. The Company
currently anticipates that it will not acquire the right to service any Mortgage
Loan it acquires in the future and that the Bank will act as servicer of any
such Residential Mortgage Loans and Commercial Real Estate Loans. The Company
anticipates that any servicing arrangement that it enters into in the future
with the Bank will contain fees and other terms that would be substantially
equivalent to those that would be contained in servicing arrangements entered
into with third parties unaffiliated with the Company. See "Servicing."
The Company's current policy is not to acquire any Commercial Mortgage
Loan that constitutes more than 5.0% of the total book value of the Mortgage
Assets of the Company at the time of its acquisition. In addition, the Company's
current policy prohibits the acquisition of any Mortgage Loan or any interest in
a Mortgage Loan (other than an interest resulting from the acquisition of
Mortgage-Backed Securities), which Mortgage Loan (i) is delinquent in the
payment of principal or interest at the time of proposed acquisition; (ii) is or
was at any time during the preceding 12 months (a) Classified, (b) on Nonaccrual
Status or (c) renegotiated due to financial deterioration of the borrower; or
(iii) has been, more than once during the preceding 12 months, more than 30 days
past due in the payment of principal or interest. Mortgage Loans that are in
"Nonaccrual Status" are generally loans that are past due 90 days or more in
principal or interest, and "Classified" Mortgage Loans are generally troubled
loans that are deemed substandard, doubtful or loss with respect to
collectibility. See "Servicing" for a discussion of the treatment of Mortgage
Loans which become nonperforming or real estate owned ("REO").
Capital and Leverage Policies. To the extent that the Board of Directors
determines that additional funding is required, the Company may raise such funds
through additional equity offerings, debt financing or retention of cash flow
(after consideration of provisions of the Code requiring the distribution by a
REIT of at least 95% of its "REIT taxable income" (excluding capital gains) and
taking into account taxes that would be imposed on undistributed taxable
income), or a combination of these methods.
The Company had no debt outstanding at December 31, 1999, and the Company
does not currently intend to incur any indebtedness. However, the organizational
documents of the Company do not contain any limitation on the amount or
percentage of debt, funded or otherwise, the Company might incur, except that
the incurrence by the Company of debt for borrowed money in excess of 20% of the
Company's total stockholders' equity will require the approval of a majority of
the Independent Directors. Any such debt incurred may include intercompany
advances made by the Bank to the Company.
The Company also may issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares without first obtaining the consent of holders of at
least two-thirds of the outstanding shares of Series A Preferred Shares, and the
Company may not issue additional shares of Preferred Stock on a parity
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with the Series A Preferred Shares without first obtaining the approval of a
majority of the Company's Independent Directors. The Company does not currently
intend to issue any additional series of Preferred Stock unless it
simultaneously receives additional capital contributions from the Bank equal to
the aggregate offering price of such additional Preferred Stock plus the
Company's expenses (including underwriting commissions or placement fees) in
connection with the issuance of such additional shares of Preferred Stock. Prior
to the issuance of additional shares of Preferred Stock, the Company will take
into consideration, among other things, the Bank's regulatory capital
requirements and an assessment of other available options for raising any
necessary capital.
Credit Risk Management Policies. The Company expects that each Mortgage
Loan acquired in the future will represent a first lien position and will be
originated by the Bank or an unaffiliated third party in the ordinary course of
its real estate lending activities based on the underwriting standards generally
applied by the Bank (at the time of origination) for its own account. See
"Underwriting Standards." The Company also expects that all Mortgage Loans held
by the Company will be serviced pursuant to the Servicing Agreements (defined
below), which require servicing in conformity with any servicing guidelines
promulgated by the Company with respect to Commercial Mortgage Loans and, in the
case of Residential Mortgage Loans, with FNMA and FHLMC guidelines and
procedures.
Conflict of Interest Policies. Because of the nature of the Company's
relationship with the Bank and the Servicing Agent (defined below), it is likely
that conflicts of interest will arise with respect to certain transactions,
including, without limitation, the Company's acquisition of Mortgage Loans from,
or disposition of Mortgage Loans to, the Bank, foreclosure on defaulted
Commercial Mortgage Loans and the modification of the Advisory Agreement or
either of the Servicing Agreements. It is the Company's policy that the terms of
any financial dealings with the Bank will be consistent with those available
from third parties in the mortgage lending industry. In addition, neither the
Advisory Agreement nor either of the Servicing Agreements may be modified or
terminated without the approval of a majority of the Independent Directors.
Conflicts of interest between the Company and the Bank may also arise in
connection with making decisions that bear upon the credit arrangements that the
Bank may have with a mortgagor under a Mortgage Loan. Conflicts also could arise
in connection with actions taken by the Bank as a controlling person in the
Company. It is the intention of the Company and the Bank that any agreements and
transactions between the Company, on the one hand, and the Bank on the other
hand, including without limitation the Mortgage Purchase Agreements and
Servicing Agreements, be fair to all parties and are consistent with market
terms for such types of transactions. The requirement in the Articles of
Incorporation that certain actions of the Company be approved by a majority of
the Independent Directors also is intended to ensure fair dealings between the
Company and the Bank. There can be no assurance, however, that any such
agreement or transaction will be on terms as favorable to the Company as could
have been obtained from unaffiliated third parties.
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There are no provisions in the Company's Articles of Incorporation
limiting any officer, director, security holder or affiliate of the Company from
having any direct or indirect pecuniary interest in any Mortgage Asset to be
acquired or disposed of by the Company or in any transaction in which the
Company has an interest or from engaging in acquiring, holding and managing
Mortgage Assets. As described herein, it is expected that the Bank will have
direct interests in transactions with the Company (including without limitation
the sale of Mortgage Assets to the Company); however, no officers or directors
of the Company will have any interests in such Mortgage Assets.
Other Policies. The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act. The Company does not
intend to (i) invest in the securities of other issuers for the purpose of
exercising control over such issuers, (ii) underwrite securities of other
issuers, (iii) actively trade in loans or other investments, (iv) offer
securities in exchange for property or (v) make loans to third parties,
including, without limitation, officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares and other shares of its capital stock in the open market or
otherwise. The Company has no present intention of causing the Company to
repurchase any shares of its capital stock, and any such action would be taken
only in conformity with applicable federal and state laws and regulations and
the requirements for qualifying as a REIT.
The Company is conducting its operations so as not to become regulated as
an investment company under the Investment Company Act. The Investment Company
Act exempts entities that, directly or through majority-owned subsidiaries, are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under current interpretations by the Staff of the Commission, in
order to qualify for this exemption, the Company, among other things, must
maintain at least 55% of its assets in Qualifying Interests and also may be
required to maintain an additional 25% in Qualifying Interests or other real
estate-related assets. The assets that the Company may acquire therefore may be
limited by the provisions of the Investment Company Act. The Company has
established a policy of limiting Other Authorized Investments to no more than
20% of the value of the Company's total assets.
The Articles of Incorporation provide that the Company shall maintain its
status as a reporting company under the Securities and Exchange Act of 1934, as
amended ("Exchange Act") for so long as any of the Series A Preferred Shares are
outstanding.
The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT. However, future economic, market, legal, tax or other
considerations may cause the Board of Directors, subject to approval by a
majority of Independent Directors, to determine that it is in the best interests
of the Company and its stockholders to revoke its REIT status. Generally, the
Code prohibits the Company from electing REIT status for the four taxable years
following the year of such revocation.
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Advisory Agreement. The Company entered into an advisory agreement with
the Bank (the "Advisory Agreement") pursuant to which the Bank administers the
day-to-day operations of the Company. The Bank in its role as advisor under the
terms of the Advisory Agreement is hereinafter referred to as the "Advisor." The
Advisor is responsible for, among other things: (i) monitoring the credit
quality of Mortgage Assets and Other Authorized Investments held by the Company;
(ii) advising the Company with respect to the acquisition, management, financing
and disposition of the Company's Mortgage Assets and Other Authorized
Investments; and (iii) representing the Company in its day-to-day dealings with
persons to whom the Company interacts. In performing its duties under the
Advisory Agreement, the Advisor is required to act in a manner that is
consistent with maintaining the Company's qualification as a REIT. The Advisor
may from time to time subcontract all or a portion of its obligations under the
Advisory Agreement to one or more of its affiliates involved in the business of
managing Mortgage Assets and Other Authorized Investments. The Advisor may, with
the approval of a majority of the Board of Directors, as well as a majority of
the Independent Directors, subcontract all or a portion of its obligations under
the Advisory Agreement to unrelated third parties. The Advisor will not, in
connection with the subcontracting of any of its obligations under the Advisory
Agreement, be discharged or relieved in any respect from its obligations under
the Advisory Agreement. The Advisor and its personnel have substantial
experience in mortgage finance and in the administration of Mortgage Loans and
Other Authorized Investments.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As long
as any Series A Preferred Shares remain outstanding, any decision by the Company
either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor is receiving an annual
advisory fee equal to $200,000.
Servicing
Residential Mortgage Loan Servicing. In March 1997, the Bank sold to
Temple Inland Mortgage Corporation ("TIMC"), a Nevada corporation and a wholly
owned subsidiary of Guaranty Federal Bank, F.S.B., which is wholly owned by
Temple-Inland Inc., an unrelated third party, the servicing rights with respect
to substantially all of the Residential Mortgage Loans held by the Bank at that
time, including all of the Residential Mortgage Loans initially acquired by the
Company from the Bank. In connection with such sale, the Bank entered into the
TIMC Residential Servicing Agreement with TIMC pursuant to which TIMC services,
among other things, all of the Residential Mortgage Loans initially acquired by
the Company from the Bank as well as with respect to certain Residential
Mortgage Loans sold by the Bank to the Company thereafter. The Bank again began
servicing Residential Mortgage Loans originated by it in February 1998.
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The Residential Servicing Agreements provide that the Servicing Agents
will receive an annual servicing fee with respect to each Residential Mortgage
Loan serviced for the Company that shall be equal to the outstanding principal
balance of such Residential Mortgage Loans multiplied by a fee of 0.25% (in the
case of fixed rate Residential Mortgage Loans (including "7/23 step rate" loans)
and 0.375% (in the case of adjustable rate Residential Mortgage Loans).
The Residential Servicing Agreements require the Servicing Agent to
service the Company's Residential Mortgage Loans in a manner generally
consistent with servicing guidelines promulgated by the Bank and with FNMA and
FHLMC guidelines and procedures and as otherwise set forth in the Residential
Servicing Agreements. The Servicing Agents will collect and remit principal and
interest payments, administer mortgage, custodial and escrow accounts, submit
and pursue insurance claims and initiate and supervise foreclosure proceedings
on the Residential Mortgage Loans they service. The Servicing Agents also will
provide accounting and reporting services to the Company for such Residential
Mortgage Loans. Additionally the Servicing Agents will assume responsibility for
payment of ground rents, taxes, assessments, water rates, mortgage insurance
premiums, and other charges that are or may become liens upon the mortgaged
property. The Servicing Agents also are responsible for any late charges or tax
penalties incurred due to its failure to pay such bills. The Residential
Servicing Agreements require the Servicing Agents to follow such collection
procedures that are consistent with the Servicing Agents' procedures for
servicing mortgage loans comparable to the Residential Mortgage Loans and to
exercise the degree of care required by FNMA and FHLMC.
The Servicing Agents may waive, modify or vary any term of any Residential
Mortgage Loan or consent to the postponement of compliance with any such term or
in any manner grant indulgence to any borrower if in the Servicing Agents'
reasonable and prudent determination such waiver, modification, postponement or
indulgence is not materially adverse to the Company; provided, however, that the
Servicing Agents shall not permit any modification with respect to any
Residential Mortgage Loan that would decrease the mortgage interest rate (other
than by adjustments required by the terms of the mortgage note), defer or
forgive the payment thereof or of any principal or interest payments, reduce the
outstanding principal amount (except for actual payments of principal), make
future advances or extend the final maturity date on such Residential Mortgage
Loan without the Company's prior written consent. However, the Servicing Agents
may permit forbearance or allow for suspension of monthly payments if the
borrower is in default or the Servicing Agents determine in their reasonable
discretion that default is imminent and if the Servicing Agents determine that
granting such forbearance or suspension is in the best interest of the Company.
The Servicing Agents will use their best efforts, consistent with the procedures
that the Servicing Agents would use in servicing loans for their own accounts,
to foreclose upon or otherwise comparably convert the ownership of properties
securing such of the Residential Mortgage Loans as come into and continue in
default and as to which no satisfactory agreements can be made for collection of
delinquent payments.
The Residential Servicing Agreement with TIMC provides that the Company
can direct TIMC to transfer the servicing and disposition functions with respect
to all Residential Mortgage
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Loans which become Nonaccrual back to the Bank. The servicing of properties that
become REO automatically will be transferred back to the Bank for the same
purpose. The Bank will charge a servicing fee with respect to the Nonaccrual
Mortgage Loans transferred to it by the Company. The Bank will then service and
dispose of such properties, as required, on the Company's behalf.
The Residential Servicing Agreements require the Servicing Agents to pay
all customary reasonable and necessary expenses related to the performance of
its duties under such agreements, including, but not limited to, costs
associated with the preservation, restoration and protection of mortgaged
property and enforcement of any required judicial proceedings. For advances of
reimbursable out-of-pocket costs and expenses, the Servicing Agents generally
will be reimbursed out of proceeds related to such Residential Mortgage Loan.
In connection with any foreclosure proceedings that the Servicing Agents
may institute, the Servicing Agents may exercise any power of sale contained in
any mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise
acquire title to a mortgaged property underlying a Residential Mortgage Loan by
operation of law or otherwise in accordance with the terms of the Residential
Servicing Agreements. In the event that title to the property securing a
Residential Mortgage Loan is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale shall be taken in the name of the
Company with the servicing with respect to such Residential Mortgage Loan to be
transferred back to the Company. It is expected that the Bank will service such
REO on behalf of the Company.
The Company may terminate the Residential Servicing Agreements upon the
happening of one or more events specified in such Residential Servicing
Agreements. Such events generally relate to either (i) the Servicers' proper and
timely performance of its duties and obligations under the Residential Servicing
Agreement or (ii) the appointment of a conservator, receiver or liquidator in
any insolvency, bankruptcy or similar proceeding. In addition, the Company also
may terminate the TIMC Residential Servicing Agreements without cause but, in
such case, would be required to pay a termination fee, which, for the first
seven years from June 1, 1997 shall be equal to 1.10% of the aggregate
outstanding principal amount of the loans then serviced and, thereafter, 1.0% of
the aggregate outstanding principal amount of the loans then serviced.
Similarly, we may terminate the Bank Residential Servicing Agreement without
cause upon payment of a termination fee equal to 1.5% of the aggregate
outstanding principal balance of the loans then serviced under the Bank
Residential Servicing Agreement. As long as any Series A Preferred Shares remain
outstanding, the Company may not terminate, or elect not to renew, the
Residential Servicing Agreements without first obtaining the approval of a
majority of the Independent Directors.
As is customary in the mortgage loan servicing industry, the Servicing
Agents will be entitled to retain any late payment charges, penalties and
assumption fees collected in connection with the Residential Mortgage Loans
serviced by it. In addition, the Servicing Agents will receive any benefit
derived from interest earned on collected principal and interest payments
between the date of collection and the date of remittance to the Company and
from interest earned on tax and insurance
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impound funds with respect to Residential Mortgage Loans serviced by it. The
Residential Servicing Agreements require the Servicing Agents to remit to the
Company no later than the 18th day of each month (or the next business day if
such 18th day is not a business day) all principal and interest collected from
borrowers of Residential Mortgage Loans serviced by it during the immediately
preceding month.
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicing Agent generally will enforce any "due-on-sale" clause
contained in the Residential Mortgage Loan, to the extent permitted under
applicable law and governmental regulations and subject to the Company's prior
approval. The terms of a particular Residential Mortgage Loan or applicable law,
however, may provide that the exercise of the "due-on-sale" clause is prohibited
under certain circumstances. Under such circumstances, the Servicing Agents will
negotiate an assumption agreement with the person to whom the mortgaged property
has been conveyed or is proposed to be conveyed, pursuant to which such person
becomes liable under the mortgage note. When an assumption is allowed, the
Servicing Agents will be authorized to negotiate a substitution of liability
agreement with the person to whom the mortgage property has been conveyed or is
proposed to be conveyed pursuant to which the original mortgagor is released
from liability and such person is substituted as mortgagor and becomes liable
under the related mortgage note. The Servicing Agents will be authorized to
collect and retain such assumption fees as are permitted by the terms of the
mortgage loan documents and applicable law. Upon any assumption of a Residential
Mortgage Loan by a transferee, a fee equal to a specified percentage of the
outstanding principal balance of the Residential Mortgage Loan is typically
required, which sum will be retained by the Servicing Agents as additional
servicing compensation.
Commercial Mortgage Loan Servicing. The Bank services the Commercial
Mortgage pursuant to the terms of a Commercial Servicing Agreement. The Bank
receives an annual servicing fee with respect to each Commercial Mortgage Loan
serviced for the Company which shall equal the outstanding principal balance of
such Commercial Mortgage Loans multiplied by a fee of 0.25% to 0.375%.
The Bank may, from time to time, subject to approval of a majority of the
Independent Directors, subcontract all or a portion of its obligations under the
Commercial Servicing Agreement. The Bank will not, to the extent it subcontracts
any of its obligations under the Commercial Servicing Agreement, be discharged
or relieved in any respect from its obligations to the Company to perform
thereunder.
The Commercial Servicing Agreement requires the Bank to service the
Company's Commercial Mortgage Loans in a manner generally consistent with
procedures and practices customarily employed and exercised by the Bank and with
any servicing guidelines promulgated by the Company. The Bank collects and
remits principal and interest payments, administers mortgage, custodial and
escrow accounts, submits and pursues insurance claims and initiates and
supervises foreclosure proceedings on the Commercial Mortgage Loans it services.
The Bank also provides
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accounting and reporting services required by the Company for such Commercial
Mortgage Loans. Additionally, for all Commercial Mortgage Loans, the Bank
assumes responsibility for payment of taxes and other charges which are or may
become a lien upon the mortgaged property. The Bank also is responsible for any
late charges or tax penalties incurred due to its failure to pay such bills. The
Commercial Servicing Agreement requires the Bank to follow such collection
procedures that are consistent with the Bank's procedures for mortgage loans
comparable to the Commercial Mortgage Loans held for its own account, including
contacting delinquent borrowers and supervising foreclosures and property
dispositions in the event of unremedied defaults. The Bank may, in its
discretion, arrange with a defaulting borrower a schedule for the liquidation of
delinquencies. The Bank will use its best efforts, consistent with the
procedures that the Bank would use in servicing loans for its own account, to
foreclose upon or otherwise comparably convert the ownership of properties
securing such of the Commercial Mortgage Loans as come into and continue in
default and as to which no satisfactory agreements can be made for collection of
delinquent payments. The Bank also will use its best efforts to realize upon
defaulted Commercial Mortgage Loans in such manner as will maximize the receipt
of principal and interest.
The Commercial Servicing Agreement requires the Bank to pay all customary,
reasonable and necessary expenses related to the performance of its duties under
the Commercial Servicing Agreement, including, but not limited to, costs
associated with the preservation of mortgaged property and enforcement of any
required judicial proceedings. The Bank generally will be reimbursed prior to
the Company out of proceeds related to such Commercial Mortgage Loan. The Bank
also will be entitled to reimbursement by the Company for expenses incurred by
it in connection with the liquidation of defaulted Commercial Mortgage Loans
serviced by it and in connection with the restoration of mortgaged property.
If claims are not made or paid under applicable insurance policies or if
coverage thereunder has ceased, the Company will suffer a loss to the extent
that the proceeds from liquidation of the mortgaged property, after
reimbursement of the Bank's expenses in the sale, are less than the outstanding
principal balance of the related Commercial Mortgage Loan. The Bank is
responsible to the Company for any loss suffered as a result of its failure to
make and pursue timely claims or as a result of actions taken or omissions made
by it which cause the policies to be canceled by the insurer.
In connection with any foreclosure proceedings that the Bank may
institute, the Bank may exercise any power of sale contained in any mortgage or
deed of trust, obtain a deed in lieu of foreclosure or otherwise acquire title
to a mortgaged property underlying a Commercial Mortgage Loan by operation of
law or otherwise in accordance with the terms of the Commercial Servicing
Agreement. The Bank is not permitted under the terms of the Commercial Servicing
Agreement to acquire title to any commercial real estate property underlying a
Commercial Mortgage Loan or take any action that would cause the Company to be
an "owner" or an "operator" within the meaning of certain federal environmental
laws, unless it has also previously determined, subject to the approval of the
Advisor, based on a report prepared by an independent
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person who regularly conducts environmental assessments, that (i) the mortgaged
property is in compliance with applicable environmental laws or that it would be
in the best interests of the Company to take such actions as are necessary to
cause the mortgaged property to comply therewith and (ii) there are no
circumstances or conditions present at the mortgaged property relating to the
use, management or disposal of any hazardous substances, hazardous materials,
hazardous wastes or petroleum-based materials for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under any
federal, state or local law or regulation, or, if any such materials are present
for which such action could be required, that it would be in the best interest
of the Company to take such actions with respect to the mortgage property.
The Company may terminate the Commercial Servicing Agreement upon the
happening of one or more events specified in such Commercial Servicing
Agreement. Such events relate generally to (i) the Bank's proper and timely
performance of its duties and obligations under the Commercial Servicing
Agreement or (ii) the appointment of a conservator, receiver or liquidator in
any insolvency, bankruptcy or similar proceeding. In addition, the Company may
also terminate the Commercial Servicing Agreement without cause but will be
required to pay a termination fee that is competitive with that which is
generally payable in the industry, equal to 1.5% of the aggregate outstanding
principal amount of the loans then serviced under the Commercial Servicing
Agreement. As long as any Series A Preferred Shares remain outstanding, the
Company may not terminate or elect not to renew, the Commercial Servicing
Agreement without the approval of a majority of the Independent Directors.
The Bank will be entitled to retain any late payment charges, prepayment
fees, penalties and assumption fees collected in connection with the Commercial
Mortgage Loans serviced by it. In addition, the Bank will receive any benefit
derived from interest earned on collected principal and interest payments
between the date of collection and the date of remittance to the Company and
from interest earned on tax and insurance impound funds with respect to
Commercial Mortgage Loans serviced by it. The Commercial Servicing Agreement
requires the Bank to remit to the Company no later than the 18th day of each
month (or the next business day if such 18th day is not a business day) all
principal and interest collected from borrowers of Commercial Mortgage Loans
serviced by it on the last day of the immediately preceding month.
When any mortgage property underlying a Commercial Mortgage Loan is
conveyed by a mortgagor, the Bank generally will enforce any "due-on-sale"
clause contained in the Commercial Mortgage Loan, including collection of any
mortgage prepayment penalties, to the extent permitted under applicable law,
governmental regulations and the loan documents.
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Federal Income Tax Considerations
The following summary of material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The discussion below is based on existing federal
income tax law, which is subject to change, with possible retroactive effect.
The discussion below does not address all aspects of taxation that may be
relevant in the particular circumstances of each stockholder or to certain types
of stockholders (including insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States, except to the extent discussed)
subject to special treatment under the federal income tax laws.
Taxation of the Company
General. Commencing with its taxable year ended December 31, 1997 the
Company has been organized and is operating in such a manner as to qualify for
taxation as a REIT under the Code, and the Company intends to continue to
operate in such a manner, but no assurance can be given that it will operate in
a manner so as to qualify or remain qualified. The Company has elected to be
taxed as a REIT under Sections 856 through 860 of the Code and the applicable
Treasury Regulations (the "REIT Requirements" or the "REIT Provisions"), which
are the requirements for qualifying as a REIT, commencing with its taxable year
ended December 31, 1997. The REIT Requirements are technical and complex. The
following discussion sets forth only a summary of the material aspects of those
requirements.
A REIT generally will not be subject to federal corporate income taxes on
that portion of its ordinary income or capital gain that is currently
distributed to stockholders. Such treatment substantially eliminates the federal
"double taxation" of earnings (at the corporate and the stockholder levels) that
generally results from investment in a corporation.
Despite the REIT election, the Company may be subject to federal income
and excise tax as follows:
First, the Company will be taxed at regular corporate rates on any
REIT taxable income, including net capital gains, less distributions to
stockholders.
Second, if the REIT has a net capital gain, the applicable tax will
be the lower of: (i) the tax imposed on REIT taxable income computed
without regard to net capital gain and the deduction for capital gain
dividends, and (ii) a tax on undistributed net capital gains at the rate
provided in Section 1201(a) of the Code.
Third, under certain circumstances, the Company may be subject to
the "alternative minimum tax" on certain of its items of tax preferences,
if any.
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Fourth, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying
net income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income.
Fifth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property
held primarily for sale to customers in the ordinary course of business,
other than sales of foreclosure property and sales that qualify for a
statutory safe harbor), such income will be subject to a 100% tax.
Sixth, if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualifications as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net
income attributable to the greater of the amount by which the Company
fails the 75% or 95% test, multiplied by a fraction intended to reflect
the Company's profitability.
Seventh, if the Company should fail to distribute, or fail to be
treated as having distributed, during each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed.
Organizational Requirements. The Code defines a REIT as a corporation,
trust, or association (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (iii) that would be taxable as
a domestic corporation, but for the REIT Requirements; (iv) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (the "Five or Fewer Test")
(as defined in the Code to include private foundations and certain pension
trusts and other entities) at any time during the last half of each taxable
year; and (vii) meets certain other tests, described below, regarding the nature
of its income and assets. The Code provides that conditions (i) through (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v) and
(vi) will not apply until after the first taxable year for which an election is
made to be taxed as a REIT. For purposes of condition (vi), certain tax-exempt
entities described in Sections 501(c)(17) and 509(a) of the Code or a portion of
a trust permanently set aside or used for purposes described in Section 642 (c)
of the Code, are generally treated as individuals, stock owned by a corporation
is treated as if owned by the shareholders of the
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organization, and the beneficiaries of a pension trust that qualifies under
Section 401(a) of the Code and that holds shares of a REIT will generally be
treated as holding shares of the REIT in proportion to their actuarial interests
in the pension trust. See "--Taxation of United States Stockholders-- Treatment
of Tax-Exempt Stockholders."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company satisfies this requirement.
Income Tests. In order to maintain qualification as a REIT, the Company
must annually satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including interest on
obligations secured by mortgages on real property, certain "rents from real
property" or as gain on the sale or exchange of such property and certain fees
with respect to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross income. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments as aforesaid and from dividends, interest and gain from the
sale or other disposition of stock or securities and certain other types of
gross income (or from any combination of the foregoing). Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition of real property (apart
from involuntary conversions and sales of foreclosure property) held for less
than four years from the date of acquisition must represent less than 30% of the
Company's gross income (including gross income from prohibited transactions) for
each taxable year. The Taxpayer Relief Act of 1997 repealed the 30-percent gross
income test requirement for tax years beginning after August 5, 1997.
For interest to qualify as "interest on obligations secured by mortgages
on real property or on interests in real property," the obligation must be
secured by real property having a fair market value at the time of acquisition
at least equal to the principal amount of the loan. The term "interest" includes
only an amount that constitutes compensation for the use or forbearance of
money. For example, a fee received or accrued by a lender which is in fact a
charge for services performed for a borrower rather than a charge for the use of
borrowed money is not includible as interest; amounts earned as consideration
for entering into agreements to make loans secured by real property, although
not interest, are otherwise treated as within the 75% and 95% classes of gross
income so long as the determination of those amounts does not depend on the
income or profits of any person. By statute, the term interest does not include
any amount based on income or profits of any person except that the Code
provides that (i) interest "based on a fixed percentage or percentages of
receipts or sales" is not excluded and (ii) when the REIT makes a loan that
provides for interest based on the borrower's receipts or sales and the borrower
leases substantially all of its interest in the property securing the loan under
one or more leases based on income or profits, only a portion of the contingent
interest paid by the borrower will be disqualified as interest.
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Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the event
that a REIT acquires by foreclosure, property that generates income that does
not qualify as "rents from real property," such income will be treated as
qualifying for three years following the taxable year in which the trust
acquires the property (which period may be extended by the IRS) so long as (i)
all leases entered into after foreclosure generate only qualifying rent, (ii)
only limited construction takes place and (iii) within 90 days of foreclosure,
any trade or business in which the property is used is conducted by an
independent contractor from which the REIT derives no income. In the event the
special foreclosure property rule applies to qualify otherwise unqualified
income, the net income that qualifies only under the special rule for
foreclosure property may be subject to tax, as described above.
The Company expects to satisfy these requirements.
Relief Provisions. If the Company fails to satisfy one or both of the 75%
and 95% gross income tests for any taxable year, it may nevertheless qualify as
a REIT for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions generally will be available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--Taxation of the Company--General," even if
these relief provisions were to apply, a tax would be imposed based upon the
greater of the amount by which the Company failed either the 75% or 95% gross
income test for that year.
Asset Tests. At the close of each quarter of each taxable year, the
Company must satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year that were purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests and to take such action
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within 30 days after the close of any quarter as may be required to cure any
noncompliance but no assurance can be given that such asset tests will be met.
Annual Distribution Requirements. In order to be treated as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) plus (ii) 95% of the net income,
if any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (B) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute (or
is not treated as having distributed) all of its net capital gain or distributes
(or is treated as having distributed) at least 95%, but less than 100% of its
"REIT taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates, as the case may be. For tax
years beginning after August 5, 1997, if the Company elects to retain, rather
than distribute, its net long-term capital gains and to pay the tax on such
gains, then each stockholder must treat a designated amount of undistributed
capital gains as long-term capital gains for his tax year in which the last day
of the Company's tax year falls. The stockholder, however, is also treated as
having paid the capital gains tax imposed on the Company on the designated
amounts included in their long-term capital gains and is allowed a credit or
refund for the tax deemed paid. The Code permits a stockholder, in certain
circumstances, to be treated for tax purposes as having (i) received a
distribution in the amount specified in the election and (ii) contributed the
amount thereof to the capital of a REIT. In the event the Company fails to
distribute 100% of its income and capital gains, the Bank may, but is not
obligated to, elect to be so treated. Moreover, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. The Company intends to make
timely distributions sufficient to satisfy the annual distribution requirement.
"REIT taxable income" is the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded and (iv)
certain other adjustments are made.
It is possible that, from time to time, the Company may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in calculating the taxable income of the Company. In
the event that such an insufficiency or such timing differences occur, in order
to meet the 95% distribution
22
<PAGE>
requirement the Company may find it necessary to arrange for borrowings or to
pay dividends in the form of taxable stock dividends if it is practicable to do
so.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year, and the relief provisions described above do not apply, the
Company will be subject to tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. In such event,
to the extent of current and accumulated earnings and profits, all distributions
to stockholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributes may be eligible for the
dividends-received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost,
and will not be permitted to requalify unless it distributes any earnings and
profits attributable to the period during which it failed to qualify. In
addition, it would be subject to tax on any built-in gains on property held
during the period during which it did not qualify if it sold such property
within 10 years of requalification. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
Taxation of United States Stockholders
Distributions Generally. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital gains
dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gain dividends will be treated as
long-term capital gain (to the extent they do not exceed the Company's actual
net capital gain) for the taxable year without regard to the period for which
the stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gains dividends as ordinary
income, pursuant to Section 291(d) of the Code. A distribution in excess of
current or accumulated earnings and profits first will be treated as a tax-free
return of capital, reducing the tax basis in the United States Stockholder's
Series A Preferred Shares, and a distribution in excess of the United States
Stockholder's tax basis in its Series A Preferred Shares will be taxable gain
realized from the sale of such shares. Dividends declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend actually is paid
23
<PAGE>
by the Company during January of the following calendar year. Stockholders may
not claim the benefit of any tax losses of the Company on their own income tax
returns.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed under
"--Taxation of the Company--General" and "--Taxation of the Company--Annual
Distribution Requirements" above. As a result, stockholders may be required to
treat as taxable dividends certain distributions that otherwise would result in
tax-free returns of capital. Moreover, any "deficiency dividend" will be treated
as a "dividend" (an ordinary dividend or a capital gain dividend, as the case
may be), regardless of the Company's earnings and profits.
Losses incurred on the sale or exchange of Series A Preferred Shares held
for less than six months will be deemed a long-term capital loss to the extent
of any capital gain dividends received by the selling stockholder with respect
to such stock.
Tax Treatment of Automatic Exchange. Upon the occurrence of an Exchange
Event, the outstanding Series A Preferred Shares automatically will be exchanged
on a one-for-one basis for Bank Preferred Shares. The Automatic Exchange will be
a taxable exchange with respect to which each holder of the Series A Preferred
Shares will have a gain or loss, as the case may be, measured by the difference
between the basis of such holder in the Series A Preferred Shares and the fair
market value of the Bank Preferred Shares received in the Automatic Exchange.
Provided that such holder's Series A Preferred Shares were held as capital
assets for more than 12 months prior to the Automatic Exchange, any gain or loss
will be long-term capital gain or loss. Long-term capital losses are deductible,
subject to certain limitations. The basis of the holder in the Bank Preferred
Shares will be the shares' fair market value at the time of the Automatic
Exchange.
Treatment of Tax-Exempt Stockholders. Distributions from the Company to a
tax-exempt employee pension trust or other domestic tax-exempt stockholder
generally will not constitute "unrelated business taxable income" ("UBTI")
unless the stockholder has borrowed to acquire or carry its Series A Preferred
Shares. Qualified trusts that hold more than 10% (by value) of the shares of
certain REITs, however, may be required to treat a certain percentage of such
REIT's distributions as UBTI. This requirement will apply only if (i) the REIT
would not qualify as such for federal income tax purposes but for the
application of the "look-through" exception to the Five or Fewer Test applicable
to shares held by qualified trusts and (ii) the REIT is "predominantly held" by
qualified trusts. A REIT is predominantly held by qualified trusts if either (i)
a single qualified trust holds more than 25% by value of the interests in the
REIT or (ii) one or more qualified trusts, each owning more than 10% by value of
the interests in the REIT, hold in the aggregate more than 50% of the interests
in the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (a) the UBTI earned by the REIT (treating the REIT as if it were
qualified trust and therefore subject to tax on UBTI) to (b) the total gross
income (less certain associated expenses) of the REIT. If the Company were to
incur indebtedness to acquire property, the percentage of any REIT dividend
24
<PAGE>
treated as UBTI would be increased to reflect any UBTI earned by the Company
from "debt-financed property." A de minimis exception applies where the ratio
set forth above is less than 5% for any year. For these purposes, a qualified
trust is any trust described in Section 401(a) of the Code and exempt from tax
under Section 501(a) of the Code. The provisions requiring qualified trusts to
treat a portion of REIT distributions as UBTI will not apply if the REIT is able
to satisfy the Five or Fewer Test without relying upon the "look-through"
exception.
Taxation of Foreign Stockholders
The following is a discussion of certain anticipated U.S. federal income
tax consequences of the ownership and disposition of the Company's stock
applicable to Non-U.S. Holders of such stock. The discussion is based on current
law and is for general information only. The discussion addresses only certain
and not all aspects of U.S. federal income taxation.
Ordinary Dividends. The portion of dividends received by Non-United States
Holders payable out of the Company's earnings and profits (which are not
attributable to capital gains of the Company and which are not effectively
connected with a U.S. trade or business of the Non-United States Holder) will be
subject to U.S. withholding tax at the rate of 30% (unless reduced by treaty).
In general, Non-United States Holders will not be considered engaged in a U.S.
trade or business solely as a result of their ownership of stock of the Company.
In cases where the dividend income from a Non-United States Holder's investment
in stock of the Company is (or is treated as) effectively connected with the
Non-United States Holder's conduct of a U.S. trade or business, the Non-United
States Holder generally will be subject to U.S. tax at graduated rates, in the
same manner as a United States Stockholder with respect to such dividends (and
may also be subject to the 30% branch profits tax in the case of a Non-United
States Holder that is a foreign corporation).
Non-Dividend Distributions. Distributions by the Company that are not
dividends out of the earnings and profits of the Company will not be subject to
U.S. income or withholding tax. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, then the distribution will be
subject to withholding at the rate applicable to dividends. However, the
Non-United States Holder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-United
States Holder, to the extent attributable to gains from dispositions of United
States Real Property Interests ("USRPIs") will be considered effectively
connected with a U.S. trade or business of the Non-United States Holder and
subject to U.S. income tax at the rate applicable to U.S. individuals or
corporations, without regard to whether such distribution is designated as a
capital gain dividend. Shares of a corporation are treated as USRPIs only if the
fair market value of the USRPIs owned by the corporation equals or exceeds 50%
of the fair market value of its total assets. If at no time during the five
years preceding the sale
25
<PAGE>
or exchange of shares in the Company, the Series A Preferred Shares constituted
a USRPI, gain or loss on the sale or exchange will not be treated as effectively
connected with a U.S. trade or business by reason of FIRPTA. Although ownership
of real property in the U.S. is always a USRPI, a loan secured by a mortgage on
U.S. real property does not constitute a USRPI unless the amounts payable by the
borrower are contingent on the income or receipts of the borrower or the
property or otherwise based on the property. The Company believes that it is
unlikely that its shares will be USRPIs or that it will derive significant gain
from USRPIs, although whether its shares are USRPIs or it derives gain from
USRPIs will depend on the facts as they ultimately develop. If the shares do
constitute USRPIs, the Company will be required to withhold tax equal to 35% of
the amount of dividends to the extent such dividends constitute USRPI Capital
Gains. Distributions subject to FIRPTA may also be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder that is not entitled
to treaty exemption.
Disposition of Stock of the Company. Unless the Company's stock
constitutes a USRPI, a sale of such stock by a Non-United States Holder
generally will not be subject to U.S. taxation under FIRPTA. The stock will not
constitute a USRPI if the Company is a "domestically controlled REIT." A
domestically controlled REIT is a REIT in which, at all times during a specified
testing period, less than 50% in value of its shares is held directly or
indirectly by Non-United States Holders. The Company believes that it is, and it
expects to continue to be, a domestically controlled REIT, and therefore that
the sale of the Company's stock will not be subject to taxation under FIRPTA.
Because the Company's stock will be publicly traded, however, no assurance can
be given the Company will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a
Non-United States Holder's sale of stock generally will still not be subject to
tax under FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly
traded" (as defined by applicable Treasury regulations) on an established
securities market (e.g., the NASDAQ National Market, on which the Series A
Preferred Stock traded) and (ii) the selling Non-United States Holder held 5% or
less of the Company's outstanding stock at all times during a specified testing
period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-United States Holder would be subject to the same treatment as a
United States Stockholder with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals) and the purchaser of the stock could be required
to withhold 10% of the purchase price and remit such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-United States Holder in two cases: (i) if the Non-United
States Holder's investment in the stock of the Company is effectively connected
with a U.S. trade or business conducted by such Non-United States Holder, the
Non-United States Holder will be subject to the same treatment as a United
States Stockholder with respect to such gain, or (ii) if the Non-United States
Holder is a nonresident alien individual who was present in the United States
for 183 days or more during the taxable year and has
26
<PAGE>
a "tax home" in the United States, the nonresident alien individual will be
subject to a 30% tax on the individual's capital gain.
Information Reporting Requirements and Backup Withholding Tax
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
United States Stockholders. Under certain circumstances, a United States
Stockholder of Series A Preferred Shares may be subject to backup withholding at
a rate of 31% on payments made with respect to, or cash proceeds of a sale or
exchange of, Series A Preferred Shares. Backup withholding will apply only if
the holder (i) fails to furnish the person required to withhold with its
Taxpayer Identification Number ("TIN") which, for an individual, would be his or
her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is notified
by the IRS that it has failed to properly report payments of interest and
dividends, or (iv) under certain circumstances, fails to certify, under penalty
of perjury, that it has furnished a correct TIN and has not been notified by the
IRS that it is subject to backup withholding for failure to report interest and
dividend payments. Backup withholding will not apply with respect to payments
made to certain exempt recipients, such as corporations and tax-exempt
organizations. A United States Stockholder should consult with a tax advisor
regarding qualification for exemption from backup withholding and the procedure
for obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
United States Stockholder will be allowed as a credit against such United States
Stockholder's United States federal income tax liability and may entitle such
United States Stockholder to a refund, provided that the required information is
furnished to the IRS.
Foreign Stockholders. Additional issues may arise pertaining to
information reporting and backup withholding with respect to a Non-United States
Holder. A Non-United States Holder should consult with a tax advisor with
respect to any such information reporting and backup withholding requirements.
Backup withholding with respect to a Non-United States Holder is not an
additional tax. Rather, the amount of any backup withholding with respect to a
payment to a Non-United States Holder will be allowed as a credit against any
United States federal income tax liability of such Non-United States Holder. If
withholding results in an overpayment of taxes, a refund may be obtained
provided that the required information is furnished to the IRS.
Other Tax Consequences.
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. The tax laws of the State of California apply the provisions of
the Code relating to REITs with certain modifications which will not have a
material beneficial nor
27
<PAGE>
adverse effect on the Company's ability to operate as a REIT. Prospective
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws on an investment in the Company.
ITEM 2: PROPERTIES
The Company utilizes office space and conference room facilities located
in Los Angeles at 5900 Wilshire Boulevard, Los Angeles, California 90036, the
building in which the Bank's principal executive offices are located. The cost
related to this office space is included in management fees paid by the Company
to the Bank.
ITEM 3: LEGAL PROCEEDINGS
The Company is not involved in any litigation at December 31, 1999. From
time to time, the Company may be involved in routine litigation arising in the
ordinary course of business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is authorized to issue up to 4,000,000 shares of common stock,
$0.01 par value per share (the "Common Stock") and 4,000,000 shares of Preferred
Stock, $0.01 par value per share (the "Preferred Stock"), of which 1,426,000
shares have been issued as the Series A Preferred Shares. The Bank owns 100% of
the Company's 10,000 shares of Common Stock outstanding at December 31, 1999.
Accordingly, there is no trading market for the Company's Common Stock. In
addition, the Bank intends that, as long as any Series A Preferred Shares are
outstanding, it will maintain direct or indirect ownership of at least a
majority of the outstanding Common Stock of the Company.
Dividends. Holders of Common Stock are entitled to receive dividends when,
as and if authorized and declared by the Board of Directors out of assets
legally available therefor, provided that, so long as any shares of Preferred
Stock are outstanding, no dividends or other distributions (including
redemptions and purchases) may be made with respect to the Common Stock unless
full dividends on the shares of all series of Preferred Stock, including
accumulations in the case of cumulative Preferred Stock, have been paid and any
other conditions precedent established under the terms of such series of
Preferred Stock have been satisfied. In order to remain qualified as a REIT, the
Company must distribute annually at least 95% of its annual "REIT taxable
income" (not including capital gains) to stockholders. Several limitations exist
which may restrict the Company's
28
<PAGE>
ability to pay dividends on the Common Stock. See "Item 1. Business--Business
and Strategy-- Dividend Policy."
Voting Rights. Subject to the rights, if any, of the holders of any class
or series of Preferred Stock, including the Series A Preferred Shares, all
voting rights are vested in the Common Stock. The holders of Common Stock are
entitled to one vote per share. All of the issued and outstanding shares of
Common Stock are held by the Bank.
As the holder of all of the outstanding shares of Common Stock of the
Company, the Bank will be able, subject to the terms of the Series A Preferred
Shares and of any other class or series of stock subsequently issued by the
Company, to elect and remove directors, amend the Articles of Incorporation and
approve other actions requiring stockholder approval under the MGCL or
otherwise.
Rights Upon Liquidation. In the event of the liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, after there have
been paid or set aside for the holders of all series of Preferred Stock the full
preferential amounts to which such holders are entitled, the holders of Common
Stock will be entitled to share equally and ratably in any assets remaining
after the payment of all debts and liabilities.
29
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
FINANCIAL DATA
As of December 31, 1999, 1998 and 1997 and for the Years ended December
31, 1999 and 1998, and for the Period from inception,
June 19, 1997 through December 31, 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At December
31, 1997 or for
the Period from
At or For the At or for the 6/19/97
Year-ended Year ended through
12/31/99 12/31/98 12/31/97
-------------------------------------------------
<S> <C> <C> <C>
STATEMENT OF EARNINGS:
Interest income................... $ 5,621 $ 5,780 $ 1,476
Total revenues.................... 5,621 5,780 1,476
Operating expenses................ 483 530 109
Net earnings...................... 5,138 5,250 1,367
BALANCE SHEET:
Mortgage loans, net............... 70,446 69,457 70,423
Total assets...................... 72,393 72,405 72,597
Total liabilities................. 42 42 460
Total stockholders' equity........ 72,351 72,363 72,137
OTHER DATA:
Dividends paid on preferred stock. 3,476 3,476 859
Dividends paid on common stock.... 1,674 1,548 460
Number of preferred shares outstanding 1,426,000 1,426,000 1,426,000
Number of common shares outstanding(1) 10,000 10,000 10,000
</TABLE>
- ----------
(1) Because the Company's Common Stock is wholly owned by the Bank, earnings
per share data is not presented.
30
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Description of Portfolio
Information with respect to the Residential Mortgage Loans and the
Commercial Mortgage Loans acquired by the Company since the commencement of its
operations is presented as of December 31, 1999. References herein to
percentages of Mortgage Loans acquired by the Company refer in each case to the
percentage of the aggregate outstanding principal balance of the Mortgage Loans
in the Company's Portfolio as of December 31, 1999, based on the outstanding
principal balances of such Mortgage Loans as of such date, after giving effect
to scheduled monthly payments received and applied on or prior to such date.
General. As of December 31, 1999, the Portfolio contained 260 Residential
Mortgage Loans, representing approximately 87.1% of the unpaid principal balance
of the Mortgage Loans contained in the Company's Portfolio, and 50 Commercial
Mortgage Loans, representing approximately 12.9% of the unpaid principal balance
of the Mortgage Loans contained in the Company's Portfolio. On December 31,
1999, the Mortgage Loans included in the Company's Portfolio had an aggregate
outstanding principal balance of $71.0 million.
Substantially all of the Residential Mortgage Loans included in the
Company's Portfolio were originated and/or purchased by the Bank in the ordinary
course of its real estate lending activities. Management believes that
substantially all of the Residential Mortgage Loans included in the Company's
Portfolio were originated and/or purchased in a manner consistent with the
underwriting policies of the Bank at the time at which such Mortgage Loans were
originated and/or purchased.
All of the Residential Mortgage Loans included in the Company's Portfolio
were originated and/or purchased between June 1973 and June 1999, and had
original terms to stated maturity of primarily 15, 20, 25 or 30 years. As of
December 31, 1999, the average outstanding principal balance of a Residential
Mortgage Loan was $237,829. The weighted average number of months since
origination of the Residential Mortgage Loans included in the Company's
Portfolio (calculated as of December 31, 1999) was approximately 33 months and
the weighted average expected remaining maturity was 306 months. The weighted
average Loan-to-Value Ratio (defined below) of the Residential Mortgage Loans
included in the Company's Portfolio is 66.2%; however, 5.6% of the Residential
Mortgage Loans have Loan-to-Value Ratios of greater than 80%. "Loan-to-Value
Ratio" means the ratio (expressed as a percentage) of the original principal
amount of such Mortgage Loan to the lesser of (i) the appraised value at
origination of the underlying mortgaged property or (ii) if the Mortgage Loan
was made to finance the acquisition of property, the purchase price of the
mortgaged property.
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<PAGE>
The mortgage notes with respect to most of the Mortgage Loans included in
the Company's Portfolio contain "due-on-sale" provisions which prevent the
assumption of the Mortgage Loan by a proposed transferee and accelerate the
payment of the outstanding principal balance of the Mortgage Loan. With respect
to a limited number of Mortgage Loans included in the Company's Portfolio, the
mortgage notes permit assumption of the Residential Mortgage Loan provided that
the proposed transferee satisfies certain criteria with respect to his ability
to repay the Mortgage Loan.
Each Commercial Mortgage Loan included in the Company's Portfolio was
originated and/or purchased by the Bank in the ordinary course of its commercial
real estate lending activities. All of the Commercial Mortgage Loans included in
the Company's Portfolio were originated and/or purchased between March 1974 and
June 1997, and had original terms to stated maturity of between 10 and 30 years.
As of December 31, 1999, the average outstanding principal balance of a
Commercial Mortgage Loan was $183,308. The weighted average number of months
since origination of the Commercial Mortgage Loans included in the Company's
Portfolio (calculated as of December 31, 1999) was approximately 119 months. As
of December 31, 1999, the weighted average Loan-to-Value Ratio of the Commercial
Mortgage Loans included in the Company's Portfolio is 68.1%. In addition, as of
December 31, 1999, no Commercial Mortgage Loan included in the Company's
Portfolio had a Loan-to-Value Ratio greater than 80%.
Residential Mortgage Loans. The following table sets forth as of December
31, 1999 certain information with respect to each type of Residential Mortgage
Loan included in the Company's Portfolio:
Type of Residential Mortgage Loan Product
<TABLE>
<CAPTION>
Percentage of
Aggregate Residential Weighted Weighted Average
Principal Mortgage Loans Average Initial Expected
Balance by Aggregate Loan to Value Remaining Maturity
Type (In Thousands) Principal Balance Ratio (Months)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
15 Year Fixed Rate $ 4,958 8.0% 60.6% 125
30 Year Fixed Rate 56,878 92.0 66.9 322
------- -----
Total.... $61,836 100.0%
-====== =====
</TABLE>
The Residential Mortgage Loans included in the Company's Portfolio bear
interest at fixed rates, which range from 5.875% per annum to 13.5% per annum.
The weighted average interest rate of the Residential Mortgage Loans included in
the Company's Portfolio is approximately 7.42% per annum.
32
<PAGE>
The following table contains certain additional data with respect to the
interest rates of the Residential Mortgage Loans included in the Company's
Portfolio:
Interest Rate of Residential Mortgage Loans
<TABLE>
<CAPTION>
Percentage of the
Aggregate Principal Company's Portfolio by
Number of Balance Aggregate Principal
Current Interest Rate Mortgage Loans (In Thousands) Balance
- --------------------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
Up to 7.499%...... 91 $ 39,700 64.1%
7.500 - 7.749... 44 7,713 12.5
7.750 - 7.999... 45 6,293 10.2
8.000 - 8.249... 11 1,308 2.1
8.250 - 8.499... 6 743 1.2
8.500 - 8.749... 10 1,039 1.7
8.750 - 8.999... 8 1,219 2.0
9.000 - 9.249... 8 452 0.7
9.250 - 9.499... 4 603 1.0
9.500 - 9.749... 3 237 0.4
9.750 - 9.999... 5 322 0.5
10.000 - 10.249... 7 728 1.2
10.250 - 10.499... 5 333 0.5
10.500 - 10.749... 5 788 1.3
10.750 - 10.999... 1 32 0.1
11.000 - 11.249... 1 24 0.0
12.000 - 12.249... 1 48 0.1
12.250 - 12.499... 1 126 0.2
12.500 - 12.749... 2 104 0.2
12.750 - 12.999... 1 2 --
13.500 - 13.749... 1 22 --
------------- --------------- -----------------
Total......... 260 $ 61,836 100.0%
============= =============== =================
</TABLE>
Substantially all of the Mortgage Loans included in the Company's
Portfolio allow the mortgagor to prepay at any time some or all of the
outstanding principal balance of the Mortgage Loan without a fee or penalty.
Commercial Mortgage Loans. The Commercial Mortgage Loans included in the
Company's Portfolio consist of loans secured by the Commercial Properties
located in California. The borrowers of the Commercial Mortgage Loans included
in the Company's Portfolio are primarily customers of the Bank to which the Bank
has extended such Commercial Mortgage Loans in the ordinary course of its
commercial real estate lending activities. The outstanding principal balances of
the Commercial Mortgage Loans included in the Company's Portfolio ranged from
$285 to $ 2.1 million as of December 31, 1999.
33
<PAGE>
The following table sets forth as of December 31, 1999 certain information
with respect to each type of multi-family residential and commercial property
underlying each Commercial Mortgage Loan included in the Company's Portfolio:
Type of Commercial Mortgage Loan
<TABLE>
<CAPTION>
Percentage of Weighted
Commercial Weighted Average
Aggregate Mortgage Loans by Weighted Average Average Current Months
Principal Balance Aggregate Principal Initial Loan to Value Loan to Value Remaining
Type (In Thousands) Balance Ratio(1) Ratio(2) to Maturity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial mortgage-fixed
rate balloon ............... $4,039 44.1% 68.3% 65.4% 84
Commercial mortgage-fixed
rate ....................... 1,308 14.3 74.4 46.2 108
Multi-family-fixed rate balloon 1,816 19.8 46.3 45.5 88
Multi-family-fixed rate ....... 2,002 21.8 73.9 38.2 85
------ -----
Total ....................... $9,165 100.0%
====== =====
</TABLE>
- ----------
(1) Represents the ratio of the outstanding principal amount of each
Commercial Mortgage Loan at the time of loan origination or modification,
if any, to the value of the property securing such Commercial Mortgage
Loan at the time of loan origination or modification, if any.
(2) Represents the ratio of the outstanding principal amount of the Commercial
Mortgage Loan at December 31, 1999 to the value of the property securing
such Commercial Mortgage Loan at the time of loan origination or
modification, if any.
Of the Commercial Mortgage Loans included in the Company's Portfolio,
approximately 63.9% are not fully amortizing and will have significant principal
balances or "balloon" payments due upon maturity.
All of the Commercial Mortgage Loans included in the Company's Portfolio
bear interest at fixed rates. The interest rates of the fixed rate Commercial
Mortgage Loans included in the Company's Portfolio range from 8.50% per annum to
11.00% per annum. The weighted average interest rate of the Commercial Mortgage
Loans in the Company's portfolio is approximately 9.49% per annum.
34
<PAGE>
The following table contains certain additional data as of December 31,
1999 with respect to the interest rates of the fixed rate Commercial Mortgage
Loans included in the Company's Portfolio:
Interest Rate of Commercial Mortgage Loans
Percentage of the
Aggregate Company's Portfolio
Number of Principal Balance by Aggregate
Interest Rate Mortgage Loans (In Thousands) Principal Balance
- ------------------- -------------- ----------------- -------------------
8.500% - 8.749%. 1 $ 488 5.3%
9.000 - 9.249... 3 1,726 18.8
9.250 - 9.499... 12 1,395 15.2
9.500 - 9.749... 17 2,827 30.9
9.750 - 9.999... 6 870 9.5
10.000 - 10.249... 6 1,434 15.7
10.250 - 10.499... 1 100 1.1
10.500 - 10.749... 2 176 1.9
11.000 - 11.249... 2 149 1.6
-------------- ----------------- -------------------
Total........... 50 $ 9,165 100.0%
============== ================= ===================
Asset Quality. The following table schedules residential mortgage loans
with past due principal and interest payments at December 31, 1999 (dollars in
thousands):
Number Principal Balance Percent of Portfolio
-------------------------------------------------------
30 to 59 days past due 1 $181 0.3%
There were no commercial mortgage loans with past due principal and
interest payments at December 31, 1999.
Geographic Distribution. As of December 31, 1999, 100% of the residential
real estate properties underlying the Company's Residential Mortgage Loans
included in the Company's Portfolio are located in California. Of the
Residential Mortgage Loans included in the Company's Portfolio, as of December
31, 1999, approximately 3.8% are secured by real estate located in Northern
California and 96.2% are secured by real estate located in Southern California.
Consequently, these Residential Mortgage Loans may be subject to a greater risk
of default than other comparable Residential Mortgage Loans in the event of
adverse economic, political or business developments and natural hazards
(earthquakes, wild fires and mud slides, for example) in California that may
affect the ability of residential property owners in California to make payments
of principal and interest on the underlying mortgages. Standard hazard insurance
required to be maintained with
35
<PAGE>
respect to Residential Mortgage Loans held by the Company may not protect the
Company against losses occurring from earthquakes and other natural disasters.
As of December 31, 1999, all of the commercial mortgaged properties
underlying the Company's Commercial Mortgage Loans included in the Company's
Portfolio are located in California. Of the Commercial Mortgage Loans included
in the Company's Portfolio, approximately 1.3% are secured by real estate
located in Northern California and 98.7% are secured by real estate located in
Southern California. Consequently, these Commercial Mortgage Loans may be
subject to a greater risk of default than other comparable Commercial Mortgage
Loans in the event of adverse economic, political or business developments in
California that may affect the ability of businesses in that area to make
payments of principal and interest on the underlying mortgages. Consequently, in
the event of a natural disaster, the Company's ability to pay dividends on the
Series A Preferred Shares could be adversely affected as it is the Company's
current intention to not maintain special hazard insurance to protect against
such losses.
Loan-to-Value Ratios; Insurance. Approximately $3.1 million of the
Residential Mortgage Loans included in the Company's Portfolio as of December
31, 1999 had Loan-to-Value Ratios of greater than 80% at the time of
origination. Of such Residential Mortgage Loans, at December 31, 1999,
approximately $2.5 million were insured under primary mortgage insurance
policies. The remaining $613,000 of such Residential Mortgage Loans at December
31, 1999 included in the Company's Portfolio with Loan-to-Value Ratios at
origination of greater than 80% did not require primary mortgage insurance
policies because the outstanding principal balances of such loans have been
reduced (due to amortization) to levels which are less than 80% of the lesser of
(i) the appraised value at origination and (ii) the purchase price of the
mortgaged property (the "Current LTV Ratio"). Residential Mortgage Loans
included in the Company's Portfolio with Loan-to-Value Ratios greater than 80%
and Current LTV Ratios less than 80% that do not require private mortgage
insurance coverage have a weighted average Current LTV Ratio of 58.5% and have a
weighted average seasoning since origination (calculated as of December 31,
1999) of 199 months. As of December 31, 1999, not more than approximately 26.1%
of the Residential Mortgage Loans that require private mortgage insurance are
insured by any one primary mortgage insurance policy issuer. At the time of
origination of the Residential Mortgage Loans, each of the primary mortgage
insurance policy insurers was approved by FNMA or FHLMC. A standard hazard
insurance policy is required to be maintained by the mortgagor with respect to
each Residential Mortgage Loan in an amount equal to the maximum insurable value
of the improvements securing such Residential Mortgage Loan or the principal
balance of such Residential Mortgage Loan, whichever is less. If the residential
real estate property underlying a Residential Mortgage Loan is located in a
flood zone, such Residential Mortgage Loan also may be covered by a flood
insurance policy as required by law. No mortgagor bankruptcy insurance will be
maintained by the Company with respect to the Residential Mortgage Loans in the
Company's Portfolio, nor will any Residential, Mortgage Loan be insured by the
Federal Housing Administration or guaranteed by the Veterans Administration. The
Company will not
36
<PAGE>
maintain any special hazard insurance policy with respect to any Residential
Mortgage Loan that could mitigate damages caused by any natural disaster.
A standard hazard insurance policy also is required to be maintained by
the mortgagor with respect to each of the Commercial Mortgage Loans included in
the Company's Portfolio. If the commercial real estate property securing a
Commercial Mortgage Loan is located in a flood zone, such Commercial Mortgage
Loan may be covered by a flood insurance policy as required by law. However, as
with the Residential Mortgage Loans in the Company's Portfolio, no special
hazard insurance or mortgagor bankruptcy insurance will be maintained by the
Company with respect to the Commercial Mortgage Loans in the Company's
Portfolio.
Financial Condition
At December 31, 1999, the Company had total assets of $72.4 million. As of
such date, an aggregate of $70.4 million or 97.3% of the Company's assets was
comprised of its loan receivables portfolio, net of the discount on loan and the
allowance for loan losses, the majority of which were acquired from the Bank in
connection with the Company's initial public offering completed in October 1997.
During the years 1999 and 1998, the Company purchased residential mortgage loans
with an aggregate principal balance of $16.5 million and $23.0 million,
respectively, from the Bank. The weighted average interest rate of the total
portfolio at December 31, 1999 was 7.69%. At December 31, 1999, due from
affiliates aggregated $657,000, accrued interest amounted to $331,000 and the
Company maintained a general valuation allowance of $253,000. See Note 3 of the
Notes to Financial Statements included in Item 8 hereof.
At December 31, 1999, the Company's total liabilities amounted to $42,000.
Stockholders' equity amounted to $72.4 million, after taking into consideration
earnings of $5.1 million and aggregate dividend payments on the common stock and
the preferred stock of $5.2 million during the year.
Results of Operations
The Company reported net earnings of $5.1 million for the year ended
December 31, 1999 as compared to $5.3 million for the year ended December 31,
1998. This decrease was primarily due to a reduction of the weighted average
yield on the loan portfolio from 7.99% to 7.69%. The Company paid $3.5 million,
$3.5 million and $859,000 in dividends on the Company's preferred stock in 1999,
1998 and 1997, respectively. The Company also declared $1.7 million, $1.5
million and $460,000 in dividends on the Company's common stock in 1999, 1998
and 1997, respectively.
Total revenues for the year ended December 31, 1999 amounted to $5.6
million as compared to $5.8 million and $1.5 million for periods ended December
31, 1998 and 1997, respectively, which
37
<PAGE>
was primarily attributable to interest earned on the Company's portfolio of
mortgage loans. The Company also earned $130,000, $283,000 and $16,000 of
interest on deposit accounts in 1999, 1998 and 1997, respectively.
Total expenses for the periods ended December 31, 1999, 1998 and 1997
amounted to $483,000, $530,000 and $109,000, respectively, of which $200,000 was
paid to the Bank in each year of 1999 and 1998 and $50,000 was paid to the Bank
in 1997 as a management fee in accordance with the terms of the Advisory
Agreement. The Bank received in 1999, 1998 and 1997, $25,867, $30,369 and $8,413
for servicing the Company's commercial mortgage loans and $82,089, $16,112 and
$0 for servicing a portion of the Company's residential mortgage loans. Temple
Inland Mortgage Co., which services a portion of the Company's residential
mortgage loans, received $69,070, $123,171 and $38,064 in 1999, 1998 and 1997,
respectively.
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb potential
loan losses from the entire loan portfolio. Management believes that the
allowance for loan losses as of December 31, 1999, is sufficient to absorb any
unidentified losses that currently exist in the portfolio. Management will
continue to review the loan portfolio to determine the extent to which any
changes in loss experience may require additional provisions in the future.
Liquidity Risk Management
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments and to
capitalize on opportunities for the Company's business expansion. In managing
liquidity, the Company takes into account various legal limitations placed on a
REIT.
The Company's principal liquidity needs are to maintain its current
portfolio size through the acquisition of additional Mortgage Loans as Mortgage
Loans currently in the portfolio mature or prepay and to pay dividends on the
Series A Preferred Shares. The acquisition of additional Mortgage Loans is
intended to be funded with the proceeds obtained from repayment of principal
balances by individual mortgagees. The Company does not have and does not
anticipate having any material capital expenditures.
To the extent that the Board of Directors determines that additional
funding is required, the Company may raise such funds through additional equity
offerings, debt financing or retention of cash flow (after consideration of
provisions of the Code requiring the distribution by a REIT of at least 95% of
its "REIT taxable income" and taking into account taxes that would be imposed on
undistributed income), or a combination of these methods. The organizational
documents of the
38
<PAGE>
Company do not contain any limitation on the amount or percentage of debt,
funded or otherwise, that the Company might incur. Notwithstanding the
foregoing, the Company may not, without the approval of a majority of the
Independent Directors, incur debt for borrowed money in excess of 20% of the
Company's total stockholders' equity. Any such debt incurred may include
intercompany advances made by the Bank to the Company.
The Company also may issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock that is or will
be senior to the Series A Preferred Shares without obtaining the prior consent
of holders of at least 66 2/3% of the shares of Preferred Stock outstanding at
that time, including the Series A Preferred Shares, and the Company may not
issue additional shares of Preferred Stock on a parity with the Series A
Preferred Shares without the prior approval of a majority of the Company's
Independent Directors.
Interest Rate Risk. The company's interest rate risk is primarily related
to loan prepayments and payoffs. The average maturity of loans is substantially
less than their average contractual terms because of prepayments and, in the
case of conventional mortgage loans, due- on-sale clauses, which generally give
the Bank the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase when the current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgages are substantially lower than current mortgage loan rates (due
to refinancings of adjustable rate and fixed rate loans at lower rates). The
following table summarizes the anticipated maturities or repricing of the
Company's interest-earning assets as of December 31, 1999, based on the
information and assumptions set forth in the notes below.
39
<PAGE>
<TABLE>
<CAPTION>
Three to More Than More Than
Within Three Twelve One Year to Three Years Over Five Net Fair
Months Months Three Years to Five Years Years Total Value
------------ -------- ----------- ------------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable (2)
Single-family residential
loans:
Fixed ................. $ -- $ 1,237 $18,738 $10,598 $31,263 $61,836 $58,690
Multi-family residential:
Fixed rate balloon .... -- 54 883 597 282 1,816 1,832
30 year fixed rate .... -- 58 942 640 362 2,002 2,034
Commercial real estate:
Fixed rate balloon .... -- 124 2,024 1,385 505 4,038 4,020
30 year fixed rate .... -- 38 616 423 232 1,309 1,303
Other interest-earning
assets .................. 926 -- -- -- -- 926 926
------- ------- ------- ------- ------- ------- -------
Total $ 926 $ 1,511 $23,203 $13,643 $32,644 $71,927 $68,805
======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted to take into account estimated prepayments based on assumptions
used by the OTS in assessing the interest rate sensitivity.
(2) Amounts disclosed represent outstanding principal balances as of December
31, 1999.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Interest Rate Risk."
40
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PEOPLE'S PREFERRED CAPITAL CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................... 42
Statements of Financial Condition--December 31, 1999 and 1998.............. 43
Statements of Earnings--Periods ended December 31, 1999, 1998 and 1997 .... 44
Statements of Changes in Stockholders' Equity--Periods ended
December 31, 1999, 1998 and 1997..................................... 45
Statements of Cash Flows--Periods ended December 31, 1999, 1998 and 1997 .. 46
Notes to Financial Statements.............................................. 47
41
<PAGE>
Independent Auditors' Report
The Board of Directors
People's Preferred Capital Corporation:
We have audited the accompanying statements of financial condition of People's
Preferred Capital Corporation as of December 31, 1999 and 1998, and the related
statements of earnings, changes in stockholders' equity and cash flows for the
years ended December 31, 1999 and 1998, and for the period from inception, June
19, 1997 through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on 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, the financial statements referred to above present fairly, in
all material respects, the financial position of People's Preferred Capital
Corporation as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998, and for the
period from inception, June 19, 1997 through December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Los Angeles, California
January 31, 2000
42
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS: 1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents .................................... $ 959 $ 1,301
Mortgage loans, net (Note 3) ................................. 70,446 69,457
Due from affiliate (Note 5) .................................. 657 1,277
Accrued interest receivable .................................. 331 370
------------ ------------
Total assets .............................................. $72,393 $72,405
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued liabilities ..................... $ 42 $ 42
------------ ------------
Total liabilities ......................................... 42 42
------------ ------------
Commitments and contingencies ................................ -- --
Stockholders' equity:
Preferred stock, par value $.01 per share, 4,000,000 shares
authorized: Preferred stock series A, issued and
outstanding 1,426,000 shares, liquidation value $35,650 14 14
Common stock, par value $.01 per share, 4,000,000 shares
authorized: 10,000 shares issued and outstanding ....... -- --
Additional paid-in capital ................................ 72,075 72,075
Retained earnings ......................................... 262 274
------------ ------------
Total stockholders' equity ................................ 72,351 72,363
------------ ------------
Total liabilities and stockholders' equity ................ $72,393 $72,405
============ ============
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF EARNINGS
For the Years Ended December 31, 1999, 1998 and
the Period from inception, June 19, 1997 through December 31, 1997
(Dollars in thousands)
1999 1998 1997
------ ------ ------
REVENUES:
Interest on mortgage loans ..... $5,491 $5,497 $1,460
Interest on deposits ........... 130 283 16
------ ------ ------
Total revenues: ............ 5,621 5,780 1,476
------ ------ ------
EXPENSES:
Loan servicing fees ............ 177 170 46
Advisory fees (Note 6) ......... 200 200 50
Professional fees .............. 76 125 11
Other .......................... 30 35 2
------ ------ ------
Total expenses ............. 483 530 109
------ ------ ------
Net earnings ............... $5,138 $5,250 $1,367
====== ====== ======
See accompanying notes to financial statements.
44
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and
the Period from inception, June 19, 1997 through December 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Number of Number of
Preferred Common
Shares par Series A Shares par Additional Total
value, $.01 Preferred value, $.01 Common Paid-in Retained Stockholders'
per share Stock per share Stock Capital Earnings Equity
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 19, 1997 ............ -- $ -- -- $ -- $ -- $ -- $ --
Issuance of Preferred Stock, Series A 1,426,000 14 -- -- 33,236 -- 33,250
Issuance of common stock ............ -- -- 10,000 -- 38,839 -- 38,839
Net earnings ........................ -- -- -- -- -- 1,367 1,367
Preferred dividends ................. -- -- -- -- -- (859) (859)
Common dividends .................... -- -- -- -- -- (460) (460)
---------------------------------------------------------------------------------
Balance at December 31, 1997 ........ 1,426,000 14 10,000 -- 72,075 48 72,137
Net earnings ........................ -- -- -- -- -- 5,250 5,250
Preferred dividends ................. -- -- -- -- -- (3,476) (3,476)
Common dividends .................... -- -- -- -- -- (1,548) (1,548)
---------------------------------------------------------------------------------
Balance at December 31, 1998 ........ 1,426,000 14 10,000 -- 72,075 274 72,363
Net earnings ........................ -- -- -- -- -- 5,138 5,138
Preferred dividends ................. -- -- -- -- -- (3,476) (3,476)
Common dividends .................... -- -- -- -- -- (1,674) (1,674)
---------------------------------------------------------------------------------
Balance at December 31, 1999 ........ 1,426,000 $ 14 10,000 $ -- $ 72,075 $ 262 $ 72,351
=================================================================================
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and
the Period from inception, June 19, 1997 through December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net earnings .......................................... $ 5,138 $ 5,250 $ 1,367
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Decrease in accrued interest receivable ........... 111 37 114
(Increase) decrease in due from affiliates ........ 620 446 (1,723)
Increase in accrued expenses ...................... -- 42 --
-------- -------- --------
Net cash (used in) provided by operating activities 5,869 5,775 (242)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage loans, net of discount ....... (16,185) (23,080) (73,952)
Mortgage loan principal repayments ................ 15,196 24,142 3,529
Purchase of accrued interest receivable ........... (72) (96) (521)
-------- -------- --------
Net cash (used in) provided by investing activities (1,061) 966 (70,944)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from preferred stock offering ........ -- -- 33,250
Net proceeds from capital contribution from Bank .. -- -- 38,839
Preferred stock dividends paid .................... (3,476) (3,476) (859)
Common stock dividends paid ....................... (1,674) (2,008) --
-------- -------- --------
Net cash (used in) provided by financing activities (5,150) (5,484) 71,230
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ........................................... (342) 1,257 44
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ................................................ 1,301 44 --
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............. $ 959 $ 1,301 $ 44
======== ======== ========
Supplemental schedule of non-cash financing activities:
Common stock dividends declared and unpaid ..... $ -- $ -- $ 460
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
People's Preferred Capital Corporation (the "Company") is a Maryland
corporation incorporated on June 19, 1997 which was created for the purpose of
acquiring, holding and managing mortgage loans secured by real estate assets.
The Company's outstanding common stock is wholly owned by People's Bank of
California (the "Bank"), a federal savings bank.
On October 3, 1997, the Company commenced its operations with the
consummation of an initial public offering of 1,426,000 shares of Series A
Preferred Shares, $0.01 par value, which raised $33.3 million, net of
underwriting and offering expenses of $2.4 million. The Series A Preferred
Shares are traded on the NASDAQ National Market. Additional expenses incurred
relative to the offering and the formation of the Company were borne by the
Bank. Concurrent with the issuance of the Series A Preferred Shares, the Bank
contributed additional capital of $38.8 million after reimbursement for offering
expenses of $426,000 to the Company.
Each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") for one newly issued preferred share of the Bank, if the
appropriate federal regulatory agency directs that the exchange occur. The
instances in which this might occur are as follows: (i) the Bank becomes
undercapitalized under the prompt corrective action regulations under the
Federal Deposit Insurance Corporation Improvements Act of 1991, (ii) the Bank is
placed into conservatorship or receivership, or (iii) the appropriate federal
agency anticipates the bank becoming "undercapitalized" in the near future. In
the event of the Automatic Exchange, the Bank preferred shares would constitute
a new series of preferred shares of the Bank, and would have the same dividend
rights, liquidation preference, redemption options and other attributes as the
Series A Preferred Shares, except that (i) the Bank preferred shares would not
be listed on a national stock exchange or national quotation system, and would
rank on an equal basis in terms of cash dividend payments and liquidation
preference with any shares of preferred stock of the Bank outstanding at the
time of the Automatic Exchange.
The Series A Preferred Shares are not redeemable prior to October 15, 2002
(except in the event the Company does not qualify as a real estate investment
trust for tax purposes or a change of control). On and after October 15, 2002,
the Series A Preferred Shares may be redeemed for cash at the option of the
Company, in whole or in part, at any time, at the redemption price of $25.00 per
share, plus authorized, declared and unpaid dividends, if any, to the date fixed
for redemption, without interest.
Upon a change of control, the Series A Preferred Shares are redeemable at
the option of the Company, in whole, but not in part, at a price per share equal
to (i) $25.00, plus (ii) an amount equal to the authorized, declared and unpaid
dividends, if any, to the date fixed for redemption, without
47
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
interest, and an additional amount of dividends that would be payable for the
period from the first day of the dividend period in which the date fixed for
redemption occurs to the date fixed for redemption plus (iii) an applicable
premium. Any redemption of Series A Preferred Shares is subject to the prior
approval of the Office of Thrift Supervision ("OTS").
Change of control means the occurrence of any of the following events:
(i) any person other than a Permitted Holder (as defined herein) shall
be the beneficial owner, directly or indirectly, of a majority of
the voting stock of the Bank or its Holding Company, whether as a
result of issuance of securities of the Bank or its Holding Company,
any merger, consolidation, liquidation or dissolution of the Bank or
its Holding Company, any direct or indirect transfer of securities
by a Permitted Holder, or otherwise; or
(ii) a sale, transfer, conveyance or other disposition of more than 75%
of the assets and 75% of the deposit liabilities of the Bank.
"Permitted Holder" means the Bishop Estate, BIL Securities or Arbur,
or any Person controlled, directly or indirectly, by the Bishop
Estate, BIL Securities or Arbur.
Upon the occurrence of a Tax Event, the Company will have the right at any
time to redeem the Series A Preferred Shares in whole, but not in part, at a
redemption price of $25.00 per share, plus the accrued and unpaid dividends, if
any, to the date fixed for redemption, without interest.
A Tax Event means the receipt by the Company of an opinion of a law firm
experienced in such matters to the effect that, as a result of : (i) any
amendment to, clarification of, or change in, the laws or any regulations of the
United States or any political subdivision or taxing authority , (ii) any
Administrative Action or (iii) any amendment to, or change in the official
position or the interpretation of such Administrative Action by any legislative
body, court, governmental authority or regulatory body, irrespective of the
manner in which such amendment or change is made known on or after the date of
issuance of the Series A Preferred Shares, there is more than an insubstantial
risk that: (a) dividends paid or to be paid by the Company with respect to the
stock of the Company are not, or will not be, fully deductible by the Company
for federal income tax purposes or (b) the Company is, or will be, subject to
more than a de minimis amount of other taxes or governmental charges as a result
of dividends paid or to be paid by the Company.
Any redemption of Series A Preferred Shares is subject to compliance with
applicable regulatory and other restrictions, including the prior approval of
the OTS. The Series A Preferred Shares will not be subject to any sinking fund
or mandatory redemption and will not be convertible into any other securities of
the Company.
48
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company has entered into servicing agreements with the Bank and Temple
Inland Mortgage Corporation to service the Company's mortgage assets.
As the Company's common stock is wholly owned by the Bank, earnings per
share data is not presented.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Residential and Commercial Mortgage Loans:
Residential and commercial mortgage loans are carried at the
principal amount outstanding, net of unamortized deferred loan fees and
direct origination costs and purchase discounts and premiums. Deferred
loan fees and direct origination costs and discounts or premiums on
one-to-four-family residential mortgage loans are accreted or amortized to
income using the interest method over the contractual term of the loans.
Unaccreted or unamortized discounts or premiums on loans sold or paid in
full are recognized in income at the time of sale or payoff. The Company
purchased additional single-family residential loans from the Bank during
1998 and 1999. It is the Company's policy to place a loan on non-accrual
status in the event that a borrower is 90 days or more delinquent. When a
loan is placed on non-accrual status, the accrued and unpaid interest
receivable is reversed. Amortization of premiums, discounts, and deferred
fees, net of deferred direct origination costs, associated with loans that
are on non-accrual status are discontinued. Income is subsequently
recognized only to the extent that cash payments are received. When, in
management's judgment, the borrower's ability to make periodic interest
and principal payments resumes, the loan is returned to accrual status.
A loan is impaired when it is "probable" that a creditor will be
unable to collect all amounts due (i.e., both principal and interest)
according to the contractual terms of the loan agreement. The measurement
of impairment may be based on (i) the present value of the expected future
cash flows of the impaired loan discounted at the loan's original
effective interest rate, (ii) the observable market price of the impaired
loan, or (iii) the fair value of the collateral of a collateral-dependent
loan. Interest income on impaired loans is recognized on a cash basis if
it is determined that collection of principal is probable. The Company
collectively reviews its portfolio of residential mortgage loans for
impairment. The Company reviews its commercial loans individually for
impairment.
Residential and commercial mortgages consist of fixed rate
mortgages. The Company's commercial loan portfolio includes fixed rate
mortgages which do not fully amortize and have a balloon payment due.
49
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(b) Allowance for Loan Losses:
The allowance for loan losses is a general allowance which is
increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic valuation of the adequacy of the
allowance is based on such factors as the Bank's and the Company's past
loan loss experience, delinquency trends, known and inherent risks in the
portfolio, potential adverse situations that may affect the borrower's
ability to repay, the estimated value of underlying collateral, and
current economic conditions.
Although management believes that its present allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the extent
to which any changes in loss experience may require additional provisions in the
future.
(c) Cash and Cash Equivalents:
For purposes of the statement of cash flows, cash and cash
equivalents include cash and amounts due from banks, and all other highly
liquid debt investments with original maturities of three months or less.
(d) Income Taxes:
The Company has elected to be treated as a REIT for Federal income
tax purposes and intends to comply with the provisions of the Code.
Accordingly, the Company will not be subject to Federal income tax to the
extent it distributes its earnings to stockholders and as long as certain
asset, income and stock ownership tests are met in accordance with the
Code. As the Company expects to qualify as a REIT for Federal income tax
purposes, no provision for income taxes is included in the accompanying
financial statements.
(e) Use of Estimates:
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and reported amounts
of revenues and expenses and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
50
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - MORTGAGE LOANS AND ALLOWANCE FOR LOAN LOSSES
At December 31, 1999 and 1998, mortgage loans, net consisted of the
following (in thousands):
December 31, December 31,
1999 1998
------------ ------------
Single-family mortgage loans ............. $ 61,836 $ 58,153
Multi-family loans ....................... 3,818 4,919
Commercial loans ......................... 5,347 6,665
-------- --------
71,001 69,737
Discount on loans ........................ (302) (27)
Allowance for loan losses ................ (253) (253)
-------- --------
$ 70,446 $ 69,457
======== ========
There was no activity in the allowance for loan losses which had a balance
of $253,000 at the beginning and end of each year.
Non-accrual loans were $0 and $75,000 at December 31, 1999 and 1998,
respectively. If loans which were on non-accrual at December 31, 1999 and 1998
had performed in accordance with the terms for the year, interest income from
these loans would have been $0 and $8,000, respectively. Interest collected on
these loans for these years was $0 and $5,000, respectively.
The Company's gross impaired loans were $0, $75,000 and $0 as of December
31, 1999, 1998 and 1997, respectively. The average impaired loans for the years
then ended were $15,000, $6,000 and $0. Interest income recognized related to
these loans was $0, $4,000 and $0 for 1999, 1998 and 1997, respectively.
As of December 31, 1999, all of the real estate properties underlying the
mortgage loans included in the Company's portfolio are located in California. Of
the residential mortgage loans included in the Company's portfolio, as of
December 31, 1999, approximately 3.8% are secured by real estate located in
northern California and 96.2% are secured by real estate located in southern
California. Of the multi-family and commercial mortgage loans included in the
Company's portfolio, approximately 1.3% are secured by real estate located in
northern California and 98.7% are secured by real estate located in southern
California.
Consequently, these mortgage loans may be subject to a greater risk of
default than other comparable mortgage loans in the event of adverse economic,
political or business developments and natural hazards (earthquakes, wild fires
and mud slides, for example) in California that may affect the ability of
property owners in California to make payments of principal and interest on the
underlying
51
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
mortgages. Standard hazard insurance required to be maintained with respect to
mortgage loans held by the Company may not protect the Company against losses
occurring from earthquakes and other natural disasters.
NOTE 4 - DIVIDENDS
Holders of Series A Preferred Shares are entitled to receive, if, when and
as authorized and declared by the Board of Directors of the Company out of funds
legally available, noncumulative dividends at a rate of 9.75% per annum of the
initial liquidation preference ($25.00 per share). Dividends on the Series A
Preferred Shares, if authorized and declared, are payable quarterly in arrears
on the last day of March, June, September and December. Dividends for each of
the years ended December 31, 1999, 1998, and for the period from June 19, 1997
to December 31, 1997 to holders of the Series A Preferred Shares totaled
approximately $3.5 million, $3.5 million and $859,000, respectively.
No cash dividends or other distributions may be paid on common stock
unless (i) the Company has paid full dividends on the Series A Preferred Shares
for the four most recent dividend periods (or such lesser number of dividend
periods during which the Series A Preferred Shares have been outstanding) and
has declared a cash dividend on the Series A Preferred Shares at the annual
dividend rate for the current dividend period, and (ii) the Company is in
compliance with the terms of all stock ranking senior to the common stock.
Dividends on common stock are paid when, as and if authorized and declared
by the Board of Directors out of funds legally available after all preferred
dividends have been paid. There were $1.7 million and $2.0 million common
dividends paid for the years ended December 31, 1999 and 1998, respectively.
There were $460,000 of common dividends declared in 1997 that were paid in 1998.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company entered into servicing agreements with the Bank pursuant to
which the Bank performs the servicing of the commercial mortgage and certain
single-family residential loans held by the Company in accordance with normal
industry practice. The servicing fee the Bank charges is 0.25% per year of the
outstanding principal balances of the commercial and single-family residential
mortgages. Servicing fee expense paid to the Bank totaled $108,000 for the year
ended December 31, 1999 compared to $47,000 and $8,000 for the periods ended
December 31, 1998 and 1997, respectively. A portion of the Company's residential
mortgage loans are serviced by Temple Inland Mortgage Corporation through a
sub-servicing arrangement at the Bank. The loans are serviced in accordance with
normal industry practice. The servicing fee is 0.25% per year of the outstanding
principal balances. Servicing fee expense paid to Temple Inland Mortgage
Corporation for the year
52
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
ended December 31, 1999 was $69,000 compared to $123,000 and $38,000 for the
periods ended December 31, 1998 and 1997, respectively.
In its capacity as servicer, the Bank holds in custodial accounts at the
Bank mortgage loan payments received on behalf of the Company. The Bank also
receives funds due to the Company from Temple Inland Mortgage Corporation via
wire transfer and remits them to the Company. The balance of such accounts
totaled $657,000 and $1.3 million at December 31, 1999 and 1998, respectively,
and was recorded as Due From Affiliates. Such payments were passed through to
the Company in January as provided in the servicing agreement. At December 31,
1999 and 1998, trust funds of approximately $0 and $5,000, representing escrows
advanced by the Bank, are on deposit in a trust account at the Bank and are not
included in the accompanying financial statements.
As the owner of 100% of the outstanding common stock of the Company, the
Bank is the sole shareholder entitled to receive common dividends. There were
$1.7 million and $2.0 million common dividends paid for the year ended December
31, 1999 and 1998, respectively. There were $460,000 of common dividends
declared in 1997 that were paid in 1998.
NOTE 6 - MANAGEMENT/ADVISORY FEES
The Company has an advisory contract with the Bank for an initial term of
five years which will be renewed automatically for additional five-year periods
unless notice of nonrenewal is delivered to the advisor by the Company. The
annual advisory fee is $200,000. As long as any Series A Preferred Shares remain
outstanding, a decision by the Company to terminate the advisory contract must
be approved by a majority of the Board of Directors, as well as by a majority of
the Independent Directors. Total advisory fees of $200,000, $200,000 and $50,000
were paid to the Bank during 1999, 1998 and 1997, respectively.
53
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of the Company's financial instruments
consisted of the following at December 31, 1999 and 1998 (Dollars in thousands):
1999 1998
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------
Financial Assets:
Cash and cash equivalents ...... $ 959 $ 959 $ 1,301 $ 1,301
Mortgage loans, net ............ 70,446 67,879 69,457 70,054
Due from Affiliate ............. 657 657 1,277 1,277
The following methods and assumptions were used to estimate the fair value
of the each type of financial instrument.
Cash and cash equivalents - The carrying value approximates the fair value
for cash and short-term investments.
Mortgage loans - For residential real estate loans, fair value is
estimated by discounting projected future cash flows at the current market
interest rates for mortgage-backed securities collateralized by loans of similar
coupon, duration and credit risk, adjusted for differences in market interest
rates between loans and securities. The fair value of commercial real estate
loans is estimated by discounting the future cash flows using the current
interest rates at which loans with similar terms would be made on property and
to borrowers with similar credit and other characteristics and with similar
remaining terms to maturity.
Due from affiliates - The carrying value approximates the fair value for
due from affiliates.
54
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
Directors and Executive Officers. The Company's Board of Directors is
composed of six members, two of whom are Independent Directors. An "Independent
Director" is a director who is not a current officer or employee of the Company
or a current director, officer or employee of the Bank or any affiliate of the
Bank. These directors will serve until their successors are duly elected and
qualified. The Company's Board of Directors currently has one open seat. There
is no current intention to alter the number of directors comprising the Board of
Directors. Certain actions by the Company require the prior approval of a
majority of Independent Directors. As long as there are only two Independent
Directors, any action that requires the approval of a majority of the
Independent Directors must be approved by both Independent Directors. Pursuant
to the Articles of Incorporation, the Independent Directors are required to take
into account the interests of the holders of both the Preferred Stock, including
the Series A Preferred Shares, and the Common Stock in assessing the benefit to
the Company of any proposed action requiring their approval. Pursuant to the
Articles of Incorporation, the Independent Directors are required to consider
the interests of the holders of both the Common Stock and the Preferred Stock,
including the Series A Preferred Shares, in determining whether any proposed
action requiring their approval is in the best interests of the Company. The
Company currently has four officers, all of whom are Bank officers. The Company
has no other employees and does not anticipate that it will require additional
employees.
The persons who were directors and executive officers of the Company as of
December 31, 1999 are as follows:
Name Age(1) Position and Offices Held
- --------------------------------------------------------------------------------
Rudolf P. Guenzel 59 President, Chief Executive Officer and Director
Timothy B. Matz 55 Director
Robert W. MacDonald 52 Director
John F. Davis 52 Director
David S. Honda 49 Director
J. Michael Holmes 53 Executive Vice President, Chief Financial
Officer, Secretary and Director
William W. Flader 51 Executive Vice President
Michael R. Hilton 48 Vice President
- ----------
(1) As of December 31, 1999.
55
<PAGE>
Set forth below is information with respect to the principal occupations
during the last five years of the Company's directors and officers.
Rudolf P. Guenzel. Mr. Guenzel is President and Chief Executive Officer
and a director of the Company, positions he has held since the Company's
inception in June 1997. Mr. Guenzel has served as President of PBOC Holdings,
Inc. and President, Chief Executive Officer and director of the Bank since March
1995. Mr. Guenzel has over 35 years of banking experience in which he has worked
in various disciplines. Mr. Guenzel began his banking career in 1963 in the
management training program of Chemical Bank, where he worked in various
capacities including Assistant Controller, prior to his departure in 1971. From
1971 through 1989, Mr. Guenzel was employed by European American Bank, starting
as head of the Credit Division and working in problem loan resolutions and
eventually as the head of the Bank's Operations and Systems Division. In 1991,
Mr. Guenzel was hired as President and Chief Executive Officer of BancFlorida
and its wholly-owned subsidiary, BancFlorida, FSB. Mr. Guenzel was hired when
the company was experiencing serious financial difficulties associated with high
non-performing assets attributable to the national recession and local economic
conditions. Mr. Guenzel directed the Company's attention to problem asset
resolution and returned BancFlorida Financial to profitability by substantially
increasing the volume of commercial and consumer loans and the amount of
transaction accounts and substantially reducing operating expenses. Mr. Guenzel
served as Chief Executive Officer through BancFlorida's merger with First Union
Corp. Following the BancFlorida acquisition, Mr. Guenzel worked as a consultant
in the area of bank profitability analysis until being hired by the Company.
Timothy B. Matz. Mr. Matz, a director since July 1999, has been the
Managing Partner since 1980 of Elias, Matz, Tiernan & Herrick L.L.P. ("EMTH"), a
Washington, D.C. based corporate and securities law firm specializing in the
representation of publicly traded bank and thrift holding companies and other
diversified financial institutions. EMTH serves as special counsel to PBOC
Holdings, Inc. the Bank's holding company, the Bank and the Company. Mr. Matz is
a graduate of the University of Virginia (B.A.), George Washington University
Law School (J.D.) and Georgetown University Law School (L.L.M.).
Robert W. MacDonald. Mr. MacDonald, a director of the Company since
inception and the Bank, is Managing Director of William E. Simon & Sons, a
merchant banking firm, where he has been employed since 1991. William E. Simon &
Sons has an indirect ownership interest in PBOC through Arbur, Inc. Mr.
MacDonald was with Salomon Brothers between 1971 and 1979, at which time he
started a financial advisory firm, Catalyst Energy Corporation, a leading
developer of independent power facilities. The company went public in 1984 and
was sold to an investor group in 1988. Between 1988 and 1991, Mr. MacDonald
created a merchant banking corporation, East Rock Partners, which invested in
alternative energy products and other projects.
John F. Davis. Mr. Davis, a director of the Company since inception, is an
attorney who specializes in federal and state depository institution law and
regulation. Mr. Davis is Chief Operating Officer of First Fidelity Bancorp,
Irvine, California since October 1998. Mr. Davis has served as a legal
consultant for two local financial institutions since 1993 and 1995,
respectively, during which he was actively involved in troubled real estate
work-outs, foreclosed real estate disposition and related litigation and, with
one of such institutions, a reorganization and
56
<PAGE>
recapitalization. During 1991 and 1992, Mr. Davis served as Of Counsel to
Griffinger, Freed, Heinemann, Cook & Foreman, San Francisco, California.
David S. Honda. Mr. Honda, a director of the Company since inception, has
since 1980 been President of D.S. Honda Construction, Inc., a general
contracting, construction, interior design and space planning firm located in
Northridge, California. Mr. Honda has been responsible for the creation or
renovation of millions of square feet of commercial real estate in Los Angeles
and he is actively involved with economic development and small business
organizations generally and with Asian business associations in particular
throughout the city. Mr. Honda has been extensively involved with civic and
service organizations in the community for many years. His firm has been
recognized by local County Boards of Supervisors and Chambers of Commerce. As a
result of the Northridge earthquake in 1994, an office building personally owned
by Mr. Honda and his wife was severely damaged, resulting in a complete tenant
vacancy of the property. Because Mr. Honda was unable to obtain additional
financing or an acceptable work-out program on the damaged property, Mr. Honda
filed for personal bankruptcy under the federal bankruptcy laws in 1995 which
was fully discharged in July 1996.
J. Michael Holmes. Mr. Holmes is Executive Vice President, Chief Financial
Officer and Secretary of the Company, positions he has held since the Company's
inception in June 1997. Mr. Holmes became a director of the Company in September
1997. Mr. Holmes has served as Executive Vice President and Chief Financial
Officer of the Bank since March 1995 and as a Director of the Bank since January
1998. Mr. Holmes has experience in various phases of a financial institution's
operations, including asset and liability management, investments, human
resources and operations. Mr. Holmes joined BancFlorida, FSB in 1974 as
Controller and served in various capacities, culminating as Executive Vice
President and Chief Financial Officer in 1985, a position he held through the
company's merger with First Union in August 1994. Mr. Holmes also served as
Secretary, Treasurer and Chief Financial Officer of BancFlorida between 1985 and
August 1994.
William W. Flader. Mr. Flader has served as Executive Vice President of
the Company since February 1998 and has served as Executive Vice President of
Retail Banking for the Bank since March 1995. Before joining the Bank, Mr.
Flader was employed by BancFlorida, FSB from October 1980 to August 1994 in
various capacities. Mr. Flader served as Senior Vice President of Retail Banking
for BancFlorida from December 1989 to August 1994. Mr. Flader has worked in
banking for over 20 years and at BancFlorida managed 46 branches. In addition,
Mr. Flader, who is a registered securities and insurance representative, was
responsible for the sale of various types of securities and insurance products.
Mr. Flader also has experience with alternative delivery banking services such
as ATMs.
Michael R. Hilton. Mr. Hilton is Vice President of the Company, a position
he has held since August of 1998. Mr. Hilton has extensive management experience
in both accounting and finance at a number of financial institutions. Mr. Hilton
has served as Vice President and Controller at the Bank since July of 1997.
Prior to that position, Mr. Hilton was the Vice President and Controller of
Ventura County National Bancorp, a commercial bank multi-holding company.
57
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Audit Committee
The Company has established an audit committee which will review the
engagement and independence of the Company's auditors. The audit committee will
also review the adequacy of the Company's internal accounting controls. The
audit committee currently consists of Messrs. Matz and Honda.
ITEM 11: EXECUTIVE COMPENSATION
Compensation of Directors and Officers
The Company pays its Independent Directors fees for their services as
directors. The Independent Directors receive a fee of $1,000 for attendance (in
person or by telephone) at each meeting of the Board of Directors or Committee
of the Board. However, multiple fees shall not be paid for two or more meetings
attended on the same day. The Company does not pay any compensation to its
officers or employees or to directors who are not Independent Directors.
Limitations on Liability of Directors and Officers
The Company's Articles of Incorporation eliminate, to the fullest extent
permitted by the Maryland General Corporation Law ("MGCL"), the personal
liability of a director to the Company or its stockholders for monetary damages
for breach of such director's fiduciary duty. The Articles of Incorporation
empower the Company to indemnify, to the fullest extent permitted by the MGCL,
any of the Company's directors or officers. The Articles of Incorporation also
empower the Company to purchase and maintain insurance to protect any director
or officer against any liability asserted against him or her incurred by him or
her, arising out of his or her status as such.
The Company's bylaws (the "Bylaws") require indemnification of its
directors and officers and specify that the right to indemnification is a
contract right, setting forth certain procedural and evidentiary standards
applicable to the enforcement of a claim under the Bylaws. The Bylaws also
entitle any director or officer to be reimbursed for the expenses of defending
any claim against him or her arising out of his or status as such. The Bylaws
also provide that the Company may enter into contracts with any director or
officer in furtherance of the indemnification provisions contained in the Bylaws
and allow the Company to create a trust fund to ensure payment of amounts
indemnified.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1999, there were shares of Common Stock of the Company
issued and outstanding, all of which were owned by the Bank. The following table
set forth certain information concerning the ownership of the Company's
outstanding Common Stock as of that date.
58
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Name and Address Amount and Nature of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class
- --------------------------------------------------------------------------------
Common Stock People's Bank of California 10,000 100%
5900 Wilshire Boulevard
Los Angeles, California 90036
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a servicing agreement with the Bank pursuant to
which the Bank performs the actual servicing of the commercial mortgage loans
and certain single-family residential loans held by the Company in accordance
with normal industry practice. The servicing fee ranges from 0.25% to 0.375% per
year of the outstanding principal balances. Servicing fee expense paid to the
Bank totaled $108,000 for 1999, $47,000 for 1998 and $8,000 for 1997. See Part
I, Item I-- "Servicing."
In its capacity as servicer, the Bank holds in custodial accounts at the
Bank mortgage loan payments received on behalf of the Company. The balance of
such accounts totaled$392,000 and $284,000 at December 31, 1999 and December 31,
1998 and was included in due from affiliates. Such payments were passed through
to the Company in January as provided in the servicing agreement.
As the owner of 100% of the outstanding common stock of the Company, the
Bank is the sole shareholder entitled to receive common dividends. There were
$1.7 million common dividends paid during the year ended December 31, 1999.
The Company has an advisory contract with the Bank for an initial term of
five years which will be renewed automatically for additional five-year periods
unless notice of nonrenewal is delivered to the advisor by the Company. The
annual advisory fee is $200,000. Total advisory fees of $200,000 were paid to
the Bank during 1999. See Part I, Item I--"Management Policies and
Programs--Advisory Agreement."
The Company incurred expenses of $33,000 for legal work performed by
Elias, Matz, Tiernan & Herrick during the year ended December 31, 1999. Mr.
Matz, a Director of the Company, is managing partner of Elias, Matz, Tiernan &
Herrick.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the year of 1999.
59
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Exhibit Index
Exhibit Description
- ------- -----------
3(a)(i) Articles of Incorporation of the Company.*
3(a)(ii) Amended and Restated Articles of Incorporation of the Company.
3(b) By-laws of the Company.*
4 Specimen of certificate representing Series A Preferred Shares.*
10(a) Residential Mortgage Loan Purchase and Warranties Agreement between
the Company and the Bank.
10(a)(i) Amendment to Residential Mortgage Loan Purchase and Warranties
Agreement between the Company and the Bank.
10(b) Commercial Mortgage Loan Purchase and Warranties Agreement between
the Company and the Bank.
10(c) Residential Mortgage Loan Servicing Agreements between the Bank and
the Temple Inland Mortgage Corporation.**
10(d) Assignment, Assumption and Recognition Agreement between the
Company, the Bank and the Servicing Agent.
10(e) Commercial Mortgage Loan Servicing Agreement between the Company and
the Bank.
10(f) Advisory Agreement between the Company and the Bank.
27 Financial Data Schedule.
- ------------
* Incorporated by reference to the Registration Statement on Form S-11 (File
No. 333-31501) of People's Preferred Capital Corporation, as filed with
the Securities and Exchange Commission on July 10, 1997.
** Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-11 (File No. 333- 31501) of People's Preferred Capital
Corporation, as filed with the Securities and Exchange Commission on
September 8, 1997.
60
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SIGNATURES
Pursuant to the requirements of the section of 13 and 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.
PEOPLE'S PREFERRED CAPITAL CORPORATION
Date: March 28, 2000 By: /s/ Rudolf P. Guenzel
-------------------------------------
Rudolf P. Guenzel
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act, this report has
been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Date
---- ----
/s/ Rudolf P. Guenzel March 28, 2000
- ---------------------------------------------------------
Rudolf P. Guenzel, President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ J. Michael Holmes March 28, 2000
- ---------------------------------------------------------
J. Michael Holmes, Senior Executive Vice President, Chief
Financial Officer, Secretary and Director
(Principal Accounting Officer)
/s/ Robert W. MacDonald March 28, 2000
- ---------------------------------------------------------
Robert W. MacDonald, Director
/s/ John F. Davis March 28, 2000
- ---------------------------------------------------------
John F. Davis, Director
/s/ David S. Honda March 28, 2000
- ---------------------------------------------------------
David S. Honda, Director
/s/ Timothy B. Matz March 28, 2000
- ---------------------------------------------------------
Timothy B. Matz, Director
61
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Exhibit 3.(a)(ii)
PEOPLE'S PREFERRED CAPITAL CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: People's Preferred Capital Corporation, a Maryland corporation
(the "Corporation"), desires to amend and restate its Articles of Incorporation
(the "Articles of Incorporation") as currently in effect and as hereinafter
amended.
SECOND: The following provisions are all the provisions of the Articles
of Incorporation currently in effect and as hereinafter amended:
ARTICLE I
INCORPORATOR
The undersigned, Billie Swaboda, whose address is 32 South Street,
Baltimore, Maryland 21202, being at least 18 years of age, does hereby form a
corporation under the general laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation is: People's Preferred Capital Corporation.
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed are to engage in any
lawful act or activity (including, without limitation or obligation, engaging in
business as a real estate investment trust under the Internal Revenue Code of
1986, as amended, or any successor statute (the "Code")) for which corporations
may be organized under the general laws of the State of Maryland as now or
hereafter in force. For purposes of these Articles, "REIT" means a real estate
investment trust under Sections 856 through 860 of the Code.
ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of
Maryland is 32 South Street, Baltimore, Maryland 21202. The name and address of
the resident agent of the Corporation
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in the State of Maryland is The Corporation Trust Incorporated, whose post
address is 32 South Street, Baltimore, Maryland 21202. The resident agent is a
corporation in the State of Maryland.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
SECTION 5.1 NUMBER OF DIRECTORS. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. The
number of directors of the Corporation initially shall be seven, which number
may be increased or decreased pursuant to the Bylaws, but shall never be less
than the minimum number required by the Maryland General Corporation Law (the
"MGCL"). At all times that any shares of Series A Preferred Stock (as herein
defined) are outstanding, at least two of the directors shall be Independent
Directors (as defined herein). The names of the directors who shall serve until
the first annual meeting of stockholders and until their successors are duly
elected and qualify are:
Henry Peters
Rudolf P. Guenzel
J. Michael Holmes
Gerald Jervis
Robert W. MacDonald
David Honda
John F. Davis
These directors may increase the number of directors and may fill any
vacancy, whether resulting from an increase in the number of directors or
otherwise, on the Board of Directors occurring before the first annual meeting
of stockholders in the manner provided in the Bylaws.
SECTION 5.2 EXTRAORDINARY ACTIONS. Except as specifically provided in
Section 6.6, notwithstanding any provision of law permitting or requiring any
action to be taken or authorized by the affirmative vote of the holders of a
greater number of votes, any such action shall be effective and valid if taken
or authorized by the affirmative vote of holders of shares entitled to cast a
majority of all the votes entitled to be cast on the matter.
SECTION 5.3 AUTHORIZATION BY BOARD OF STOCK ISSUANCE. The Board of
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any
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class or series, whether now or hereafter authorized, for such consideration as
the Board of Directors may deem advisable (or without consideration in the case
of a stock split or stock dividend), subject to such restrictions or
limitations, if any, as may be set forth in the Articles of Incorporation or the
Bylaws.
SECTION 5.4 PREEMPTIVE RIGHTS. Except as may be provided by the Board
of Directors in setting the terms of classified or reclassified shares of stock
pursuant to Section 6.4, no holder of shares of stock of the Corporation shall,
as such holder, have any preemptive right to purchase or subscribe for any
additional shares of stock of the Corporation, any security convertible into an
additional issue of stock of the Corporation, or any other security of the
Corporation which it may issue or sell.
SECTION 5.5 INDEMNIFICATION.
SECTION 5.5.1 GENERAL. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, including actions
by or in the right of the Corporation, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation or any predecessor of the
Corporation, or who, while acting as such, is or was serving at the request of
the Corporation or any predecessor of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation (foreign or
domestic), partnership, joint venture, trust, other enterprise or employee
benefit plan, against expenses (including attorney's fees), judgments, fines,
excise taxes and amounts paid in settlement actually and reasonably incurred by
such person in connection with such action, suit or proceeding to the full
extent authorized by the MGCL in effect from time to time, provided that the
Corporation shall not be liable for any amount which may be due to any person in
connection with a settlement of any action, suit or proceeding effected without
its prior written consent or any action, suit or proceeding initiated by any
person seeking indemnification hereunder (other than to enforce the requirements
of this Section 5.5.1) without its prior written consent.
SECTION 5.5.2 ADVANCEMENT OF EXPENSES. Reasonable expenses
incurred by a director, officer, employee or agent of the Corporation in
defending a civil, administrative, investigative or criminal action, suit or
proceeding described in Section 5.5.1 of this Section 5.5 shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors only upon receipt by the
Corporation of (i) a written affirmation by the person of such person's good
faith belief that the standard of conduct necessary for indemnification by the
Corporation under Section 5.5.1 of this Section 5.5 has been met and (ii) a
written undertaking by or on behalf of such person to repay such amount if it
shall ultimately be determined that the applicable standard of conduct has not
been met or the person is not otherwise entitled to be indemnified by the
Corporation.
SECTION 5.5.3 OTHER RIGHTS AND REMEDIES. The indemnification
and advancement of expenses provided by this Section 5.5 shall not be deemed to
exclude any other rights to which
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those seeking indemnification or advancement of expenses may be entitled under
the MGCL in effect from time to time, both as to actions in their official
capacity and as to actions in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such person, provided that no indemnification shall be made to
or on behalf of an individual if a judgment or other final adjudication
establishes that his acts or omissions relate to matters for which the liability
of directors and officers cannot be restricted or limited under the MGCL in
effect from time to time.
SECTION 5.5.4 INSURANCE. Upon resolution passed by the Board
of Directors, the Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or who, while acting as such, is or was serving at the request of
the Corporation as a director, officer, partner, trustee, employee or agent of
another corporation (foreign or domestic), partnership, joint venture, trust,
other enterprise or employee benefit plan, against any liability asserted
against and incurred by him in any such capacity or arising out of his position,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Section 5.5 or the Bylaws of the
Corporation.
SECTION 5.5.5 SECURITY FUND; INDEMNITY AGREEMENTS. By action
of the Board of Directors (notwithstanding their interest in the transaction),
the Corporation may create and fund a trust fund or fund of any nature, and may
enter into agreements with its directors, officers, employees and agents for the
purpose of securing or insuring in any manner its obligation to indemnify or
advance expenses provided for in this Section 5.5.
SECTION 5.5.6 MODIFICATION. The duties of the Corporation to
indemnify and to advance expenses to any persons as provided in this Section 5.5
shall be in the nature of a contract between the Corporation and each such
person, and no amendment or repeal of any provision of this Section 5.5 shall
alter, to the detriment of such person, the right of such person to the advance
of expenses or indemnification related to a claim based on an act or failure to
act which took place prior to such amendment or repeal.
SECTION 5.6 DETERMINATIONS BY BOARD. The determination as to any of the
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the Articles of Incorporation and in the
absence of actual receipt of an improper benefit in money, property or services
or active and deliberate dishonesty established by a court, shall be final and
conclusive and shall be binding upon the Corporation and every holder of shares
of its stock: the amount of the net income of the Corporation for any period and
the amount of assets at any time legally available for the payment of dividends,
redemption of its stock or the payment of other distributions on its stock; the
amount of paid-in surplus, net assets, other surplus, annual or other net
profit, net assets in excess of capital, undivided profits or excess of profits
over losses on sales of assets; the amount, purpose, time of creation, increase
or decrease, alteration or cancellation of any reserves or charges and the
propriety thereof (whether or not any obligation or liability for which such
reserves or charges shall have been created, shall have been paid or
discharged); the fair value,
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or any sale, bid or asked price to be applied in determining the fair value, of
any asset owned or held by the Corporation; and any matters relating to the
acquisition, holding and disposition of any assets by the Corporation.
SECTION 5.7 REIT QUALIFICATION. The Board of Directors shall use its
reasonable best efforts to take such actions as are necessary or appropriate to
qualify and preserve the status of the Corporation as a REIT. If the Board of
Directors determines that it is no longer in the best interests of the
Corporation to continue to be qualified as a REIT, the Board of Directors may
revoke or otherwise terminate the Corporation's REIT election pursuant to
Section 856(g) of the Code; provided, however, that as long as any shares of
Series A Preferred Stock (as defined in Section 6.1) remain outstanding, any
such determination may not be made without the approval of a majority of the
Independent Directors.
SECTION 5.8 REMOVAL OF DIRECTORS. Subject to the rights of holders of
one or more classes or series of Preferred Stock to elect one or more directors,
any director, or the entire Board of Directors, may be removed from office at
any time, but only by the affirmative vote of the holders of at least a majority
of the votes entitled to be cast in the election of directors.
SECTION 5.9 ADVISOR AGREEMENTS. Subject to such approval of
stockholders and other conditions, if any, as may be required by any applicable
statute, rule or regulation, the Board of Directors may authorize the execution
and performance by the Corporation of one or more agreements with any person,
corporation, association, company, trust, partnership (limited or general) or
other organization whereby, subject to the supervision and control of the Board
of Directors, any such other person, corporation, association, company, trust,
partnership (limited or general) or other organization shall render or make
available to the Corporation managerial, investment, advisory and/or related
services, office space and other services and facilities (including, if deemed
advisable by the Board of Directors, the management or supervision of the
investments of the Corporation) upon such terms and conditions as may be
provided in such agreement or agreements (including, if deemed fair and
equitable by the Board of Directors, the compensation payable thereunder by the
Corporation).
ARTICLE VI
STOCK
SECTION 6.1 AUTHORIZED SHARES. The Corporation has authority to issue
4,000,000 shares of Common Stock, $.01 par value per share ("Common Stock") and
4,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred
Stock"), of which 2,000,000 shares are classified as 9.75% Non-Cumulative
Exchangeable Preferred Stock, Series A, $.01 par value per share ("Series A
Preferred Stock") with the preferences, conversion, exchange or other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption as set forth in Section
6.6. The aggregate par value of all authorized shares of stock having par value
is $80,000.
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SECTION 6.2 COMMON STOCK. Subject to the provisions of Article VII,
each share of Common Stock shall entitle the holder thereof to one vote. The
Board of Directors may reclassify any unissued shares of Common Stock from time
to time in one or more classes or series of stock.
SECTION 6.3 PREFERRED STOCK. The Board of Directors may classify any
unissued shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock of any series from time to time, in one or
more series of stock.
SECTION 6.4 CLASSIFIED OR RECLASSIFIED SHARES. Prior to issuance of
classified or reclassified shares of any class or series, the Board of Directors
by resolution shall: (a) designate that class or series to distinguish it from
all other classes and series of stock of the Corporation; (b) specify the number
of shares to be included in the class or series; (c) set or change, subject to
the provisions of Article VII and subject to the express terms of any class or
series of stock of the Corporation outstanding at the time, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms and conditions of
redemption for each class or series; and (d) cause the Corporation to file
articles supplementary with the State Department of Assessments and Taxation of
Maryland ("SDAT"). Any of the terms of any class or series of stock set or
changed pursuant to clause (c) of this Section 6.4 may be made dependent upon
facts or events ascertainable outside the Articles of Incorporation (including
determinations by the Board of Directors or other facts or events within the
control of the Corporation) and may vary among holders thereof, provided that
the manner in which such facts, events or variations shall operate upon the
terms of such class or series of stock is clearly and expressly set forth in the
articles supplementary filed with the SDAT.
SECTION 6.5 ARTICLES OF INCORPORATION AND BYLAWS. All persons who shall
acquire stock in the Corporation shall acquire the same subject to the
provisions of the Articles of Incorporation and the Bylaws.
SECTION 6.6 SERIES A PREFERRED STOCK.
SECTION 6.6.1 LIQUIDATION VALUE AND RANK. Each Series A
Preferred Share shall have a stated liquidation value of $25.00 per share, plus
an amount per share equal to any dividends authorized and declared but unpaid,
without interest. The Series A Preferred Shares shall rank prior to all classes
or series of Common Stock of the Corporation and to all other classes and series
of equity securities of the Corporation now or hereafter authorized, issued or
outstanding (the Common Stock and such other classes and series of equity
securities of the Corporation are collectively referred to herein as the "Junior
Stock"), other than any class or series of equity securities of the Corporation
expressly designated as ranking on a parity with (the "Parity Stock") or senior
to (the "Senior Stock") the Series A Preferred Shares as to dividend rights and
rights upon voluntary or involuntary liquidation, winding up or dissolution of
the Corporation. The Series A Preferred Shares shall be junior to the creditors
of the Corporation. The Series A Preferred Shares shall be subject to the
creation of Senior Stock, Parity Stock and Junior Stock to the extent not
expressly prohibited by the Articles of Incorporation.
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SECTION 6.6.2 DIVIDENDS.
(a) PAYMENT OF DIVIDENDS. Holders of Series A Preferred Shares
shall be entitled to receive, if, when and as authorized and declared
by the Board of Directors, out of assets of the Corporation legally
available therefor, noncumulative cash dividends at an annual rate of
9.75% of the $25.00 stated liquidation value per share ($2.4375 per
share per annum), and no more. Such noncumulative cash dividends shall
be payable, if authorized and declared, quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, or, if such day
is not a Business Day (as defined herein), on the next Business Day
(each such date, a "Dividend Payment Date"). Each authorized and
declared dividend shall be payable to holders of record of the Series A
Preferred Shares as they appear on the stock books of the Corporation
at the close of business on such record dates, not more than forty-five
(45) calendar days nor less than ten (10) calendar days preceding the
Dividend Payment Date therefor, as determined by the Board of Directors
(each such date, a "Record Date"); provided, however, that if a
redemption date for the Series A Preferred Shares occurs after a
dividend is authorized and declared but before it is paid, such
dividend shall be paid as part of the redemption price to the person to
whom the redemption price is paid. Quarterly dividend periods (each, a
"Dividend Period") shall commence on and include the first day, and
shall end on and include the last day, of the calendar quarter in which
the corresponding Dividend Payment Date occurs; provided, however, that
the first Dividend Period (the "Initial Dividend Period") shall
commence on and include the first day upon which a share of Series A
Preferred Shares shall be issued and shall end on and include December
31, 1997.
The amount of dividends payable on each share outstanding on a
Record Date of the Series A Preferred Shares for each full Dividend
Period shall be $0.609375. The amount of dividends payable for the
Initial Dividend Period and for any other Dividend Period which, as to
a share of Series A Preferred Shares (determined by reference to the
issuance date and the redemption or retirement date thereof), is
greater or less than a full Dividend Period shall be computed on the
basis of the number of days elapsed in the period using a 360-day year
composed of twelve (12) thirty (30) day months, provided, however, that
in the event of the Automatic Exchange (as defined herein), any accrued
and unpaid dividends on the Series A Preferred Shares as of the Time of
Exchange (as defined herein) shall be deemed to be accrued and unpaid
dividends on the Bank Preferred Shares (as defined herein).
Holders of the Series A Preferred Shares shall not be entitled
to any interest, or any sum of money in lieu of interest, in respect of
any dividend payment or payments on the Series A Preferred Shares
authorized and declared by the Board of Directors which may be unpaid.
Any dividend payment made on the Series A Preferred Shares shall first
be credited against the earliest authorized and declared but unpaid
cash dividend with respect to the Series A Preferred Shares.
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(b) DIVIDENDS NONCUMULATIVE. The right of holders of Series A
Preferred Shares to receive dividends is noncumulative. Accordingly, if
the Board of Directors does not authorize or declare a dividend payable
in respect of any Dividend Period, holders of Series A Preferred Shares
shall have no right to receive a dividend in respect of such Dividend
Period, and the Corporation shall have no obligation to pay a dividend
in respect of such Dividend Period, whether or not dividends are
authorized and declared and payable in respect of any future Dividend
Period.
(c) PRIORITY AS TO DIVIDENDS. No full dividends or other
distributions shall be authorized, declared or paid or set apart for
payment on any Parity Stock or Junior Stock for any Dividend Period
unless full dividends have been or contemporaneously are authorized,
declared and paid or authorized and declared and a sum sufficient for
the payment thereof set apart for such payment on the Series A
Preferred Shares for (i) the immediately preceding Dividend Period, in
the case of Parity Stock, and (ii) such then-current Dividend Period,
in the case of Junior Stock. When dividends are not paid in full (or a
sum sufficient for such full payment is not so set apart) for any
Dividend Period on the Series A Preferred Shares and any Parity Stock,
dividends authorized and declared on the Series A Preferred Shares and
Parity Stock shall only be authorized and declared PRO RATA based upon
the respective amounts that would have been paid on the Series A
Preferred Shares and such Parity Stock had dividends been authorized
and declared in full.
In addition to the foregoing restriction, the Corporation
shall not authorize, declare, pay or set apart funds for any dividends
or other distributions (other than in Common Stock or other Junior
Stock) with respect to any Common Stock or other Junior Stock of the
Corporation or repurchase, redeem or otherwise acquire, or set apart
funds for repurchase, redemption or other acquisition of, any Common
Stock or other Junior Stock through a sinking fund or otherwise, unless
and until (i) the Corporation shall have authorized, declared and paid
full dividends on the Series A Preferred Shares for the four (4) most
recent preceding Dividend Periods (or such lesser number of Dividend
Periods during which Series A Preferred Shares have been outstanding)
or sufficient funds have been paid over to the dividend disbursing
agent of the Corporation for payment of such dividends and (ii) the
Corporation has authorized and declared a cash dividend on the Series A
Preferred Shares at the annual dividend rate for the then-current
Dividend Period, and sufficient funds have been paid over to the
dividend disbursing agent for the Corporation for the payment of such
cash dividend for such then-current Dividend Period.
No dividend shall be paid or set aside for holders of Series A
Preferred Shares for any Dividend Period unless full dividends have
been paid or set aside for the holders of Senior Stock as to dividends
for such Dividend Period.
(d) Any reference to "dividends" or "distributions" in this
Section 6.6.2 shall not be deemed to include any distribution made in
connection with any voluntary or involuntary dissolution, liquidation
or winding up of the Corporation.
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SECTION 6.6.3 OPTIONAL REDEMPTION.
(a) GENERAL. The Series A Preferred Shares are not subject to
mandatory redemption, and, except as hereinafter provided in Section
6.6.3(b) below, are not subject to optional redemption by the
Corporation prior to October 15, 2002. On or after October 15, 2002,
subject to receipt of any required regulatory approvals, the Series A
Preferred Shares may be redeemed in cash by the Corporation or any
successor or acquiring or resulting entity at its option, in whole or
in part, at any time or from time to time, upon notice as provided in
subsection (d) of this Section 6.6.3, at the redemption price of $25.00
per share, plus authorized, declared and unpaid dividends to the date
fixed for redemption, without interest.
The aggregate redemption price payable to each holder of
record of Series A Preferred Shares to be redeemed shall be rounded to
the nearest cent ($0.01).
If less than all of the outstanding Series A Preferred Shares
are to be redeemed, the Corporation will select those shares to be
redeemed PRO RATA, by lot or by such other methods as the Board of
Directors in its sole discretion determines to be equitable, provided
that such method satisfies any applicable requirements of any
securities exchange or quotation system on which the Series A Preferred
Shares are then listed or quoted. If redemption is being effected by
the Corporation, on and after the date fixed for redemption, dividends
shall cease to accrue on the Series A Preferred Shares called for
redemption, and they shall be deemed to cease to be outstanding,
provided that the redemption price (including any authorized and
declared but unpaid dividends to the date fixed for redemption, without
interest) has been duly paid or provided for. If redemption is being
effected by an entity other than the Corporation, on and as of the date
fixed for redemption, such entity shall be deemed to own the Series A
Preferred Shares being redeemed for all purposes of these Articles of
Incorporation, provided that the redemption price (including the amount
of any authorized and declared but unpaid dividends to the date fixed
for redemption, without interest) has been duly paid or provided for.
(b) TAX EVENT. The Corporation will have the right, at any
time upon the occurrence of a Tax Event, to redeem the Series A
Preferred Shares, in whole, but not in part, upon notice as provided in
subsection (d) of this Section 6.6.3, at a redemption price of $25.00
per share, plus all authorized, declared and unpaid dividends for the
then-current Dividend Period to the date fixed for redemption, without
interest. As used herein, "Tax Event" means the receipt by the
Corporation of an opinion of a law firm, experienced in such matters to
the effect that, as a result of (i) any amendment to, clarification of,
or change (including any announced prospective change) in, the laws,
treatises or any regulations thereunder of the United States or any
political subdivision or taxing authority thereof or therein affecting
taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure,
notice or announcement (including any notice or announcement or intent
to adopt such procedures or regulations) (each, an "Administrative
Action") or (iii) any amendment to, clarification of, or change in the
official positions or the
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interpretation of any such Administrative Action or any interpretation
or pronouncement that provides for a position with respect to any such
Administrative Action that differs from the theretofore generally
accepted position, in each case, by any legislative body, court,
governmental authority or regulatory body, irrespective of the manner
in which such amendment, clarification or change is made known, which
amendment, clarification or change is effective or such pronouncement
of decision is announced on or after the date of issuance of the Series
A Preferred Shares, there is more than an insubstantial risk that (A)
dividends paid or to be paid by the Corporation with respect to the
stock of the Corporation are not, or will not be, fully deductible by
the Corporation for United States federal income tax purposes or (B)
the Corporation is, or will be, subject to more than a DE MINIMIS
amount of other taxes, duties or other governmental charges as a result
of dividends paid or to be paid by the Corporation.
(c) CHANGE OF CONTROL. In addition to the redemption
provisions of subsections (a) and (b) above and not in lieu of or in
substitution therefor, in the event of a Change of Control, subject to
receipt of any required regulatory approvals, the Series A Preferred
Shares shall be redeemable at the option of the Corporation or its
successor or any acquiring or resulting entity with respect to the
Corporation (including by any parent or subsidiary of the Corporation,
any such successor, or any such acquiring or resulting entity), as
applicable, on or prior to October 15, 2002, in whole but not in part.
Redemption of the Series A Preferred Shares pursuant to this subsection
(c) shall be effected by notice as provided in subsection (d) of this
Section 6.6.3, given by the Corporation or its successor or any
acquiring or resulting entity with respect to the Corporation
(including by any parent or subsidiary of the Corporation, any such
successor, or any such acquiring or resulting entity), as applicable,
at a redemption price per share equal to (i) $25.00, plus (ii) an
amount equal to any authorized, declared and unpaid dividends to the
date fixed for redemption, without interest, and, without duplication,
an additional amount equal to the amount of dividends that would be
payable on the Series A Preferred Shares in respect of the period from
the first day of the Dividend Period in which the date fixed for
redemption occurs to the date fixed for redemption (assuming all such
dividends were to be authorized and declared), plus (iii) the
Applicable Premium, payable in cash.
The aggregate redemption price payable to each holder of
record of Series A Preferred Shares to be redeemed shall be rounded to
the nearest cent ($0.01).
Subject to subsection (d) of this Section 6.6.3, the
Corporation or any such successor or acquiring or resulting entity
shall be entitled to issue a notice of redemption under this subsection
(c) after the Corporation or a parent company shall have entered into a
definitive binding agreement with a third party that will result in a
Change of Control, provided that (i) the date fixed for redemption
shall not be earlier than the date on which the related Change of
Control shall occur and (ii) the right and obligation to effect such
redemption shall be contingent upon the occurrence of such Change of
Control.
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If redemption is being effected by the Corporation, on and as
of the date fixed for redemption, dividends shall cease to accrue on
the Series A Preferred Shares called for redemption, and they shall be
deemed to cease to be outstanding, provided that the redemption price
(including any authorized and declared but unpaid dividends to the date
fixed for redemption, without interest) has been duly paid or provided
for. If redemption is being effected by an entity other than the
Corporation, on and as of the redemption date such entity shall be
deemed to own the Series A Preferred Shares being redeemed for all
purposes of these Articles of Incorporation, provided that the
redemption price (including the amount of any authorized and declared
but unpaid dividends to the date fixed for redemption) has been duly
paid or provided for.
"Affiliate" of any specified Person means (i) any other Person
which, directly or indirectly, is in control of, is controlled by or is
under common control with such specified person or (ii) any other
Person who is a director or executive officer (A) of such specified
Person, (B) of any Subsidiary of such specified Person or (C) of any
Person described in clause (i) above. For purposes of this definition,
control of a Person means the power, direct or indirect, to direct or
cause the direction of the management and policies of such Person
whether by contract or otherwise; and the terms "controlling" and
"controlled' have meanings correlative to the foregoing.
"Applicable Premium" means an amount equal to (A) the present
value of (1) the dividends that would be payable on the Series A
Preferred Shares in respect of the period from the date fixed for
redemption through October 15, 2002 (assuming all such dividends were
to be authorized and declared) plus (2) $25.00 (assuming such $25.00 is
paid on October 15, 2002), computed using a discount rate equal to the
Treasury Rate plus 75 basis points, divided by (B) $25.00.
"Business Day" means any day other than a Saturday, Sunday or
a day on which banking institutions are not required to be open in the
State of California.
"Capital Stock" of any Person means any and all shares,
interests (including partnership interests), rights to purchase,
warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into or
exchangeable for such equity.
"Change of Control" means the occurrence of any of the
following events:
(i) any Person other than a Permitted Holder shall be
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Securities Exchange Act of 1934, as amended),
directly or indirectly, of a majority in the aggregate of the
total voting power of the Voting Stock of People's Bank of
California (the "Bank") or SoCal Holdings,
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Inc. (the "Holding Company"), whether as a result of issuance
of securities of the Bank or the Holding Company, any merger,
consolidation, liquidation or dissolution of the Bank or the
Holding Company, any direct or indirect transfer of securities
by a Permitted Holder or otherwise; or
(ii) a sale, transfer, conveyance or other
disposition, in a single transaction or in a series of related
transactions (other than to an Affiliate of the Bank or one or
more of its subsidiaries), in either case occurring outside
the ordinary course of business, of more than 75% of the
assets and 75% of the deposit liabilities of the Bank shown on
the consolidated balance sheet of the Bank as of the end of
the most recent fiscal quarter ending at least 45 days prior
to such transaction (or the first in such related series of
transactions).
"Permitted Holder" means the Trustees of the Estate
of Bernice Pauahi Bishop (the "Bishop Estate"), BIL Securities
(Offshore) Limited ("BIL Securities") or Arbur, Inc. ("Arbur")
or any Person controlled, directly or indirectly, by the
Bishop Estate, BIL Securities or Arbur.
"Person" shall mean an individual, corporation,
partnership, estate, trust (including a trust qualified under
Sections 401(a) or 501(c)(17) of the Code), a portion of a
trust permanently set aside for or to be used exclusively for
the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section
509(a) of the Code, joint stock company or other entity.
"Subsidiary" means any corporation, association,
partnership or other business entity of which more than 50% of
the total voting power of shares of Capital Stock or other
interests (including partnership interests) entitled (without
regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the
time owned, directly or indirectly, by (i) a Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii)
one or more Subsidiaries of such Person.
"Treasury Rate" means the yield to maturity at the
time of computation of United States Treasury securities with
a constant maturity (as compiled and published in the most
recent Federal Reserve Statistical Release H.15(519) which has
become publicly available at least two Business Days prior to
the date fixed for redemption (or, if such Statistical Release
is no longer published, any
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publicly available source of similar market data)) most nearly
equal to the then remaining period of time to October 15,
2002; PROVIDED, HOWEVER, that, if such period is not equal to
the constant maturity of a United States Treasury security for
which a weekly average yield is given, the Treasury Rate shall
be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of
United States Treasury securities for which such yields are
given, except that, if such period is less than one year, the
weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall
be used.
"Voting Stock" of a corporation means all classes of
Capital Stock of such corporation then outstanding and
normally entitled to vote in the election of directors.
"Wholly owned Subsidiary" means a Subsidiary of a
Person all the Capital Stock of which (other than directors'
qualifying shares) is owned by such Person or another Wholly
owned Subsidiary.
(d) NOTICE OF OPTIONAL REDEMPTION. Notice of any optional
redemption, setting forth (i) the date and place fixed for said
redemption, (ii) the redemption price and (iii) a statement that
dividends on the Series A Preferred Shares (A) to be redeemed by the
Corporation will cease to accrue on such redemption date, or (B) to be
redeemed by an entity other than the Corporation will thereafter accrue
solely for the benefit of such entity, shall be mailed at least thirty
(30) days, but not more than sixty (60) days, prior to said date fixed
for redemption to each holder of record of Series A Preferred Shares to
be redeemed at his or her address as the same shall appear on the stock
ledger of the Corporation. If less than all of the Series A Preferred
Shares owned by such holder are then to be redeemed, such notice shall
specify the number of shares thereof that are to be redeemed and the
numbers of the certificates representing such shares. Notice of any
redemption shall be given by first class mail, postage prepaid. Neither
failure to mail such notice, nor any defect therein or in the mailing
thereof, to any particular holder shall affect the sufficiency of the
notice or the validity of the proceedings for redemption with respect
to the other holders. Any notice which was mailed in the manner herein
provided shall be conclusively presumed to have been duly given whether
or not the holder receives such notice.
If such notice of redemption shall have been so mailed, and
if, on or before the date fixed for redemption specified in such
notice, all funds necessary for such redemption shall have been set
aside by the Corporation (or other entity as provided in subsection (a)
or (c) of this Section 6.6.3) separate and apart from its other funds
in trust for the account of the holders of Series A Preferred Shares to
be redeemed (so as to be and continue to be available therefor) or
delivered to the redemption agent with irrevocable instructions to
effect the redemption in accordance with the relevant notice of
redemption, then, on and after said
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redemption date, notwithstanding that any certificate for Series A
Preferred Shares so called for redemption shall not have been
surrendered for cancellation or transfer, the Series A Preferred Shares
(i) so called for redemption by the Corporation shall be deemed to be
no longer outstanding and all rights with respect to such Series A
Preferred Shares so called for redemption shall forthwith cease and
terminate, or (ii) so called for redemption by an entity other than the
Corporation shall be deemed owned for all purposes of these Articles of
Incorporation by such entity, except in each case for the right of the
holders thereof to receive, out of the funds so set aside in trust, the
amount payable on redemption thereof, but without interest, upon
surrender (and endorsement or assignment for transfer, if required by
the Corporation or such other entity) of their certificates.
In the event that holders of Series A Preferred Shares that
shall have been redeemed shall not within two (2) years (or any longer
period if required by law) after the redemption date claim any amount
deposited in trust with a bank or trust company for the redemption of
such shares, such bank or trust company shall, upon demand and if
permitted by applicable law, pay over to the Corporation (or other
entity that redeemed the shares) any such unclaimed amount so deposited
with it, and shall thereupon be relieved of all responsibility in
respect thereof, and thereafter the holders of such shares shall,
subject to applicable escheat laws, look only to the Corporation (or
other entity that redeemed the shares) for payment of the redemption
price thereof, but without interest from the date fixed for redemption.
(d) STATUS OF SHARES REDEEMED. Series A Preferred Shares
redeemed pursuant to this Section 6.6.3, or purchased or otherwise
acquired for value by the Corporation shall, after such acquisition,
have the status of authorized and unissued shares of Preferred Stock
and may be reissued by the Corporation at any time as shares of any
series of Preferred Stock other than as Series A Preferred Shares.
SECTION 6.6.4 AUTOMATIC EXCHANGE.
(a) GENERAL. Subject to the terms and conditions of this
Section 6.6.4, each Series A Preferred Share will be exchanged
automatically (the "Automatic Exchange") for one newly issued share of
9.75% Noncumulative Preferred Stock, par value $.01 per share (a "Bank
Preferred Share"), of the Bank. The issuance of the Bank Preferred
Shares has been duly authorized by the Board of Directors of the Bank.
The preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms
and conditions of the Bank Preferred Shares shall be as set forth in
the First Supplementary Section to Section 5 of the Bank's Charter
which has been filed with the Office of Thrift Supervision (the "OTS").
All corporate action necessary for the Bank to issue the Bank Preferred
Shares as of the Time of Exchange was completed prior to or
concurrently with completion of the offering of the Series A Preferred
Shares.
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(b) CONDITIONS OF EXCHANGE. The Automatic Exchange will occur
only if the appropriate federal regulatory agency directs in writing (a
"Directive") an exchange of the Series A Preferred Shares for Bank
Preferred Shares because (i) the Bank becomes "undercapitalized" under
prompt corrective action regulations, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal
regulatory agency, in its sole discretion, anticipates the Bank
becoming "undercapitalized" in the near term (the "Exchange Event").
(c) SURRENDER OF CERTIFICATES. Upon the Exchange Event, each
holder of Series A Preferred Shares shall be unconditionally obligated
to surrender to the Bank the certificates representing each Series A
Preferred Share held by such holder, and the Bank shall be
unconditionally obligated to issue to such holder in exchange for each
such Series A Preferred Share a certificate representing one Bank
Preferred Share.
(d) EFFECTIVENESS OF AND PROCEDURE FOR EXCHANGE. The Automatic
Exchange shall occur as of 8:00 a.m. Eastern Time on the effective date
of such exchange as set forth in the Directive, or, if such date is not
set forth in the Directive, as of 8:00 a.m. Eastern Time on the first
Business Day immediately following the date of the issuance of the
Directive (the "Time of Exchange"). As of the Time of Exchange, all of
the Series A Preferred Shares will be deemed canceled without any
further action on the part of the Corporation or any other Person, all
rights of the holders of the Series A Preferred Shares as stockholders
of the Corporation shall cease, and such persons shall thereupon and
thereafter be deemed to be and shall be for all purposes the holders of
Bank Preferred Shares. Notice of the occurrence of the Exchange Event
shall be given by first-class mail, postage prepaid, mailed within 30
days of such event, to each holder of record of the Series A Preferred
Shares, at such holder's address as the same appears on the stock
register of the Corporation. Each such notice shall indicate the place
or places where certificates for the Series A Preferred Shares are to
be surrendered by the holders thereof, and the Bank shall deliver to
each such holder certificates for Bank Preferred Shares upon surrender
of certificates for the Series A Preferred Shares. Until such
replacement share certificates are delivered (or in the event such
replacement certificates are not delivered), certificates previously
representing the Series A Preferred Shares shall be deemed for all
purposes to represent Bank Preferred Shares.
(e) STATUS OF SHARES REDEEMED; TREATMENT OF DIVIDENDS. Any
Series A Preferred Shares purchased or redeemed by the Corporation in
accordance with Section 6.6.3 hereof prior to the Time of Exchange
shall not be deemed outstanding and shall not be subject to the
Automatic Exchange. In the event of the Automatic Exchange, any accrued
and unpaid dividends on the Series A Preferred Shares as of the Time of
Exchange shall be deemed to be accrued and unpaid dividends on the Bank
Preferred Shares.
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SECTION 6.6.5 LIQUIDATION VALUE.
(a) LIQUIDATING DISTRIBUTIONS. In the event of any
liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of Series A Preferred Shares
shall be entitled to receive for each share thereof, out of the assets
of the Corporation legally available for distribution to shareholders
under applicable law, or the proceeds thereof, before any payment or
distribution of the assets shall be made to holders of shares of Common
Stock or any other Junior Stock (subject to the rights of the holders
of any class or series of equity securities having preference with
respect to distributions upon liquidation and the Corporation's general
creditors), liquidating distributions in the amount of $25.00 per
share, plus an amount per share equal to any dividends authorized and
declared but unpaid, without interest.
If the amounts available for distribution in respect of Series
A Preferred Shares and any outstanding Parity Stock upon any such
voluntary or involuntary liquidation, dissolution or winding up are not
sufficient to satisfy the full liquidation rights of all of the
outstanding Series A Preferred Shares and such Parity Stock, then the
holders of such outstanding shares shall share ratably in any such
distribution of assets in proportion to the full respective
preferential amounts to which they are entitled. After payment of the
full amount of the liquidating distribution to which they are entitled,
the holders of Series A Preferred Shares will not be entitled to any
further participation in any liquidating distribution of any remaining
assets by the Corporation. All distributions made in respect of Series
A Preferred Shares in connection with such a liquidation, dissolution
or winding up of the Corporation shall be made PRO RATA to the holders
entitled thereto.
(b) CONSOLIDATION, MERGER OR CERTAIN OTHER ACTIONS. Neither
the consolidation, merger or other business combination of the
Corporation with or into any other person, nor the sale of all or
substantially all of the assets of the Corporation, shall be deemed to
be a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 6.6.5.
SECTION 6.6.6 VOTING RIGHTS.
(a) GENERAL. Except as expressly provided in this Section
6.6.6, holders of Series A Preferred Shares shall have no voting
rights. When the holders of Series A Preferred Shares are entitled to
vote, each Series A Preferred Share will be entitled to one vote.
(b) RIGHT TO ELECT DIRECTORS. If full dividends on the Series
A Preferred Shares shall not have been paid for six (6) Dividend
Periods, the maximum authorized number of directors of the Corporation
shall thereupon be increased by two (2). Subject to compliance with any
requirement for regulatory approval of (or non-objection to) persons
serving as directors, the holders of Series A Preferred Shares, voting
together as a class with the holders of any Parity Stock upon which the
same voting rights as those of the Series A Preferred Shares have been
conferred and are irrevocable, shall have the exclusive right to elect
the two
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additional directors at the Corporation's next annual meeting of
shareholders and at each subsequent annual meeting until full dividends
have been authorized, declared and paid or authorized and declared and
a sum sufficient for payment thereof is set apart for payment for four
(4) consecutive Dividend Periods. The term of such directors (each a
"Preferred Director") elected thereby shall terminate, and the total
number of directors shall be decreased by two (2), upon the first
annual meeting of stockholders after the payment or the authorization,
declaration and setting aside for payment of full dividends on the
Series A Preferred Shares for four (4) consecutive Dividend Periods.
Any Preferred Director may be removed by, and shall not be removed
except by, the vote of the holders of record of the outstanding Series
A Preferred Shares and Parity Stock entitled to vote, voting together
as a single class without regard to series, at a meeting of the
Corporation's stockholders. As long as dividends on the Series A
Preferred Shares shall not have been paid for six (6) Dividend Periods,
(i) any vacancy in the office of a Preferred Director may be filled
(except as provided in the following clause (ii)) by an instrument in
writing signed by the remaining Preferred Director and filed with the
Corporation, and (ii) in the case of the removal of any Preferred
Director, the vacancy may be filled by the vote of the holders of the
outstanding Series A Preferred Shares and Parity Stock entitled to
vote, voting together as a single class without regard to series, at
the same meeting at which such removal shall be voted. Each director
appointed as aforesaid by the remaining Preferred Director shall be
deemed, for all purposes hereof, to be a Preferred Director.
(c) CERTAIN VOTING RIGHTS. So long as any Series A Preferred
Shares are outstanding, the Corporation shall not, without the consent
or vote of the holders of at least two-thirds of the outstanding Series
A Preferred Shares voting separately as a class, (i) amend, alter or
repeal or otherwise change any provision of these Articles of
Incorporation if such amendment, alteration, repeal or change would
materially and adversely affect the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications or terms or conditions of
redemption of the Series A Preferred Shares, or (ii) authorize, create
or increase the authorized amount of or issue any class or series of
any equity securities of the Corporation, or any warrants, options or
other rights exercisable or convertible or exchangeable into any class
or series of any equity securities of the Corporation, ranking prior to
the Series A Preferred Shares, either as to dividend rights or rights
on liquidation, dissolution or winding up of the Corporation or (iii)
merge, consolidate, reorganize or effect any other business combination
involving the Corporation, unless the resulting corporation will
thereafter have no class or series of equity securities either
authorized or outstanding ranking prior to the Series A Preferred
Shares as to dividends or as to the distribution of assets upon
liquidation, dissolution or winding up, except the same number of
shares of such equity securities with the same preferences, conversion
or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications or terms or conditions
of redemption as the shares of equity securities of the Corporation
that are authorized and outstanding immediately prior to such
transaction, and each holder of Series A Preferred Shares immediately
prior to such transaction shall receive shares with the same
preferences, conversion or other rights, voting
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powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption of
the resulting corporation as the Series A Preferred Shares held by such
holder immediately prior thereto.
The creation or issuance of Parity Stock or Junior Stock in
respect of the payment of dividends, or the distribution of assets upon
liquidation, dissolution or winding up of the Corporation, or an
amendment that increases the number of authorized shares of preferred
stock of the Series A Preferred Shares or any Junior Stock or Parity
Stock, shall not be deemed to be a material and adverse change
requiring a vote of the holders of Series A Preferred Shares pursuant
to this Section 6.6.6(c).
6.6.7 INDEPENDENT DIRECTORS.
(a) NUMBER; DEFINITION. As long as any Series A Preferred
Shares are outstanding, at least two directors on the Board of
Directors shall be Independent Directors. As used herein, "Independent
Director" means any director of the Corporation who is either (i) not a
current officer or employee of the Corporation or (ii) not a current
director, officer or employee of the Bank or any affiliate of the Bank.
(b) APPROVAL OF INDEPENDENT DIRECTORS. As long as any Series A
Preferred Shares are outstanding, the Corporation may not take the
following actions without first obtaining the approval of a majority of
the Independent Directors: (i) the issuance of additional Preferred
Stock ranking on a parity with the Series A Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of 20% of the
Corporation's total stockholders' equity, (iii) the acquisition of
assets other than Mortgage Loans, Mortgage-Backed Securities or Other
Authorized Investments, (iv) the termination or modification of, or the
election not to renew, the Advisory Agreement dated October 3, 1997, by
and between the Corporation and the Bank, the Commercial Mortgage
Servicing Agreement between the Corporation and the Bank, dated October
3, 1997, the Assignment, Assumption and Recognition Agreement between
Temple Inland Mortgage Corporation, the Bank and the Corporation, dated
October 3, 1997 or the subcontracting of any duties under the Advisory
Agreement or the Commercial Mortgage Servicing Agreement to third
parties unaffiliated with the Bank, (v) any material amendment to or
modification of either the Residential Mortgage Purchase and Warranties
Agreement or the Commercial Mortgage Purchase and Warranties Agreement,
each dated October 3, 1997 between the Corporation and the Bank, (vi)
the determination to revoke the Corporation's status as a real estate
investment trust under Sections 856 through 860 of the Code, and (vii)
any dissolution, liquidation or termination of the Company prior to
October 15, 2002. So long as the number of Independent Directors is
two, the foregoing actions must be approved by both of the Independent
Directors. For purposes of this Section 6.6.7, (i) "Mortgage Loans"
means whole loans secured by single-family (one- to four-unit)
residential, multi-family or commercial real estate properties, (ii)
"Mortgage-Backed Securities" means securities either issued or
guaranteed by agencies of the Federal government or government
sponsored agencies or that are rated by at least one nationally
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recognized independent rating organization and that represent interests
in or obligations backed by pools of Mortgage Loans, and (iii) "Other
Authorized Investments" means non-mortgage-related securities
authorized by Section 856(c)(5)(B) of the Code, in an amount which
shall not exceed 20% of the value of the Company's total assets.
(c) DETERMINATION BY INDEPENDENT DIRECTORS. In determining
whether any proposed action requiring their consent is in the best
interests of the Corporation, the Independent Directors shall consider
the interests of holders of both the Common Stock and the Preferred
Stock, including, without limitation, the holders of the Series A
Preferred Shares. In considering the interests of the holders of the
Preferred Stock, including, without limitation, holders of the Series A
Preferred Shares, the Independent Directors shall owe the same duties
that the Independent Directors owe with respect to holders of shares of
Common Stock.
SECTION 6.6.8 NO CONVERSION RIGHTS. The holders of Series A
Preferred Shares shall not have any rights to convert such shares into shares of
any other class or series of stock or into any other securities of, or any
interest in, the Corporation.
SECTION 6.6.9 NO SINKING FUND. No sinking fund shall be
established for the retirement or redemption of Series A Preferred Shares.
SECTION 6.6.10 PREEMPTIVE OR SUBSCRIPTION RIGHTS. No holder of
Series A Preferred Shares shall have any preemptive or subscription rights in
respect of any shares of the Corporation that may be issued.
SECTION 6.6.11 NO OTHER RIGHTS. The Series A Preferred Shares
shall not have any designations, preferences or relative, participating,
optional or other special rights except as set forth in the Articles of
Incorporation or as otherwise required by law.
SECTION 6.6.12 COMPLIANCE WITH APPLICABLE LAW. Declaration by
the Board of Directors and payment by the Corporation of dividends to holders of
the Series A Preferred Shares and repurchase, redemption or other acquisition by
the Corporation (or another entity as provided in subsection (a) of Section
6.6.3 hereof) of Series A Preferred Shares shall be subject in all respects to
any and all restrictions and limitations placed on dividends, redemptions or
other distributions by the Corporation (or any such other entity) under (i)
laws, regulations and regulatory conditions or limitations applicable to or
regarding the Corporation (or any such other entity) from time to time and (ii)
agreements with federal banking authorities with respect to the Corporation (or
any such other entity) from time to time in effect.
SECTION 6.6.13 MAINTENANCE OF STATUS AS REPORTING COMPANY. As
long as any Series A Preferred Shares are outstanding, the Corporation shall
maintain its status as a reporting company under the Securities Exchange Act of
1934, as amended.
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ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
SECTION 7.1 DEFINITIONS. For the purpose of this Article VII, the
following terms not otherwise defined in these Articles of Incorporation shall
have the following meanings:
OWNERSHIP LIMIT. The term "Ownership Limit" shall mean no more than
7.5% of the aggregate initial liquidation preference of the issued and
outstanding shares of Preferred Stock of the Corporation, including the Series A
Preferred Shares. The number and value of the outstanding shares of Capital
Stock shall be determined by the Board of Directors of the Corporation in good
faith, which determination shall be conclusive for all purposes hereof. The
Board of Directors also may determine that compliance with any restriction or
limitation on stock ownership and transfers set forth in this Article VII is no
longer required for REIT qualification or that, based upon then current law,
such restriction or limitation may be modified.
CONSTRUCTIVE OWNERSHIP. The term "Constructive Ownership" shall mean
ownership of Capital Stock by a Person, whether the interest in the shares of
Capital Stock is held directly or indirectly (including by a nominee), and shall
include interests that would be treated as owned through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The
terms "Constructive Owner," "Constructively Owns" and "Constructively Owned"
shall have the correlative meanings.
CAPITAL STOCK. The term "Capital Stock" shall mean all classes or
series of stock of the Corporation, including, without limitation, Common Stock
and Preferred Stock.
CHARITABLE BENEFICIARY. The term "Charitable Beneficiary" shall mean
one or more beneficiaries of the Trust as determined pursuant to Section 7.3.6,
provided that each such organization must be described in Section 501(c)(3) of
the Code and contributions to each such organization must be eligible for
deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
EXCEPTED HOLDER. The term "Excepted Holder" shall mean the Bishop
Estate, BIL Securities and Arbur and any entity controlled directly or
indirectly by the Bishop Estate, BIL Securities and Arbur, and their successors,
for each of which no Ownership Limit shall apply, and any stockholder of the
Corporation who is exempted from application of the Ownership Limit or for whom
the Ownership Limit is modified by these Articles of Incorporation or by the
Board of Directors pursuant to Section 7.2.7. Furthermore, any Person which owns
or is deemed to own shares of the Corporation by reason of the attribution of
shares of the Corporation (under certain attribution provisions of the Code) to
an Excepted Shareholder shall be treated as an Excepted Shareholder.
INITIAL DATE. The term "Initial Date" shall mean the date upon which
the Articles of Incorporation containing this Article VII are filed with the
SDAT.
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MARKET PRICE. The term "Market Price" on any date shall mean, with
respect to any class or series of outstanding shares of Capital Stock, the
Closing Price for such Capital Stock on such date. The "Closing Price" on any
date shall mean the last sale price for such Capital Stock, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, for such Capital Stock, in either case as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the principal national securities
exchange on which such Capital Stock is listed or admitted to trading or, if
such Capital Stock is not listed or admitted to trading on any national
securities exchange, the last quoted price, or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System
or, if such system is no longer in use, the principal other automated quotation
system that may then be in use or, if such Capital Stock is not quoted by any
such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in such Capital Stock selected by
the Board of Directors of the Corporation or, in the event that no trading price
is available for such Capital Stock, the fair market value of the Capital Stock,
as determined in good faith by the Board of Directors of the Corporation.
PROHIBITED OWNER. The term "Prohibited Owner" shall mean, with respect
to any purported Transfer, any Person who, but for the provisions of Section
7.2.1, would own or Constructively Own shares of Preferred Stock in violation of
this Article VII, and if appropriate in the context, shall also mean any Person
who would have been the record owner of the shares that the Prohibited Owner
would have so owned.
RESTRICTION TERMINATION DATE. The term "Restriction Termination Date"
shall mean the first day after the Initial Date on which the Corporation
determines pursuant to Section 5.7 of the Articles of Incorporation that it is
no longer in the best interests of the Corporation to attempt to, or continue
to, qualify as a REIT.
TRANSFER. The term "Transfer" shall mean any issuance, sale, transfer,
gift, assignment, devise or other disposition, as well as any other event that
causes any Person to acquire Constructive Ownership of Preferred Stock or the
right to vote or receive dividends on Preferred Stock, or any agreement to take
any such actions or cause any such events, including (a) the granting or
exercise of any option (or any disposition of any option), (b) any disposition
of any securities or rights convertible into or exchangeable for Preferred Stock
or any interest in Preferred Stock or any exercise of any such conversion or
exchange right, (c) transfers of interests in other entities that result in
changes in Constructive Ownership of Preferred Stock and (d) the transfer of any
shares of Preferred Stock pursuant to a waiver of the Ownership Limit under
Section 7.2.7.; in each case, whether voluntary or involuntary, whether
Constructively Owned and whether by operation of law or otherwise. The terms
"Transferring" and "Transferred" shall have the correlative meanings.
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TRUST. The term "Trust" shall mean any trust provided for in Section
7.3.1.
TRUSTEE. The term "Trustee" shall mean the Person unaffiliated with the
Corporation and a Prohibited Owner, that is appointed by the Corporation to
serve as trustee of the Trust.
SECTION 7.2 CAPITAL STOCK.
SECTION 7.2.1 OWNERSHIP LIMITATIONS. During the period
commencing on the Initial Date and prior to the Restriction Termination
Date:
(a) BASIC RESTRICTIONS.
(i) No Person, other than an Excepted
Holder, shall Constructively Own shares of Preferred Stock in
excess of the Ownership Limit.
(ii) Notwithstanding any other provisions
contained herein, any Transfer of shares of Preferred Stock
that, if effective, would result in the Preferred Stock being
beneficially owned by less than 100 Persons (determined under
the principles of Section 856(a)(5) of the Code) shall be VOID
AB INITIO, and the intended transferee shall acquire no rights
in such shares of Preferred Stock.
(b) TRANSFER IN TRUST. If any Transfer of shares of
Preferred Stock occurs which, if effective, would result in any Person
Constructively Owning shares of Preferred Stock in violation of Section
7.2.1(a)(i),
(i) then that number of shares of the
Preferred Stock the Constructive Ownership of which otherwise
would cause such Person to violate Section 7.2.1(a)(i)
(rounded up to the nearest whole share) shall be automatically
transferred to a Trust for the benefit of a Charitable
Beneficiary, as described in Section 7.3, effective as of the
close of business on the Business Day prior to the date of
such Transfer, and such Person shall acquire no rights in such
shares; or
(ii) if the transfer to the Trust described
in clause (i) of this sentence would not be effective for any
reason to prevent the violation of Section 7.2.1(a)(i), then
the Transfer of that number of shares of Preferred Stock that
otherwise would cause any Person to violate Section
7.2.1(a)(i) shall be VOID AB INITIO, and the intended
transferee shall acquire no rights in such shares of Capital
Stock.
SECTION 7.2.2 REMEDIES FOR BREACH. If the Board of Directors
of the Corporation or any duly authorized committee thereof shall at any time
determine in good faith that a Transfer or other event has taken place that
results in a violation of Section 7.2.1 or that a Person intends to acquire or
has attempted to acquire Constructive Ownership of any shares of Preferred Stock
in violation of Section 7.2.1 (whether or not such violation is intended), the
Board of Directors or a
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committee thereof shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or other event, including, without
limitation, causing the Corporation to redeem shares, refusing to give effect to
such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer or other event; provided, however, that any Transfers or
attempted Transfers or other events in violation of Section 7.2.1 shall
automatically result in the transfer to the Trust described above, and, where
applicable, such Transfer (or other event) shall be VOID AB INITIO as provided
above irrespective of any action (or non-action) by the Board of Directors or a
committee thereof.
SECTION 7.2.3 NOTICE OF RESTRICTED TRANSFER. Any Person who
acquires or attempts or intends to acquire Ownership or Constructive Ownership
of shares of Preferred Stock that will or may violate Section 7.2.1(a), or any
Person who would have owned shares of Preferred Stock that resulted in a
transfer to the Trust pursuant to the provisions of Section 7.2.1(b) shall
immediately give written notice to the Corporation of such event, or in the case
of such a proposed or attempted transaction, give at least 15 days prior written
notice, and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer on the Corporation's status as a REIT.
SECTION 7.2.4 OWNERS REQUIRED TO PROVIDE INFORMATION. From the
Initial Date and prior to the Restriction Termination Date:
(a) every owner of more than one percent (or such
lower percentage as required by the Code or the Treasury Regulations
promulgated thereunder) of the outstanding shares of Capital Stock,
within 30 days of June 30 and December 31 of each year, shall give
written notice to the Corporation stating the name and address of such
owner, the number of shares of Capital Stock and other shares of the
Capital Stock Constructively Owned and a description of the manner in
which such shares are held. Each such owner shall provide to the
Corporation such additional information as the Corporation may request
in order to determine the effect, if any, of such Constructive
Ownership on the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit.
(b) each Person who is a Constructive Owner of
Capital Stock and each Person (including the stockholder of record) who
is holding Capital Stock for a Constructive Owner shall provide to the
Corporation such information as the Corporation may request, in good
faith, in order to determine the Corporation's status as a REIT and to
comply with requirements of any taxing authority or governmental
authority or to determine such compliance.
SECTION 7.2.5 REMEDIES NOT LIMITED. Subject to Section 5.7 of
the Articles of Incorporation, nothing contained in this Section 7.2 shall limit
the authority of the Board of Directors of the Corporation to take such other
action as it deems necessary or advisable to protect the Corporation and the
interests of its stockholders in preserving the Corporation's status as a REIT.
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SECTION 7.2.6 AMBIGUITY. In the case of an ambiguity in the
application of any of the provisions of this Section 7.2, Section 7.3, or any
definition contained in Section 7.1, the Board of Directors of the Corporation
shall have the power to determine the application of the provisions of this
Section 7.2 or Section 7.3 with respect to any situation based on the facts
known to it. In the event Section 7.2 or 7.3 requires an action by the Board of
Directors and the Articles of Incorporation fails to provide specific guidance
with respect to such action, the Board of Directors shall have the power to
determine the action to be taken so long as such action is not contrary to the
provisions of Sections 7.1, 7.2 or 7.3.
SECTION 7.2.7 EXCEPTIONS.
(a) Subject to Section 7.2.7(b), the Board of
Directors of the Corporation, in its sole discretion, may exempt a
Person from the Ownership Limit and may establish or increase an
Ownership Limit for such Person if it receives a ruling from the
Internal Revenue Service, or an opinion of counsel, in either case in
form and substance satisfactory to the Board of Directors in its sole
discretion, as it may deem necessary or advisable in order to determine
or ensure the Corporation's status as a REIT. Notwithstanding the
receipt of any ruling or opinion, the Board of Directors may impose
such conditions or restrictions as it deems appropriate in connection
with granting such exception.
(b) An underwriter which participates in a public
offering or a private placement of Preferred Stock (or securities
convertible into or exchangeable for Capital Stock) may own or
Constructively Own shares of Capital Stock (or securities convertible
into or exchangeable for Capital Stock) in excess of the Ownership
Limit, but only to the extent necessary to facilitate such public
offering or private placement.
SECTION 7.2.8 LEGEND. Each certificate for shares of Preferred
Stock shall bear substantially the following legend:
The shares represented by this certificate are subject to
restrictions on Constructive Ownership and Transfer for the
purpose of the Corporation's maintenance of its status as a
Real Estate Investment Trust under the Internal Revenue Code
of 1986, as amended (the "Code"). Subject to certain further
restrictions and except as expressly provided in the
Corporation's Articles of Incorporation, (i) no Person may
Constructively Own in excess of 7.5% of the aggregate initial
liquidation preference of the issued and outstanding shares of
Preferred Stock of the Corporation, including the Series A
Preferred Shares; and (ii) no Person may Transfer shares of
Capital Stock if such Transfer would result in the Capital
Stock of the Corporation being owned (directly or
beneficially) by fewer than 100 Persons. Any Person who
attempts to Constructively Own shares of Capital Stock which
causes or will cause a Person to Constructively Own
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shares of Capital Stock in excess or in violation of the above
limitations must immediately notify the Corporation. If any of
the restrictions on transfer or ownership are violated, the
shares of Capital Stock represented hereby will be
automatically transferred to a Trustee of a Trust for the
benefit of one or more Charitable Beneficiaries. In addition,
upon the occurrence of certain events, attempted Transfers in
violation of the restrictions described above may be VOID AB
INITIO. All capitalized terms in this legend have the meanings
defined in the Articles of Incorporation of the Corporation,
as the same may be amended from time to time, a copy of which,
including the restrictions on transfer and ownership, will be
furnished to each holder of Capital Stock of the Corporation
on request and without charge.
Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability to a stockholder on request and without charge.
SECTION 7.3 TRANSFER OF PREFERRED STOCK IN TRUST.
SECTION 7.3.1 OWNERSHIP IN TRUST. Upon any purported Transfer
or other event that would result in a transfer of shares of Preferred Stock to a
Trust, such shares of Preferred Stock shall be deemed to have been transferred
to the Trustee as trustee of a Trust for the exclusive benefit of one or more
Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be
effective as of the close of business on the Business Day prior to the purported
Transfer or other event that results in the transfer to the Trust. The Trustee
shall be appointed by the Corporation and shall be a Person unaffiliated with
the Corporation and any Prohibited Owner. Each Charitable Beneficiary shall be
designated by the Corporation as provided in Section 7.3.6.
SECTION 7.3.2 STATUS OF SHARES HELD BY THE TRUSTEE. Shares of
Preferred Stock held by the Trustee shall be issued and outstanding shares of
Preferred Stock of the Company. The Prohibited Owner shall have no rights in the
shares held by the Trustee. The Prohibited Owner shall not benefit economically
from ownership of any shares held in trust by the Trustee, shall have no rights
to dividends and shall not possess any rights to vote or other rights
attributable to the shares held in the Trust.
SECTION 7.3.3 DIVIDEND AND VOTING RIGHTS. The Trustee shall
have all voting rights and rights to dividends or other distributions with
respect to shares of Preferred Stock held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend
or other distribution paid prior to the discovery by the Corporation that the
shares of Preferred Stock have been transferred to the Trustee shall be paid by
the recipient of such dividend or distribution to the Trustee upon demand and
any dividend or other distribution authorized but unpaid shall be paid when due
to the Trustee. Any dividend or distribution so paid to the Trustee
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shall be held in trust for the Charitable Beneficiary. The Prohibited Owner
shall have no voting rights with respect to shares held in the Trust and,
subject to Maryland law, effective as of the date that the shares of Preferred
Stock have been transferred to the Trustee, the Trustee shall have the authority
(at the Trustee's sole discretion) (i) to rescind as void any vote cast by a
Prohibited Owner prior to the discovery by the Corporation that the shares of
Preferred Stock have been transferred to the Trustee and (ii) to recast such
vote in accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary; provided, however, that if the Corporation has already
taken irreversible corporate action, then the Trustee shall not have the
authority to rescind and recast such vote. Notwithstanding the provisions of
this Article VII, until the Corporation has received notification that shares of
Preferred Stock have been transferred into a Trust, the Corporation shall be
entitled to rely on its share transfer and other stockholder records for
purposes of preparing lists of stockholders entitled to vote at meetings,
determining the validity and authority of proxies and otherwise conducting votes
of stockholders.
SECTION 7.3.4 SALE OF SHARES BY TRUSTEE. Within 20 days of
receiving notice from the Corporation that shares of Preferred Stock have been
transferred to the Trust, the Trustee of the Trust shall sell the shares held in
the Trust to a person, designated by the Trustee, whose ownership of the shares
will not violate the ownership limitations set forth in this Article VII. Upon
such sale, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
Prohibited Owner and to the Charitable Beneficiary as provided in this Section
7.3.4. The Prohibited Owner shall receive the lesser of (1) the price paid by
the Prohibited Owner for the shares or, if the Prohibited Owner did not give
value for the shares in connection with the event causing the shares to be held
in the Trust (e.g., in the case of a gift, devise or other such transaction),
the Market Price of the shares on the day of the event causing the shares to be
held in the Trust and (2) the price per share received by the Trustee from the
sale or other disposition of the shares held in the Trust. Any net sales
proceeds in excess of the amount payable to the Prohibited Owner shall be
immediately paid to the Charitable Beneficiary. If, prior to the discovery by
the Corporation that shares of Preferred Stock have been transferred to the
Trustee, such shares are sold by a Prohibited Owner, then (i) such shares shall
be deemed to have been sold on behalf of the Trust and (ii) to the extent that
the Prohibited Owner received an amount for such shares that exceeds the amount
that such Prohibited Owner was entitled to receive pursuant to this Section
7.3.4, such excess shall be paid to the Trustee upon demand.
SECTION 7.3.5 PURCHASE RIGHT IN STOCK TRANSFERRED TO THE
TRUSTEE. Shares of Preferred Stock transferred to the Trustee shall be deemed to
have been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Trust (or, in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (ii) the Market Price on
the date the Corporation, or its designee, accepts such offer. The Corporation
shall have the right to accept such offer until the Trustee has sold the shares
held in the Trust pursuant to Section 7.3.4. Upon such a sale to the
Corporation, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
Prohibited Owner.
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SECTION 7.3.6 DESIGNATION OF CHARITABLE BENEFICIARIES. By
written notice to the Trustee, the Corporation shall designate one or more
nonprofit organizations to be the Charitable Beneficiary of the interest in the
Trust such that (i) the shares of Capital Stock held in the Trust would not
violate the restrictions set forth in this Article VII in the hands of such
Charitable Beneficiary and (ii) each such organization must be described in
Section 501(c)(3) of the Code and contributions to each such organization must
be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of
the Code.
SECTION 7.4 SETTLEMENT OF TRANSACTIONS. Nothing in this Article VII
shall preclude the settlement of any transaction entered into through the
facilities of any national securities exchange or automated inter-dealer
quotation system. The fact that the settlement of any transaction is so
permitted shall not negate the effect of any other provision of this Article VII
and any transferee in such a transaction shall be subject to all of the
provisions and limitations set forth in this Article VII.
SECTION 7.5 ENFORCEMENT. The Corporation is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions of
this Article VII.
SECTION 7.6 NON-WAIVER. No delay or failure on the part of the
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of Directors,
as the case may be, except to the extent specifically waived in writing.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendment to its Articles of Incorporation, now or hereafter authorized by law,
including any amendment altering the terms or contract rights, as expressly set
forth in these Articles of Incorporation, of any shares of outstanding stock.
All rights and powers conferred by the Articles of Incorporation on
stockholders, directors and officers are granted subject to this reservation.
Subject to the rights of the holders of shares of Series A Preferred Stock set
forth in Section 6.6, any amendment to the Articles of Incorporation shall be
valid only if approved by the affirmative vote of a majority of all the votes
entitled to be cast on the matter. Any amendment to Section 6.6 of the Articles
of Incorporation shall be valid only if approved as provided therein.
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers of a corporation,
no director or officer of the Corporation shall be liable to the Corporation or
its stockholders for money damages. Neither the amendment nor
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repeal of this Article IX, nor the adoption or amendment of any other provision
of the Articles of Incorporation or Bylaws inconsistent with this Article IX,
shall apply to or affect in any respect the applicability of the preceding
sentence with respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption.
ARTICLE X
NON-APPLICABILITY OF MARYLAND GENERAL CORPORATION LAW TO
CERTAIN BUSINESS COMBINATIONS AND CONTROL
SHARE ACQUISITIONS
The provisions of Title 3, Subtitle 6 of the Corporations and
Associations Article of the Annotated Code of Maryland (or any successor
statute) shall not apply to any business combination by the Bank and any present
or future affiliates thereof. This Article X may be altered, repealed, in whole
or in part, at any time, provided that such repeal shall not affect any business
combinations that have been consummated or are subject to an existing agreement
entered into prior to such alteration or repeal.
The provisions of Title 3, Subtitle 7 of the Corporations and
Associations Article of the Annotated Code of Maryland (or any successor
statute) shall not apply to any acquisition by the Bank and any present or
future affiliates thereof of shares of stock of the Corporation. This Article X
may be repealed, in whole or in part, at any time, whether before or after an
acquisition of control shares and, upon such repeal, may, to the extent provided
by any successor article or bylaw, apply to any prior or subsequent control
share acquisition.
THIRD: The amendment to and restatement of the Articles of
Incorporation as hereinabove set forth has been duly advised by the Board of
Directors and approved by the stockholders of the Corporation as required by
law.
FOURTH: The current address of the principal office of the Corporation
in the State of Maryland is as set forth in Article IV of the foregoing
amendment and restatement of the Articles of Incorporation.
FIFTH: The name and address of the Corporation's current resident agent
is as set forth in Article IV of the foregoing amendment and restatement of the
Articles of Incorporation.
SIXTH: The number of directors of the Corporation and the names of
those currently in office are as set forth in Article V of the foregoing
amendment and restatement of the Articles of Incorporation.
SEVENTH: The total number of shares of stock which the Corporation had
authority to issue immediately prior to this amendment and restatement was
10,000 shares, $.01 par value per share, all of one class. The aggregate par
value of all shares of stock having par value was $100.
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EIGHTH: The total number of shares of stock which the Corporation has
authority to issue pursuant to the foregoing amendment and restatement of the
Articles of Incorporation is 8,000,000, consisting of 4,000,000 shares of Common
Stock, $.01 par value per share, and 4,000,000 shares of Preferred Stock, $.01
par value per share. The aggregate par value of all authorized shares of stock
having par value is $80,000.
NINTH: The undersigned President acknowledges these Articles of
Amendment and Restatement to be the corporate act of the Corporation and, as to
all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
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IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President and attested to by its Secretary on this 1st day of October, 1997.
ATTEST: PEOPLE'S PREFERRED CAPITAL
CORPORATION
/s/ J. Michael Holmes By: /s/ Rudolf P. Guenzel
- --------------------------------- ---------------------------------
Secretary President
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Exhibit 10.(a)
- --------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
PEOPLE'S PREFERRED CAPITAL CORPORATION
PURCHASER
PEOPLE'S BANK OF CALIFORNIA
SELLER
DATED AS OF OCTOBER 3, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Definitions................................................ 1
SECTION 2. Agreement to Purchase Initial Portfolio.................... 11
SECTION 3. Subsequent Purchases....................................... 11
SECTION 4. Payment of Purchase Price.................................. 12
SECTION 5. Examination of Mortgage Files.............................. 12
SECTION 6. Conveyance from Seller to Purchaser........................ 12
SUBSECTION 6.1 Possession of Servicing Files........................ 12
SUBSECTION 6.2 Books and Records.................................... 13
SUBSECTION 6.3 Delivery of Custodian's File......................... 13
SECTION 7. Servicing of the Mortgage Loans............................ 14
SECTION 8. Representations, Warranties and Covenants of the
Seller; Remedies for Breach.............................. 15
SUBSECTION 8.1 Representations and Warranties Regarding the Seller.. 15
SUBSECTION 8.2 Representations and Warranties Regarding
Individual Mortgage Loans.......................... 17
SUBSECTION 8.3Remedies for Breach of Representations and Warranties.. 26
SECTION 9. Closing.................................................... 29
SECTION 10. Closing Documents.......................................... 29
SECTION 11. Costs...................................................... 30
SECTION 12. Merger or Consolidation of the Seller...................... 30
SECTION 13. Mandatory Delivery; Grant of Security Interest............. 31
SECTION 14. Notices.................................................... 31
SECTION 15. Severability Clause........................................ 32
SECTION 16. Counterparts............................................... 32
SECTION 17. Governing Law.............................................. 32
SECTION 18. Intention of the Parties................................... 33
SECTION 19. Successors and Assigns; Assignment of Purchase Agreement... 33
SECTION 20. Waivers.................................................... 33
SECTION 21. Entire Agreement, Amendment................................ 33
SECTION 22. General Interpretive Principles............................ 34
SECTION 23. Reproduction of Documents.................................. 34
SECTION 24. Further Agreements......................................... 34
SECTION 25. Recordation of Assignments of Mortgage..................... 35
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EXHIBITS
EXHIBIT A Contents of Each Mortgage File
EXHIBIT B Residential Mortgage Servicing Agreement
EXHIBIT C Form of Seller's Officer's Certificate
EXHIBIT D Form of Opinion of Counsel to the Seller
EXHIBIT E Notice of Sale and Release of Collateral
EXHIBIT F Form of Security Release Certification
EXHIBIT G Form of Assignment and Assumption Agreement
EXHIBIT H Initial Portfolio Mortgage Loan Schedule
EXHIBIT I Form of Commitment Letter
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RESIDENTIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
This RESIDENTIAL MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the
"Agreement"), dated as of October 3, 1997, by and between People's Preferred
Capital Corporation, a Maryland corporation, having an office at 5900 Wilshire
Boulevard, Los Angeles, California 90036 (the "Purchaser"), and People's Bank of
California, a stock savings bank organized under the laws of the United States
of America, having an office at 5900 Wilshire Boulevard, Los Angeles, California
90036 (the "Seller").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller, from time to time, certain Mortgage Loans
(as defined herein) on a servicing retained basis as described herein, and which
shall be delivered as whole loans; and
WHEREAS, each Mortgage Loan, at the time it is sold by Seller to Purchaser
pursuant to this Agreement, will be secured by a mortgage, deed of trust or
other security instrument creating a first lien on a residential dwelling
located in the jurisdiction indicated on the related Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of the
conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the premises and mutual agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Purchaser and the Seller agree
as follows:
SECTION 1. DEFINITIONS.
For purposes of this Agreement and any Commitment Letter (as defined
herein), the following capitalized terms shall have the respective meanings set
forth below. Other capitalized terms used in this Agreement and not defined
herein shall have the respective meanings set forth in the Residential Servicing
Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Act" means The National Housing Act, as amended from time to time.
<PAGE>
"Adjustable Rate Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement the interest rate of which adjusts
periodically based on the index identified in the Mortgage Note.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agreement" means this Residential Mortgage Loan Purchase and Warranties
Agreement, all amendments hereof and supplements hereto and each Commitment
Letter hereunder.
"ALTA" means The American Land Title Association or any successor thereto.
"Ancillary Income" means all late charges, assumption fees, escrow account
benefits, reinstatement fees, conversion fees, optional insurance commissions
and similar types of fees arising from or in connection with any Mortgage and
collected from the related Mortgagor, to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"Appraised Value" means the value of the Mortgaged Property set forth in
an appraisal made in connection with the origination of the related Mortgage
Loan as the value of the Mortgaged Property.
"Assignment and Assumption Agreement" has the meaning set forth in Section
19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered in
blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage Loan to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking and savings and loan institutions in the State of
California or the State in which the servicing operations of the Seller's
Servicer are located, are authorized or obligated by law or executive order to
be closed.
"Classified" is used herein generally to describe a Mortgage Loan which is
deemed substandard, doubtful or loss with respect to collectibility.
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"Closing Date" means the Initial Closing Date and any other date on which
the parties hereto shall agree to close a sale of Mortgage Loans hereunder as
set forth in a duly executed Commitment Letter.
"Code" means Internal Revenue Code of 1986, as amended.
"Commitment Letter" means a letter agreement executed by the Purchaser and
the Seller providing for the purchase and sale of Mortgage Loans and
substantially in the form of Exhibit I hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Conventional Loan" means a conventional residential first lien mortgage
loan which is a Mortgage Loan.
"Convertible Mortgage Loan" means any individual Mortgage Loan purchased
pursuant to this Agreement which contains a provision whereby the Mortgagor is
permitted to convert the Mortgage Loan to a fixed rate Mortgage Loan in
accordance with the terms of the related Mortgage Note.
"Custodial Account" means the separate trust account created and
maintained pursuant to the Residential Servicing Agreement.
"Cut-off Date" means the Initial Cut-off Date and any other date as of
which the principal balance of Mortgage Loans will be determined for purposes of
calculating the Purchase Price for the purchase and sale of Mortgage Loans,
which date shall be set forth in the related Commitment Letter.
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Due Date" means the day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained
pursuant to the Residential Servicing Agreement with respect to each Mortgage
Loan, as specified in the Residential Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, the amounts
(whether referred to as escrow, impound or otherwise) constituting ground rents,
taxes, assessments, water
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rates, sewer rents, municipal charges, mortgage insurance premiums, fire and
hazard insurance premiums, flood insurance premiums, earthquake insurance
premiums, condominium charges, and, to the extent that such items can become a
lien on the Mortgaged Property superior to the Mortgage, if unpaid, and are
reportable by the Servicer's tax lien reporting service, any other payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document.
"FHA" means the Federal Housing Administration, an agency within the
United States Department of Housing and Urban Development, or any successor
thereto and including the Federal Housing Commissioner and the Secretary of
Housing and Urban Development where appropriate under the FHA Regulations.
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any successor
thereto.
"FNMA" means the Federal National Mortgage Association, or any successor
thereto.
"Gross Margin" means, with respect to each Adjustable Rate Mortgage Loan,
the applicable fixed percentage which, when added to the applicable Index (and
rounded as set forth in the applicable Mortgage Note), calculates to the current
Mortgage Interest Rate paid by the related Mortgagor (without taking into
account any Lifetime Rate Caps, Periodic Rate Caps or minimum interest rates).
"HUD" means the Department of Housing and Urban Development, or any
federal agency or official thereof which may from time to time succeed to the
functions thereof with regard to FHA mortgage insurance. The term "HUD," for
purposes of this Agreement, is also deemed to include subdivisions thereof such
as the FHA and Government National Mortgage Association.
"Independent Directors" means the members of the Board of Directors of the
Purchaser who are not current employees or officers of the Purchaser or current
employees, officers or directors of the Seller or any affiliate of the Seller.
In addition, any members of the Board of Directors of the Purchaser elected by
holders of the preferred stock of the Purchaser, including the Series A
Preferred Shares, will be deemed to be "Independent Directors" for purposes of
approving actions requiring the approval of a majority of the Independent
Directors.
"Index" means, with respect to each Interest Rate Adjustment Date of a
Six-Month Treasury Rate Adjustable Rate Mortgage Loan, the weekly average
investment yield of auction rates on six-month Treasury securities as made
available by the Federal Reserve Board; with respect to each Interest Rate
Adjustment Date of a One-Year Treasury Rate Adjustable Rate Mortgage Loan, the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of one year, as made available by the Federal Reserve Board; and, with
respect to each Interest Rate Adjustment Date of an Eleventh District Cost of
Funds Adjustable Rate Mortgage Loan, the then-current monthly weighted average
cost of funds for savings institutions in Arizona, California and Nevada that
are members of the Eleventh Federal Home Loan Bank District.
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"Initial Closing Date" means October 3, 1997, or such other date as the
parties hereto may mutually agree.
"Initial Cut-off Date" means September 22, 1997.
"Initial Portfolio Mortgage Loan Schedule" means the schedule of Mortgage
Loans to be purchased by the Purchaser on the Initial Closing Date, attached
hereto as Exhibit H.
"Initial Portfolio Purchase Price" means the amount set forth in Section 2
of this Agreement.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Interest Rate Adjustment Date" means, with respect to each Adjustable
Rate Mortgage Loan, the date, specified in the related Mortgage Note, on which
the Mortgage Interest Rate is adjusted.
"Lifetime Rate Cap" means the provision of each Mortgage Note related to
an Adjustable Rate Mortgage Loan which provides for an absolute maximum Mortgage
Interest Rate thereunder as set forth in the related Mortgage Note.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of such Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage Loan,
the ratio (expressed as a percentage) of the original principal amount of the
Mortgage Loan to the lesser of (a) the Appraised Value of the related Mortgaged
Property at origination and (b) if the Mortgage Loan was made to finance the
acquisition of the related Mortgaged Property, the purchase price of the
Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note, including any riders, addendums, assumptions, modifications or
extensions thereto, which creates a first lien on an unsubordinated estate in
fee simple in real property securing the Mortgage Note; except that with respect
to real property located in jurisdictions in which the use of leasehold estates
for residential properties is a widely accepted practice, the mortgage, deed of
trust or other instrument securing the Mortgage Note may secure and create a
first lien upon a leasehold estate of the Mortgagor.
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"Mortgage File" means the items pertaining to a particular Mortgage Loan
referred to in Exhibit A, and any additional documents required to be added to
the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of an Adjustable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
"Mortgage Loan" means an individual residential first mortgage loan which
is the subject of this Agreement, each Mortgage Loan originally sold pursuant to
this Agreement being identified on Exhibit H attached hereto, and each Mortgage
Loan sold pursuant to a Commitment Letter being identified on the applicable
Mortgage Loan Schedule, and each of which Mortgage Loans includes or shall
include, without limitation, the Mortgage File, the Monthly Payments, Principal
Prepayments, Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds,
and all other rights, benefits, proceeds and obligations arising from or in
connection with such Mortgage Loan, excluding replaced or repurchased mortgage
loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan, the
following documents pertaining to such Mortgage Loan:
(a) The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I to Exhibit A hereto, a lost note affidavit,
executed by an officer of the Seller, with a copy of the original
note attached thereto) bearing all intervening endorsements,
endorsed "Pay to the order of (IN BLANK) without recourse" and
signed in the name of the Seller by an authorized officer. To the
extent that there is no room on the face of the Mortgage Notes for
endorsements, the endorsement may be contained on an allonge, if
state law so allows. If the Mortgage Loan was acquired by the Seller
in a merger, the endorsement must be by "[Seller], successor by
merger to [name of predecessor]." If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the endorsement must be by "[Seller], formerly known as [previous
name]"; and
(b) The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all of the Mortgage Loans in form and
substance acceptable for recording and signed in the name of the
Seller. If the Mortgage Loan was acquired by the Seller in a merger,
the Assignment of Mortgage must be made by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as
[previous name]."
(c) The original of any guarantee executed in connection with the
Mortgage Note.
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(d) The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation, a photocopy of such Mortgage certified by
the Seller to be true and correct will be delivered; if such
Mortgage has been lost or if such public recording office retains
the original recorded Mortgage, the Seller shall deliver or cause to
be delivered to the Purchaser, a photocopy of such Mortgage,
certified by such public recording office to be a true and complete
copy of the original recorded Mortgage.
(e) The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon if
such agreements have been recorded, or certified copies of such
documents if the originals thereof are unavailable.
(f) Originals of all intervening assignments of the Mortgage with
evidence of recording thereon, if such intervening assignment has
been recorded.
(g) The original mortgagee policy of title insurance or, in the event
such original title policy is unavailable, a certified true copy of
the related policy binder or commitment for title certified to be
true and complete by the title insurance company.
(h) Any other security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
(i) For Mortgage Loans with original LTV's greater than 80%, evidence of
a Primary Insurance Policy.
"Mortgage Loan Schedule" means (a) the Initial Portfolio Mortgage Loan
Schedule attached hereto as Exhibit H and (b) any schedule of Mortgage Loans in
similar form attached to and constituting part of a duly executed Commitment
Letter, in each case setting forth at least the following information with
respect to each Mortgage Loan set forth thereon: (1) the Seller's Mortgage Loan
identifying number; (2) the Mortgagor's name; (3) the street address of the
Mortgaged Property including the city, state and zip code; (4) a code indicating
whether the Mortgaged Property at origination was owner-occupied, second home or
investor owned; (5) the property type, i.e., the type of residential units
constituting the Mortgaged Property; (6) the original months to maturity; (7)
the remaining months to maturity from the applicable Cut-off Date, based on the
original amortization schedule, and, if different, the maturity expressed in the
same manner but based on the actual amortization schedule; (8) the Loan-to-Value
Ratio at origination; (9) the Mortgage Interest Rate as of the applicable
Cut-off Date; (10) the stated maturity date; (11) the amount of the Monthly
Payment as of the applicable Cut-off Date; (12) the original principal amount
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of the Mortgage Loan; (13) the principal balance of the Mortgage Loan as of the
close of business on the applicable Cut-off Date; (14) a code indicating the
purpose of the loan (i.e., purchase and refinance); (15) a code indicating the
documentation style (i.e. full, alternative or reduced); (16) the type of
Mortgage Loan product, if any; (17) the first payment Due Date; (18) the initial
Mortgage Interest Rate; (19) the amount of the first Monthly Payment; (20) the
name of any Qualified Insurer with respect to a PMI Policy; and (21) the
Servicing Fee Rate. With respect to any Adjustable Rate Mortgage Loan, such
schedule shall also set forth (1) the Interest Rate Adjustment Dates; (2) the
Gross Margin; (3) the Lifetime Rate Cap; (4) any Periodic Rate Caps; (5) any
minimum interest rate, if other than the Gross Margin; (6) the first Interest
Rate Adjustment Date after the applicable Cutoff Date; (7) any Payment
Adjustment Cap; (8) the first Payment Adjustment Date after the related Cut-off
Date; (9) whether such Mortgage Loan has the potential to negatively amortize;
and (10) the name of the applicable Index, in each case, under the terms of the
Mortgage Note. With respect to the Mortgage Loans in the aggregate set forth
thereon, each Mortgage Loan Schedule shall set forth the following information,
as of the applicable Cut-off Date: (1) the number of Mortgage Loans; (2) the
current aggregate outstanding principal balance of the Mortgage Loans; (3) the
weighted average Mortgage Interest Rate of the Mortgage Loans; and (4) the
weighted average remaining maturity of the Mortgage Loans and (5) the weighted
average servicing fee.
"Mortgage Note" means the note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage, including any amendment, modification or
addendum thereto.
"Mortgaged Property" means the real property (or leasehold estate, if
applicable) securing repayment of the debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Non-accrual Status" refers to Mortgage Loans that are 90 days or more
past due in the payment of principal or interest.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller or the Servicer, as the case may be, and
delivered to the Purchaser as required by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Seller, reasonably acceptable to the Purchaser.
"Payment Adjustment Cap" means, with respect to an Adjustable Rate
Mortgage Loan, the maximum amount of the related Monthly Payment as adjusted on
a given Payment Adjustment Date in accordance with the terms of the related
Mortgage Note.
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"Payment Adjustment Date" means, with respect to each Adjustable Rate
Mortgage Loan, the date set forth in the related Mortgage Note on which the
Monthly Payment is adjusted in accordance with the terms of the Mortgage Note.
"Periodic Rate Cap" means the provision of each Mortgage Note related to
each Adjustable Rate Mortgage Loan which provides for an absolute maximum amount
by which the Mortgage Interest Rate therein may increase or decrease on an
Interest Rate Adjustment Date above or below the Mortgage Interest Rate
previously in effect as set forth in the applicable Mortgage Note.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"PMI Policy" or "Primary Mortgage Insurance Policy" means a policy of
primary mortgage guaranty insurance issued by a Qualified Insurer.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price to be paid on the applicable Closing Date
by the Purchaser to the Seller in consideration for the Mortgage Loans to be
purchased by the Purchaser on such Closing Date (including, without limitation,
the Initial Portfolio Purchase Price to be paid by Purchaser at the Initial
Closing) as set forth in this Agreement or a duly executed Commitment Letter, as
the case may be.
"Purchaser" means People's Preferred Capital Corporation or its successor
in interest or assigns or any successor to the Purchaser under this Agreement as
herein provided.
"Qualified Appraiser" means, with respect to a Mortgaged Property, an
appraiser who had no interest, direct or indirect in such Mortgaged Property or
in any loan made on the security thereof, and whose compensation is not affected
by the approval or disapproval of the Mortgage Loan, and such appraiser and the
appraisal made by such appraiser both satisfy the requirements of Title XI of
the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 and the
regulations promulgated thereunder, all as in effect on the date the Mortgage
Property was appraised.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided and approved as an
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insurer by FNMA with respect to primary mortgage insurance and, in addition, in
the two highest rating categories by Best's with respect to hazard and flood
insurance.
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to be
substituted by the Seller for a Deleted Mortgage Loan which must, on the date of
such substitution, (i) have an outstanding principal balance, after deduction of
all payments collected as of the date of substitution (or in the case of a
substitution of more than one mortgage loan for a Deleted Mortgage Loan, an
aggregate principal balance), not in excess of the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall will be provided by
the Seller to the Servicer for deposit in the Custodial Account by the Seller in
the month of substitution); (ii) have a Mortgage Interest Rate and a remaining
term to maturity, each of which is as reasonably comparable as possible to the
Mortgage Interest Rate and remaining term to maturity of the Deleted Mortgage
Loan; (iii) be of the same type as the Deleted Mortgage Loan (i.e., Mortgage
Loan with the same Periodic Rate Caps or fixed rate); and (iv) comply with each
representation and warranty (respecting individual Mortgage Loans) set forth in
Section 8.2 hereof.
"Remittance Date" means the date specified in the Residential Servicing
Agreement.
"Repurchase Price" means, with respect to any Mortgage Loan, a price equal
to (i) the unpaid principal balance of such Mortgage Loan plus (ii) interest,
net of Servicing Fees, on such unpaid principal balance of such Mortgage Loan at
the Mortgage Interest Rate from the last date through which interest has been
paid or advanced to the Purchaser to the date of repurchase, less any
unreimbursed advances made by the Servicer, if any, in respect of such
repurchased Mortgage Loan.
"Residential Servicing Agreement" means the Assignment, Assumption and
Recognition Agreement, attached as Exhibit B hereto, to be entered into by the
Seller, the Purchaser and Temple-Inland Mortgage Corporation, as servicer,
providing for Temple-Inland Mortgage Corporation to service the Mortgage Loans
for the Purchaser as specified by the Residential Servicing Agreement.
"RESPA" means Real Estate Settlement Procedures Act, as amended from time
to time.
"Seller" means People's Bank of California, and its successors in interest
and assigns.
"Series A Preferred Shares" means the __% Noncumulative Exchangeable
Preferred Stock, Series A, par value $.01 per share, of the Purchaser.
"Servicer" means Temple-Inland Mortgage Corporation.
"Servicing Fee" means, with respect to each Mortgage Loan, subject to the
Residential Servicing Agreement, the amount of the annual fee the Purchaser
shall pay to the Servicer, which shall for a period of one full month be equal
to one-twelfth of the product of (a) the Servicing Fee Rate and (b) the Stated
Principal Balance of such Mortgage Loan. Such fee shall be payable monthly,
computed on the basis of the same principal amount and period in respect of
which any
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related interest payment on a Mortgage Loan is computed, and shall be pro rated
for any portion of a month during which the Mortgage Loan is serviced by the
Servicer under the Residential Servicing Agreement. The obligation of the
Purchaser to pay the Servicing Fee with respect to any Mortgage Loan is limited
to, and the Servicing Fee is payable solely from, the interest portion
(including recoveries with respect to interest from Liquidation Proceeds, to the
extent permitted by the Residential Servicing Agreement) of the related Monthly
Payment collected by the Servicer, or as otherwise provided under the
Residential Servicing Agreement. In addition to the Servicing Fee, the Servicer
shall be entitled to retain all Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the applicable Mortgage Loan Schedule with respect to such Mortgage
Loan.
"Servicing File" means, with respect to each Mortgage Loan, the files
retained by the Servicer during the period in which the Servicer is acting as
Servicer pursuant to the Residential Servicing Agreement, consisting of
originals of all documents in the Mortgage File which are not delivered to the
Purchaser or its designee and copies of the other Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan, the unpaid
principal balance as of the date of determination of such balance.
SECTION 2. AGREEMENT TO PURCHASE INITIAL PORTFOLIO.
The Seller hereby agrees to sell, transfer, assign, set over and convey to
the Purchaser on the Initial Closing Date, without recourse, but subject to the
terms of this Agreement, all right, title and interest of the Seller in and to
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
the related Mortgage Files and all rights and obligations arising under the
documents contained therein. Mortgage Loans on the Initial Portfolio Mortgage
Loan Schedule shall have an aggregate principal balance on the Initial Cut-off
Date in an amount no less than $__________.
The Initial Portfolio Purchase Price payable by the Purchaser in
consideration for the Mortgage Loans listed on the Initial Portfolio Mortgage
Loan Schedule shall be equal to the actual aggregate unpaid principal balance of
the Mortgage Loans as of the Initial Cut-off Date as accepted by the Purchaser
on the Initial Closing Date plus interest accrued on such Mortgage Loans at the
weighted average Mortgage Interest Rate from the last interest paid to date for
each such Mortgage Loan to and including the day prior to the Initial Closing
Date.
SECTION 3. SUBSEQUENT PURCHASES.
From time to time, by executing a Commitment Letter substantially in the
form of Exhibit I hereto, the Seller shall sell, transfer, assign, set over and
convey to the Purchaser, without recourse, but subject to the terms of this
Agreement, and the Purchaser will purchase, all the right, title and interest of
the Seller, as of the applicable Closing Date, in and to the Mortgage Loans set
forth in the
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Mortgage Loan Schedule attached to such Commitment Letter, and the Purchaser
shall pay to Seller the Purchase Price set forth in such Commitment Letter on
such Closing Date.
SECTION 4. PAYMENT OF PURCHASE PRICE.
The estimated Purchase Price computed as of the Initial Cut-off Date and
other Cut-off Dates, as applicable, shall be paid by Purchaser on the applicable
Closing Date by wire transfer of immediately available funds. The difference, if
any, between such estimated Purchase Price and the actual Purchase Price
computed as of the applicable Closing Date shall be paid by Seller or Purchaser
to the other, as the case may be, no later than ten business days after the
applicable Closing Date.
The Purchaser shall, with respect to any Mortgage Loan purchased hereunder
or pursuant to a duly executed Commitment Letter, be entitled to (1) all
principal due after the applicable Cut-off Date, (2) all other recoveries of
principal collected on or after the applicable Cut-off Date and (3) all payments
of interest on the Mortgage Loans (net of applicable Servicing Fees as provided
in the Residential Servicing Agreement) collected on or after such Cut-off Date.
The outstanding principal balance of each Mortgage Loan as of the applicable
Cut-off Date is determined after application of payments of principal collected
on or before such Cut-off Date, together with any unscheduled principal
prepayments received prior to such Cutoff Date.
SECTION 5. EXAMINATION OF MORTGAGE FILES.
Prior to the date hereof or the date of any duly executed Commitment
Letter, as the case may be, the Seller has or shall have (a) delivered to the
Purchaser or its designee in escrow, for examination with respect to each
Mortgage Loan to be purchased, the related Mortgage File pertaining to each
Mortgage Loan, or (b) made the related Mortgage File available to the Purchaser
for examination at the Seller's offices or such other location as shall
otherwise be agreed upon by the Purchaser and the Seller. The fact that the
Purchaser or its designee has conducted or has failed to conduct any partial or
complete examination of any Mortgage Files shall not affect the Purchaser's (or
any of its successor's) rights to demand repurchase, substitution or other
relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
SUBSECTION 6.1 POSSESSION OF SERVICING FILES.
The Servicing Files relating to any Mortgage Loans purchased by Purchaser
hereunder or pursuant to a duly executed Commitment Letter shall be retained by
the Servicer in accordance with the terms of the Residential Servicing Agreement
and, as provided therein, shall be appropriately identified in the computer
system and/or books and records of the Servicer, as appropriate, to clearly
reflect the sale of the related Mortgage Loan to the Purchaser.
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SUBSECTION 6.2 BOOKS AND RECORDS.
Record title to each Mortgage Loan as of the applicable Closing Date shall
be in the name of the Seller, or the Purchaser or one or more of its designees,
as the Purchaser shall select. Notwithstanding the foregoing, each Mortgage and
related Mortgage Note shall be possessed solely by the Purchaser or the
appropriate designee of the Purchaser, as the case may be. All rights arising
out of the Mortgage Loans including, but not limited to, all amounts received by
the Seller or the Servicer after the applicable Cut-off Date on or in connection
with a Mortgage Loan (other than amounts due prior to the applicable Cut-off
Date) shall be vested in the Purchaser or one or more of its designees;
provided, however, that all amounts received on or in connection with a Mortgage
Loan (other than amounts due prior to the applicable Cut-off Date) shall be
received and held by the Seller or the Servicer in trust for the benefit of the
Purchaser or its designee, as the case may be, as the owner of the Mortgage
Loans pursuant to the terms of this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's balance
sheet and other financial statements as a sale of assets by the Seller.
SUBSECTION 6.3 DELIVERY OF MORTGAGE LOAN DOCUMENTS.
On or prior to each Closing Date, the Seller shall deliver and release to
the Purchaser or its designee the Mortgage Loan Documents with respect to each
Mortgage Loan sold to the Purchaser on such Closing Date, and set forth on the
Mortgage Loan Schedule, except as otherwise provided in the Residential
Servicing Agreement.
The Seller shall forward, or shall cause the Servicer to forward, to the
Purchaser or its designee all original documents evidencing an assumption,
modification, consolidation, conversion or extension of any Mortgage Loan
entered into in accordance with the Residential Servicing Agreement within 30
days of their execution, provided, however, that the Seller shall provide, or
shall cause the Servicer to provide, the Purchaser or its designee with a
certified true copy of any such document submitted for recordation within 30
days of its execution, and shall promptly provide the original of any document
submitted for recordation or a copy of such document certified by the
appropriate public recording office to be a true and complete copy of the
original within ninety (90) days of its submission for recordation (provided,
that with respect to assignments of the Mortgages reflecting the assignment from
the Seller to the Purchaser, one final assignment shall be executed by Seller in
blanket non-recordable form, and no other forms of assignment of such Mortgages
shall be executed or recorded unless and until the Purchaser shall request
execution of individual Assignments of Mortgages pursuant to and in accordance
with Section 25 hereof).
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the submission for
recordation and in the event that the Seller does not cure such failure within
30 days of discovery or receipt of written notification of such failure from the
Purchaser, the related Mortgage Loan shall, upon the request of the Purchaser,
be repurchased by the Seller at the
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price and in the manner specified in Subsection 8.3. The foregoing repurchase
obligation shall not apply in the event that the Seller cannot deliver, or cause
to be delivered, such original or copy of any document submitted for recordation
to the appropriate public recording office within the specified period due to a
delay caused by the recording office in the applicable jurisdiction; provided
that the Seller shall instead deliver, or cause to be delivered, a recording
receipt of such recording office or, if such recording receipt is not available,
an officer's certificate of a servicing officer of the Servicer, confirming that
such documents have been accepted for recording. Notwithstanding anything herein
to the contrary, under the circumstances described in the preceding sentence,
the Seller shall continue to make all reasonable efforts to obtain the original
of any document submitted for recordation to the appropriate public recording
office.
The Seller shall pay all initial recording fees, if any, for the
Assignments of Mortgage and any other fees or costs in transferring all original
documents to the Purchaser or its designee. The Purchaser or its designee shall
be responsible for recording the Assignments of Mortgage and shall be reimbursed
by the Seller for the reasonable costs associated therewith pursuant to the
preceding sentence.
SECTION 7. SERVICING OF THE MORTGAGE LOANS.
All Mortgage Loans will be sold by the Seller to the Purchaser on a
servicing retained basis.
The Purchaser shall retain the Servicer as independent contract servicer
of the Mortgage Loans pursuant to and in accordance with the terms and
conditions contained in the Residential Servicing Agreement. The Purchaser, the
Seller and the Servicer shall execute the Residential Servicing Agreement on or
before the Initial Closing Date in the form attached hereto as Exhibit B.
Pursuant to the Residential Servicing Agreement, the Servicer shall
service the Mortgage Loans on behalf of the Purchaser and shall be entitled to
the Servicing Fee and any Ancillary Income with respect to each Mortgage Loan
from the Closing Date with respect to the sale and purchase thereof until the
termination of the Residential Servicing Agreement with respect to such Mortgage
Loan as set forth in the Residential Servicing Agreement. The Servicer shall
conduct such servicing in accordance with the terms of the Residential Servicing
Agreement. In the event that the Purchaser elects to terminate the servicing by
the Servicer of a Mortgage Loan which has gone into Nonaccrual Status or has
been foreclosed and as to which title to the related Mortgage Property has been
transferred to the Purchaser ("REO Property"), pursuant to the terms of the
Residential Servicing Agreement, at the Purchaser's election and direction, the
Seller shall service such Mortgage Loan or REO Property on behalf of the
Purchaser in the same manner in which Seller services its own Mortgage Loans and
REO of similar kind. The Seller shall be entitled to servicing compensation with
respect to those transferred Mortgage Loans which have gone into Non-accrual
Status on the same basis as the Servicer under the Residential Servicing
Agreement.
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SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER; REMEDIES FOR
BREACH.
SUBSECTION 8.1 REPRESENTATIONS AND WARRANTIES REGARDING THE SELLER.
The Seller represents, warrants and covenants to the Purchaser that as of
the date hereof and as of each Closing Date:
(a) DUE ORGANIZATION AND AUTHORITY; ENFORCEABILITY. The Seller is a stock
savings bank duly organized, validly existing and in good standing under the
laws of the United States of America and has all licenses necessary to carry on
its business as now being conducted and is licensed, qualified and in good
standing in each state wherein it owns or leases any material properties or
where a Mortgaged Property is located, if the laws of such state require
licensing or qualification in order to conduct business of the type conducted by
the Seller, and in any event the Seller is in compliance with the laws of any
such state to the extent necessary to ensure the enforceability of the related
Mortgage Loan in accordance with the terms of this Agreement; the Seller has the
full corporate power, authority and legal right to hold, transfer and convey the
Mortgage Loans and to execute and deliver this Agreement and to perform its
obligations hereunder; the execution, delivery and performance of this Agreement
(including all instruments of transfer to be delivered pursuant to this
Agreement) by the Seller and the consummation of the transactions contemplated
hereby have been duly and validly authorized; this Agreement and all agreements
contemplated hereby have been duly executed and delivered and constitute the
valid, legal, binding and enforceable obligations of the Seller subject to
bankruptcy laws and other similar laws of general application affecting rights
of creditors and subject to the application of the rules of equity, including
those respecting the availability of specific performance, none of which will
materially interfere with the realization of the benefits provided thereunder,
regardless of whether such enforcement is sought in a proceeding in equity or at
law; and all requisite corporate action has been taken by the Seller to make
this Agreement and all agreements contemplated hereby valid and binding upon the
Seller in accordance with their terms;
(b) ORDINARY COURSE OF BUSINESS. The consummation of the transactions
contemplated by this Agreement are in the ordinary course of business of the
Seller, and the transfer, assignment and conveyance of the Mortgage Notes and
the Mortgages by the Seller pursuant to this Agreement are not subject to the
bulk transfer or any similar statutory provisions in effect in any applicable
jurisdiction;
(c) NO CONFLICTS. Neither the execution and delivery of this Agreement,
the sale of the Mortgage Loans to the Purchaser, the consummation of the
transactions contemplated hereby, nor the fulfillment of or compliance with the
terms and conditions of this Agreement, will conflict with or result in a breach
of any of the terms, conditions or provisions of the Seller's charter or bylaws
or any legal restriction or any agreement or instrument to which the Seller is
now a party or by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of any law,
rule, regulation, order, judgment or decree to which the Seller or its
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property is subject, or result in the creation or imposition of any lien, charge
or encumbrance that would have an adverse effect upon any of its properties
pursuant to the terms of any mortgage, contract, deed of trust or other
instrument or impair the ability of the Purchaser to realize on the Mortgage
Loans, impair the value of the Mortgage Loans, impair the ability of the
Purchaser to realize the full amount of any mortgage insurance benefits accruing
pursuant to this Agreement or impair the ability of the Seller to perform its
obligations hereunder;
(d) ABILITY TO PERFORM; SOLVENCY. The Seller does not believe, nor does it
have any reason or cause to believe, that it cannot perform each and every
covenant contained in this Agreement. The Seller is solvent and the sale of the
Mortgage Loans will not cause the Seller to become insolvent. The sale of the
Mortgage Loans is not undertaken with the intent to hinder, delay or defraud any
of the Seller's creditors;
(e) NO LITIGATION PENDING. There is no action, suit, proceeding or
investigation pending or threatened against the Seller, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, could result in any material adverse change in the business,
operations, financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or which would draw into question the
validity of this Agreement or any Mortgage Loan or of any action taken or to be
taken in connection with the obligations of the Seller contemplated herein, or
which would be likely to impair materially the ability of the Seller to perform
under the terms of this Agreement;
(f) NO CONSENT REQUIRED. No consent, approval, authorization or order of,
or registration or filing with, or notice to any court or governmental agency or
body is required for the execution, delivery and performance by the Seller of or
compliance by the Seller with this Agreement or the Mortgage Loans, the delivery
of a portion of the Mortgage Files to the Purchaser or its designee or the sale
of the Mortgage Loans or the consummation of the transactions contemplated by
this Agreement, or if required, such approval has been obtained prior to the
applicable Closing Date;
(g) SELECTION PROCESS. The Mortgage Loans were selected from among the
outstanding mortgage loans in the Seller's portfolio as of the applicable
Closing Date as to which the representations and warranties set forth in
Subsection 8.2 could be made and such selection was not made in a manner so as
to affect adversely the interests of the Purchaser;
(h) INITIAL PORTFOLIO. The aggregate characteristics of the Mortgage Loans
set forth in the Initial Portfolio Mortgage Loan Schedule are as set forth under
the heading "Business and Strategy--Description of Initial Portfolio" in the
Prospectus relating to the Series A Preferred Shares of the Purchaser, dated
September 30, 1997;
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(i) NO UNTRUE INFORMATION. Neither this Agreement nor any information,
statement, tape, diskette, report, form, or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statements contained herein or therein not misleading; and
(j) NO BROKERS. The Seller has not dealt with any broker, investment
banker, agent or other person that may be entitled to any commission or
compensation in connection with the sale of the Mortgage Loans.
SUBSECTION 8.2 REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
MORTGAGE LOANS.
The Seller hereby represents and warrants to the Purchaser, as to each
Mortgage Loan and as of the applicable Closing Date for such Mortgage Loan (or
as of such other date as may be specified below), that:
(a) MORTGAGE LOANS AS DESCRIBED. The information set forth in the
applicable Mortgage Loan Schedule is complete, true and correct in all material
respects as of the date indicated thereon;
(b) PAYMENTS CURRENT; STATUS. All payments required to be made up to, but
not including, the applicable Cut-off Date for the Mortgage Loan under the terms
of the Mortgage Note have been made and credited. No payment required under the
Mortgage Loan is delinquent nor has any payment under the Mortgage Loan been 30
days or more delinquent more than once within the period falling twelve (12)
months prior to the applicable Cut-off Date. The Mortgage Loan is not, and has
not been at any time in the twelve months immediately preceding the applicable
Cut-off Date, (i) Classified, (ii) in Non-accrual Status or (iii) renegotiated
due to the financial deterioration of the Mortgagor;
(c) NO OUTSTANDING CHARGES. There are no defaults in complying with the
terms of the Mortgage, and all taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges, leasehold payments or ground rents
which previously became due and owing have been paid, or an escrow of funds or
payment plan has been established in an amount sufficient to pay for every such
item which remains unpaid and which has been assessed but is not yet due and
payable. The Seller has not advanced funds, or induced, solicited or knowingly
received any advance of funds by a party other than the Mortgagor, directly or
indirectly, for the payment of any amount required under the Mortgage Loan,
except for interest accruing from the date of the Mortgage Note or date of
disbursement of the Mortgage Loan proceeds, whichever is earlier, to the day
which precedes by one month the Due Date of the first installment of principal
and interest;
(d) ORIGINAL TERMS UNMODIFIED. The terms of the Mortgage Note and Mortgage
have not been impaired, waived, altered or modified in any respect, from the
date of origination except
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as contained in the Mortgage Loan Documents, and the terms of which are
reflected in the related Mortgage Loan Schedule, if applicable. The terms of any
such waiver, alteration or modification are reflected on the related Mortgage
Loan Schedule, if applicable, and either (i) the substance of such terms has
been approved by the title insurer, if any, to the extent required by the
policy, or (ii) such waiver, alteration or modification has not and will not
affect the priority of the related Mortgage. No Mortgagor has been released, in
whole or in part, except in connection with an assumption agreement, which
assumption agreement is part of the Mortgage Loan File delivered to the
Purchaser or its designee and the terms of which are reflected in the related
Mortgage Loan Schedule;
(e) NO DEFENSES. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto, and no Mortgagor is now or was, at the time of origination of
the related Mortgage Loan, a debtor in any state or Federal bankruptcy or
insolvency proceeding;
(f) HAZARD INSURANCE. Pursuant to the terms of the Mortgage, all buildings
or other improvements upon the Mortgaged Property are insured by a generally
acceptable insurer against loss by fire, hazards of extended coverage and such
other hazards as are set forth in the Residential Servicing Agreement attached
hereto as Exhibit B. If required by the Flood Disaster Protection Act of 1973,
as amended, the Mortgage Loan is covered by a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration,
which policy conforms to FNMA, as well as all additional requirements set forth
in the Residential Servicing Agreement attached hereto as Exhibit B. All
individual insurance policies contain a standard mortgagee clause naming the
Seller and its successors and assigns as mortgagee, and all premiums thereon
have been paid. The Mortgage for each Mortgage Loan obligates the Mortgagor
thereunder to maintain the hazard insurance policy at the Mortgagor's cost and
expense, and on the Mortgagor's failure to do so, authorizes the holder of the
Mortgage to obtain and maintain such insurance at such Mortgagor's cost and
expense, and to seek reimbursement therefor from the Mortgagor. Where required
by state law or regulation, the Mortgagor has been given an opportunity to
choose the carrier of the required hazard insurance, provided the policy is not
a "master" or "blanket" hazard insurance policy covering a condominium, or any
hazard insurance policy covering the common facilities of a planned unit
development. To the best knowledge of the Seller, the hazard insurance policy is
the valid and binding obligation of the insurer, is in full force and effect,
and will be in full force and effect and inure to the benefit of the Purchaser
upon the consummation of the transactions contemplated by this Agreement. No
action, inaction or event has occurred and no state of facts exists or has
existed that has resulted or could result in the exclusion from, denial of, or
defense to coverage under any hazard insurance policy. The Seller has not
engaged in, and has no knowledge of the Mortgagor's having engaged in, any act
or omission which would impair the coverage of any such policy, the benefits of
the endorsement provided for herein, or the validity and binding effect of
either including, without limitation, no unlawful fee, commission, kickback or
other unlawful compensation or value of any kind has been or will be received,
retained or realized by any attorney,
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firm or other person or entity, and no such unlawful items have been received,
retained or realized by the Seller;
(g) COMPLIANCE WITH APPLICABLE LAWS. Any and all requirements of any
federal, state or local law including, without limitation, usury,
truth-in-lending, real estate settlement procedures, consumer credit protection,
fair housing, equal credit opportunity and disclosure laws applicable to the
Mortgage Loan have been complied with in all material respects, the consummation
of the transactions contemplated hereby will not involve the violation of any
such laws or regulations, and the Seller or the Servicer shall maintain in its
possession, available for the Purchaser's inspection, and shall deliver to the
Purchaser upon demand, evidence of compliance with all such requirements;
(h) NO SATISFACTION OF MORTGAGE. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the Mortgaged
Property has not been released from the lien of the Mortgage, in whole or in
part, nor has any instrument been executed that would effect any such release,
cancellation, subordination or rescission. Neither the Seller, the Servicer nor
any other Person has waived the performance by the Mortgagor of any action, if
the Mortgagor's failure to perform such action would cause the Mortgage Loan to
be in default, nor has the Seller, the Servicer nor any other Person waived any
default resulting from any action or inaction by the Mortgagor;
(i) LOCATION AND TYPE OF MORTGAGED PROPERTY. The Mortgaged Property is
located in the state identified in the related Mortgage Loan Schedule and
consists of a single parcel of real property with a detached single family
residence erected thereon, or a townhouse, or a two-to four-family dwelling, or
an individual condominium unit in a condominium project, or an individual unit
in a planned unit development, provided, however, that any condominium unit or
planned unit development shall conform with requirements acceptable to FNMA
regarding such dwellings and that no residence or dwelling is a single parcel of
real property with a cooperative housing corporation erected thereon, a mobile
home or a manufactured dwelling. As of the date of origination, no portion of
the Mortgaged Property is used for commercial purposes and, to the best
knowledge of Seller, since the date of origination, no portion of the Mortgaged
Property is used for commercial purposes;
(j) VALID FIRST LIEN. The Mortgage is a valid, subsisting, enforceable and
perfected first lien on the Mortgaged Property, including all buildings,
improvements and fixtures on the Mortgaged Property and all installations and
mechanical, electrical, plumbing, heating and air conditioning systems located
in or annexed to such buildings, and all additions, alterations and replacements
made at any time with respect to the foregoing as set forth in each Mortgage.
The lien of the Mortgage is subject only to:
(1) the lien of current real property taxes and assessments not yet
due and payable;
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(2) covenants, conditions and restrictions, rights of way, easements
and other matters of the public record as of the date of recording
acceptable to prudent mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered
to the originator of the Mortgage Loan and (a) specifically referred to or
otherwise considered in the appraisal made for the originator of the
Mortgage Loan or (b) which do not adversely affect the Appraised Value of
the Mortgaged Property set forth in such appraisal; and
(3) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage or the use, enjoyment, value or
marketability of the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to
and delivered in connection with the Mortgage Loan establishes and creates a
valid, subsisting, enforceable and perfected first lien and first priority
security interest on the property described therein and the Seller has full
right to sell and assign the same to the Purchaser. The Mortgaged Property was
not, as of the date of origination of the Mortgage Loan, subject to a mortgage,
deed of trust, deed to secure debt or other security instrument creating a lien
subordinate to the lien of the Mortgage (except any such subordinate loan which
was created in connection with the origination of the related Mortgage Loan
details of which are contained in the related Mortgage File);
(k) VALIDITY OF MORTGAGE DOCUMENTS. The Mortgage Note and the Mortgage and
any other agreement executed and delivered by a Mortgagor in connection with a
Mortgage Loan are genuine, and each is the legal, valid and binding obligation
of the maker thereof enforceable in accordance with its terms. To the best
knowledge of the Seller, all parties to the Mortgage Note, the Mortgage and any
other such related agreement had legal capacity to enter into the Mortgage Loan
and to execute and deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and any other such related
agreement have been duly and properly executed by such parties. To the best
knowledge of the Seller, no fraud, error, omission, misrepresentation,
negligence or similar occurrence with respect to a Mortgage Loan has taken place
on the part of any Person, including without limitation, the Mortgagor, any
appraiser, any builder or developer, or any other party involved in the
origination of the Mortgage Loan;
(l) FULL DISBURSEMENT OF PROCEEDS. The Mortgage Loan has been closed and
the proceeds of the Mortgage Loan have been fully disbursed and there is no
requirement for future advances thereunder, and any and all requirements as to
completion of any on-site or off-site improvement and as to disbursements of any
escrow funds therefor have been complied with. All costs, fees and expenses
incurred in making or closing the Mortgage Loan and the recording of the
Mortgage were paid, and the Mortgagor is not entitled to any refund of any
amounts paid or due under the Mortgage Note or Mortgage;
(m) OWNERSHIP. The Seller is the sole owner of record and holder of the
Mortgage Loan and the indebtedness evidenced by each Mortgage Note, except for
the assignments of mortgage
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<PAGE>
which have been sent for recording, and upon recordation the Purchaser will be
the sole owner of record and holder of each Mortgage and the indebtedness
evidenced by each Mortgage Note, and upon the sale of the Mortgage Loans to the
Purchaser, the Servicer will retain the Mortgage Files or any part thereof not
delivered to the Purchaser or its designee in trust only for the purpose of
servicing and supervising the servicing of each Mortgage Loan. The Mortgage Loan
is not assigned or pledged, and the Seller has good and indefeasible title
thereto, and has full right to transfer and sell the Mortgage Loan to the
Purchaser free and clear of any encumbrance, equity, participation interest,
lien, pledge, charge, claim or security interest, and has full right and
authority subject to no interest or participation of, or agreement with, any
other party, to sell and assign each Mortgage Loan pursuant to this Agreement
and following the sale of each Mortgage Loan, the Purchaser will own such
Mortgage Loan free and clear of any encumbrance, equity, participation interest,
lien, pledge, charge, claim or security interest except as created by Purchaser.
The Seller intends to relinquish all rights to possess, control and monitor the
Mortgage Loan. After the applicable Closing Date, the Seller will have no right
to modify or alter the terms of the sale of any Mortgage Loan and the Seller
will have no obligation or right to repurchase such Mortgage Loan or substitute
another Mortgage Loan therefor, except as provided in this Agreement;
(n) DOING BUSINESS. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (1) in
compliance with any and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located and (2) either (i) organized
under the laws of such state, or (ii) qualified to do business in such state, or
(iii) a federal savings and loan association, a savings bank or a national bank
having a principal office in such state, or (3) not doing business in such
state;
(o) PMI POLICY. Each Mortgage Loan which at the time of its origination
was required to be insured as to payment defaults by a PMI Policy in accordance
with the underwriting policies customarily employed by the Seller or one of its
predecessors in interest during the period of such origination was so insured.
All provisions of each PMI Policy have been and are being complied with, each
such policy is valid and remains in full force and effect, and all premiums due
thereunder have been paid. To the best knowledge of the Seller, no action,
inaction, or event has occurred and no state of facts exists that has, or will
result in the exclusion from, denial of, or defense to coverage by the PMI
Policy (including, without limitation, any exclusions, denials or defenses which
would limit or reduce the availability of the timely payment of the full amount
of the loss otherwise due thereunder to the insured) whether arising out of
actions, representations, errors, omissions, negligence, or fraud of the Seller,
the related Mortgagor or any party involved in the application for such
coverage, including the appraisal, plans and specifications and other exhibits
or documents submitted therewith to the insurer under such insurance policy, or
for any other reason under such coverage, but not including the failure of such
insurer to pay by reason of such insurer's breach of such insurance policy or
such insurer's financial inability to pay. Any Mortgage Loan subject to a PMI
Policy obligates the Mortgagor thereunder to maintain the PMI Policy and to pay
all premiums and charges in connection therewith.
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(p) TITLE INSURANCE. The Mortgage Loan is covered by an ALTA lender's
title insurance policy or other form of policy or insurance acceptable to FNMA
and each such title insurance policy is issued by a title insurer acceptable to
FNMA and qualified to do business in the jurisdiction where the Mortgaged
Property is located, insuring the Seller, its successors and assigns, as to the
first priority lien of the Mortgage in the original principal amount of the
Mortgage Loan, subject only to the exceptions contained in clauses (1), (2) and
(3) of paragraph (j) of this Subsection 8.2, and against any loss by reason of
the invalidity or unenforceability of the lien resulting from the provisions of
the Mortgage providing for adjustment to the Mortgage Interest Rate and Monthly
Payment. Where required by state law or regulation, the Mortgagor has been given
the opportunity to choose the carrier of the required mortgage title insurance.
Additionally, such lender's title insurance policy affirmatively insures ingress
and egress, and against encroachments by or upon the Mortgaged Property or any
interest therein. The Seller, its successor and assigns, are the sole insureds
of such lender's title insurance policy, and such lender's title insurance
policy is valid and remains in full force and effect and will be in force and
effect upon the consummation of the transactions contemplated by this Agreement.
No claims have been made under such lender's title insurance policy and, neither
the Seller nor, to the best knowledge of Seller, any other prior holder of the
related Mortgage, has done, by act or omission, anything which would impair the
coverage of such lender's title insurance policy, including without limitation,
no unlawful fee, commission, kickback or other unlawful compensation or value of
any kind has been or will be received, retained or realized by any attorney,
firm or other person or entity, and no such unlawful items have been received,
retained or realized by the Seller;
(q) NO DEFAULTS. There is no default, breach, violation or event which
would permit acceleration existing under the Mortgage or the Mortgage Note and
no event which, with the passage of time or with notice and the expiration of
any grace or cure period, would constitute a default, breach, violation or event
which would permit acceleration, and neither the Seller nor its predecessors
have waived any default, breach, violation or event which would permit
acceleration;
(r) NO MECHANICS' LIENS. To the best knowledge of Seller, there is no
mechanics' or similar liens or claims filed for work, labor or material (and no
rights are outstanding that under law could give rise to such liens) affecting
the Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage;
(s) LOCATION OF IMPROVEMENTS; NO ENCROACHMENTS. With respect to each
Mortgage Loan, to the best knowledge of Seller, all improvements which were
considered in determining the Appraised Value of the Mortgaged Property lay
wholly within the boundaries and building restriction lines of the Mortgaged
Property, and no improvements on adjoining properties encroach upon the
Mortgaged Property. To the best knowledge of Seller, no improvement located on
or being part of the Mortgaged Property is in violation of any applicable zoning
law or regulation;
(t) ORIGINATION: PAYMENT TERMS. The Mortgage Loan was originated by a
mortgagee approved by the Secretary of HUD pursuant to Sections 203 and 211 of
the Act, a savings and loan association, a savings bank, a commercial bank,
credit union, insurance company or similar
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institution which is supervised and examined by a federal or state authority. To
the best knowledge of the Seller, the documents, instruments and agreements
submitted for loan underwriting were not falsified and contain no untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the information and statements therein not
misleading. Principal payments on the Mortgage Loan commenced no more than sixty
(60) days after funds were disbursed in connection with the Mortgage Loan. The
Mortgage Interest Rate, as well as the Lifetime Rate Cap and the Periodic Rate
Cap if the Mortgage Loan is an Adjustable Rate Mortgage Loan, are as set forth
on the applicable Mortgage Loan Schedule. The Mortgage Note is payable each
month in equal monthly installments of principal and interest, which
installments of interest are subject to change if the Mortgage Loan is an
Adjustable Rate Mortgage Loan due to the adjustments to the Mortgage Interest
Rate on each Interest Rate Adjustment Date, with interest calculated and payable
in arrears, sufficient to amortize the Mortgage Loan fully by the stated
maturity date, over an original term of not more than forty years from
commencement of amortization. Each Convertible Mortgage Loan contains a
provision allowing the Mortgagor to convert the Mortgage Note from an adjustable
interest rate Mortgage Note to a fixed interest rate Mortgage Note in accordance
with the terms of the Mortgage Note or a rider to the related Mortgage Note;
(u) CUSTOMARY PROVISIONS. The Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the holder thereof
adequate for the realization against the Mortgaged Property of the benefits of
the security provided thereby, including, (i) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial
foreclosure. For Mortgage Loans secured by Mortgaged Property located in
California, there is no homestead or other exemption available to a Mortgagor
which would interfere with the right to sell the Mortgaged Property at a
trustee's sale or the right to foreclose the Mortgage, subject to applicable
federal and state laws and judicial precedent with respect to bankruptcy and
right of redemption or similar law;
(v) CONFORMANCE WITH UNDERWRITING STANDARDS. The Mortgage Loan was
underwritten in accordance with the underwriting standards of the Seller or one
of its predecessors in interest, as applicable, or FNMA's underwriting standards
(except that the principal balance of certain Mortgage Loans may have exceeded
the limits of FNMA), in each case in effect at the time the Mortgage Loan was
originated. The Mortgage Note and Mortgage are on forms acceptable to the
Purchaser, in its sole discretion, as evidenced by the Purchaser's purchase of
the related Mortgage Loans, and the Seller has not made any representations to a
Mortgagor that are inconsistent with the Mortgage and the Mortgage Note;
(w) OCCUPANCY OF THE MORTGAGED PROPERTY. With respect to each Mortgage
Loan, the related Mortgaged Property is lawfully occupied under applicable law.
To the best knowledge of Seller, all inspections, licenses and certificates
required to be made or issued with respect to all occupied portions of the
Mortgaged Property and, with respect to the use and occupancy of the same,
including but not limited to certificates of occupancy and fire underwriting
certificates, have been made or obtained from the appropriate authorities;
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(x) NO ADDITIONAL COLLATERAL. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding Mortgage and the
security interest of any applicable security agreement or chattel mortgage
referred to in clause (j) above;
(y) DEEDS OF TRUST. In the event the Mortgage constitutes a deed of trust,
a trustee, authorized and duly qualified under applicable law to serve as such,
has been properly designated and currently so serves and is named in the
Mortgage, and no fees or expenses are or will become payable by the Purchaser to
the trustee under the deed of trust, except in connection with a trustee's sale
after default by the Mortgagor;
(z) VALUE AND MARKETABILITY. The Seller has no actual knowledge of any
circumstances or conditions with respect to the Mortgage, the Mortgaged
Property, the Mortgagor, the Mortgage File or the Mortgagor's credit standing
that can reasonably be expected to cause the Mortgage Loan to become delinquent,
or adversely affect the value or marketability of the Mortgage Loan;
(aa) DELIVERY OF MORTGAGE DOCUMENTS. The Mortgage Note, the Mortgage, the
Assignment of Mortgage and any other Mortgage Loan Documents (except for Primary
Insurance Policies held by the Servicer) for each Mortgage Loan have been
delivered to the Purchaser or its designee. The Seller and the Servicer are in
possession of a complete, true and accurate Mortgage File in compliance with
Exhibit A hereto, except for such documents the originals of which have been
delivered to the Purchaser or its designee;
(bb) CONDOMINIUMS/PLANNED UNIT DEVELOPMENTS. If the Mortgaged Property is
a condominium unit or a planned unit development, such condominium or planned
unit development project which would be acceptable to FNMA.
(cc) [Reserved]
(dd) ASSUMABILITY. Either (i) the Mortgage Loan Documents provide that a
related Mortgage Loan may only be assumed if the party assuming such Mortgage
Loan meets certain credit requirements stated in such documents, or (ii) the
Mortgage Note with respect to such Mortgage Loan contains a "due-on-sale"
provision which prevents the assumption of the Mortgage Loan by a proposed
transferee and accelerates the payment of the outstanding principal balance of
such Mortgage Loan;
(ee) NO BUYDOWN PROVISIONS; NO GRADUATED PAYMENTS OR CONTINGENT INTERESTS.
The Mortgage Loan does not contain provisions pursuant to which Monthly Payments
are paid or partially paid with funds deposited in any separate account
established by the Seller, the Mortgagor, or anyone on behalf of the Mortgagor,
or paid by any source other than the Mortgagor nor does it contain any other
similar provisions which may constitute a "buydown" provision. The Mortgage Loan
is not a graduated payment mortgage loan and the Mortgage Loan does not have a
shared appreciation or other contingent interest feature;
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(ff) [Reserved]
(gg) MORTGAGED PROPERTY UNDAMAGED; NO CONDEMNATION PROCEEDINGS. To the
best knowledge of Seller, there is no proceeding pending or to the best
knowledge of Seller threatened for the total or partial condemnation of the
Mortgaged Property. To the best knowledge of Seller, the Mortgaged Property is
undamaged by waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty so as to affect adversely the value of the Mortgaged
Property as security for the Mortgage Loan or the use for which the premises
were intended and each Mortgaged Property is in good repair;
(hh) COLLECTION PRACTICES; ESCROW DEPOSITS; INTEREST RATE ADJUSTMENTS. The
origination and collection practices used by the Seller and the Servicer with
respect to the Mortgage Loan have been in all material respects in compliance
with Accepted Servicing Practices, applicable laws and regulations, and have
been in all material respects legal and proper. With respect to escrow deposits
and Escrow Payments, all such payments are in the possession of, or under the
control of, the Servicer and, to the best knowledge of the Seller, there exist
no deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. To the best knowledge of the Seller, all
Escrow Payments have been collected in full compliance with state and federal
law and the provisions of the related Mortgage Note and Mortgage. An escrow of
funds is not prohibited by applicable law and has been established in an amount
sufficient to pay for every item that remains unpaid and has been assessed but
is not yet due and payable if required under the Mortgage Loan. No escrow
deposits or Escrow Payments or other charges or payments due the Servicer have
been capitalized under the Mortgage or the Mortgage Note. To the best knowledge
of the Seller, all Mortgage Interest Rate adjustments and adjustments to the
Monthly Payment, if the Mortgage Loan is an Adjustable Rate Mortgage Loan, have
been made in strict compliance with state and federal law and the terms of the
related Mortgage and Mortgage Note on the related Interest Rate Adjustment Date.
With respect to each Adjustable Rate Mortgage Loan, the Mortgage Interest Rate
adjusts annually, semiannually or monthly as set forth in the applicable
Mortgage Notes. If, pursuant to the terms of the Mortgage Note, another index
was selected for determining the Mortgage Interest Rate, the same index was used
with respect to each Mortgage Note which required a new index to be selected,
and such selection did not conflict with the terms of the related Mortgage Note.
To the best knowledge of the Seller, the Servicer executed and delivered any and
all notices required under applicable law and the terms of the related Mortgage
Note and Mortgage regarding the Mortgage Interest Rate and the Monthly Payment
adjustments. Any interest required to be paid pursuant to state, federal and
local law has been properly paid and credited;
(ii) OTHER INSURANCE POLICIES. In connection with the placement of any
hazard insurance policy or PMI Policy, no commission, fee, or other compensation
has been or will be received by the Seller or by any officer, director, or
employee of the Seller or any designee of the Seller or any corporation in which
the Seller or any officer, director, or employee had a financial interest at the
time of placement of such insurance;
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(jj) NO VIOLATION OF ENVIRONMENTAL LAWS. To the best knowledge of Seller,
there is no pending action or proceeding directly involving the Mortgaged
Property in which compliance with any environmental law, rule or regulation is
an issue, there is no violation of any environmental law, rule or regulation
with respect to the Mortgaged Property, and nothing further remains to be done
to satisfy in full all requirements of each such law, rule or regulation
constituting a prerequisite to use and enjoyment of said property;
(kk) SOLDIERS' AND SAILORS' CIVIL RELIEF ACT. The Mortgagor has not
notified the Seller and the Seller has no knowledge of any relief requested or
allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of
1940;
(ll) APPRAISAL. The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan by a
Qualified Appraiser who had no interest, direct or indirect in the Mortgaged
Property or in any loan made on the security thereof, and whose compensation is
not affected by the approval or disapproval of the Mortgage Loan, and, if
applicable on the date the Mortgage Loan was originated, the appraisal and
appraiser both satisfy the requirements of FNMA and Title XI of the Federal
Institutions Reform, Recovery, and Enforcement Act of 1989 and the regulations
promulgated thereunder;
(mm) [Reserved]
(nn) [Reserved]
(oo) [Reserved]
(pp) ESCROW ANALYSIS. With respect to each Mortgage Loan for which an
Escrow Account exists, Seller has analyzed or has caused the Servicer to
analyze, within the last twelve months (unless such Mortgage Loan was originated
within such twelve month period) the required Escrow Payments for each Mortgage
Loan and adjusted the amount of such payments so that, assuming all required
payments are timely made, any deficiency will be eliminated on or before the
first anniversary of such analysis, or any overage will be refunded to the
Mortgagor, in accordance with RESPA and any other applicable law; and
(qq) PRIOR SERVICING. Each Mortgage Loan has been serviced in all material
respects in compliance with Accepted Servicing Practices; provided that, in the
event of any breach of the representation and warranty set forth in this
Subsection (qq), the Seller shall not be required to repurchase any such
Mortgage Loan unless such breach had, and continues to have, a material and
adverse effect on the value of the related Mortgage Loan or the interest of the
Purchaser therein.
SUBSECTION 8.3 REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
It is understood and agreed that the representations and warranties set
forth in Subsections 8.1 and 8.2 shall survive the sale of the Mortgage Loans to
the Purchaser and shall inure to the
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benefit of the Purchaser, notwithstanding any restrictive or qualified
endorsement on any Mortgage Note or Assignment of Mortgage or the examination or
failure to examine any Mortgage File. Upon discovery by either the Seller or the
Purchaser of a breach of any of the foregoing representations and warranties
which materially and adversely affects the interests of the Purchaser in the
related Mortgage Loan, the party discovering such breach shall give prompt
written notice to the other.
The Seller, promptly after discovery of a breach of any such
representation or warranty, shall notify the Purchaser of such breach and the
details thereof. Within sixty (60) days of the earlier of (i) notice by the
Seller pursuant to the immediately preceding sentence or (ii) notice by the
Purchaser to the Seller of any breach of a representation or warranty with
respect to a Mortgage Loan, the Seller shall use its best efforts promptly to
cure such breach in all material respects. If such breach can ultimately be
cured but is not reasonably expected to be cured within the 60 day period,
Seller shall have such additional time as is reasonably determined by Purchaser
(not to exceed 120 days) to cure or correct such breach provided Seller has
commenced curing or correcting such breach and is diligently pursuing same. If
such breach cannot be or has not been cured, the Seller shall, upon the
expiration of the cure period described above, at the Purchaser's option and
subject to the provisions of this Subsection 8.3, repurchase such Mortgage Loan
at the Repurchase Price, unless the Seller elects to substitute a Qualified
Substitute Mortgage Loan for such Mortgage Loan pursuant to this Subsection 8.3.
The Seller may, at the Seller's option and provided that the Seller has a
Qualified Substitute Mortgage Loan, rather than repurchase the Mortgage Loan as
provided above, remove such Mortgage Loan (a "Deleted Mortgage Loan") and
substitute in its place a Qualified Substitute Mortgage Loan or Loans. If the
Seller has no Qualified Substitute Mortgage Loan, it shall repurchase the
deficient Mortgage Loan. Any repurchase of a Mortgage Loan or Mortgage Loans
pursuant to the foregoing provisions of this Subsection 8.3 shall be
accomplished by either (a) if the Residential Servicing Agreement is in effect,
deposit in the Custodial Account of the amount of the Repurchase Price for
payment to the Purchaser on the next scheduled Remittance Date, after deducting
therefrom any amount received in respect of such repurchased Mortgage Loan or
Loans and being held in the Custodial Account for future distribution or (b) if
the Residential Servicing Agreement is no longer in effect, by direct remittance
of the Repurchase Price to the Purchaser or its designee in accordance with the
Purchaser's instructions.
At the time of repurchase or substitution, the Purchaser and the Seller
shall arrange for the reassignment of the Deleted Mortgage Loan to the Seller
and the delivery to the Seller of any documents held by the Purchaser or its
designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to such
Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the related Mortgage Loan Schedule to
reflect the withdrawal of the Deleted Mortgage Loan from this Agreement, and, in
the case of substitution, identify a Qualified Substitute Mortgage Loan and
amend the related Mortgage Loan Schedule to reflect the addition of such
Qualified Substitute Mortgage Loan to this Agreement. In connection with any
such substitution, the Seller shall be deemed to have made as to such Qualified
Substitute Mortgage Loan the representations and warranties set forth in this
Agreement except that all such
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representations and warranties set forth in this Agreement shall be deemed made
as of the date of such substitution. The Seller shall effect such substitution
by delivering to the Purchaser or its designee for such Qualified Substitute
Mortgage Loan the documents required by Subsection 6.3, with the Mortgage Note
endorsed as required by Subsection 6.3. The Seller shall deposit in the
Custodial Account the Monthly Payment, or in the event that the Residential
Servicing Agreement is no longer in effect, remit directly to the Purchaser or
its designee in accordance with the Purchaser's instructions the Monthly Payment
less the Servicing Fee collected, if any, on such Qualified Substitute Mortgage
Loan or Loans in the month following the date of such substitution. Monthly
Payments collected with respect to Qualified Substitute Mortgage Loans in the
month of substitution shall be retained by the Seller. For the month of
substitution, payments to the Purchaser shall include the Monthly Payment
collected on any Deleted Mortgage Loan in the month of substitution, and the
Seller shall thereafter be entitled to retain all amounts subsequently received
by the Seller in respect of such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the amount
(if any) by which the aggregate principal balance of all Qualified Substitute
Mortgage Loans as of the date of substitution is less than the aggregate Stated
Principal Balance of all Deleted Mortgage Loans (after application of principal
payments collected as of the date of substitution). The amount of such shortfall
shall be distributed by the Seller directly to the Purchaser or its designee in
accordance with the Purchaser's instructions within two (2) Business Days of
such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments, and other costs and expenses (but excluding any consequential,
indirect, special, exemplary or punitive damages ("Special Damages"), except for
such Special Damages which the Purchaser is required by law to pay to a third
party) resulting from any claim, demand, defense or assertion based on or
grounded upon, or resulting from, a breach of the Seller representations and
warranties contained in this Agreement. It is understood and agreed that the
obligations of the Seller set forth in this Subsection 8.3 to cure, substitute
for or repurchase a defective Mortgage Loan and to indemnify the Purchaser as
provided in this Subsection 8.3 constitute the sole remedies of the Purchaser
respecting a breach of the foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of the
breach of any representations and warranties made in Subsections 8.1 and 8.2
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with this
Agreement.
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SECTION 9. CLOSING.
The closing for the purchase and sale of any Mortgage Loans shall take
place on (i) the Initial Closing Date with respect to the purchase and sale of
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
(ii) on the Closing Date set forth in a duly executed Commitment Letter with
respect to the purchase and sale of Mortgage Loans pursuant thereto. At the
Purchaser's option, any closing shall be either: by telephone, confirmed by
letter or wire as the parties shall agree, or conducted in person, at such place
as the parties shall agree.
The closing for the purchase and sale of Mortgage Loans to be purchased on
any Closing Date shall be subject to each of the following conditions:
(a) all of the representations and warranties of the Seller under this
Agreement shall be true and correct as of such Closing Date, no
default shall have occurred and no event shall have occurred which,
with notice or the passage of time or both, would constitute a
default under this Agreement;
(b) the Purchaser shall have received, or the Purchaser's attorneys
shall have received in escrow, all closing documents as specified in
Section 10 of this Agreement, in such forms as are agreed upon and
acceptable to the Purchaser, duly executed by all signatories other
than the Purchaser as required pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the Purchaser or its
designee all Mortgage Loan Documents with respect to each Mortgage
Loan not otherwise required under the Residential Servicing
Agreement to be in the possession of, and actually in the possession
of the Servicer; and
(d) all other terms and conditions of this Agreement shall have been
complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the Seller
on the applicable Closing Date the applicable Purchase Price, plus accrued
interest pursuant to Section 4 of this Agreement, by wire transfer of
immediately available funds to the account designated by the Seller.
SECTION 10. CLOSING DOCUMENTS.
The closing documents for the Mortgage Loans to be purchased on any
Closing Date shall consist of fully executed originals of the following
documents:
1. on the Initial Closing Date only, this Agreement (and on all
subsequent Closing Dates, a Commitment Letter in the form of Exhibit
I hereto);
2. on the Initial Closing Date only, the Residential Servicing
Agreement, dated as of the Initial Cut-off Date, in the form of
Exhibit B hereto;
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3. an Officer's Certificate, in the form of Exhibit C hereto, including
all attachments thereto;
4. an Opinion of Counsel of the Seller (who may be an employee of the
Seller), in the form of Exhibit D hereto;
5. a Notice of Sale and Release of Collateral, in the form of Exhibit E
hereto;
6. a Security Release Certification, in the form of Exhibit F hereto
executed by any person, as requested by the Purchaser, if any of the
Mortgage Loans have at any time been subject to any security
interest, pledge or hypothecation for the benefit of such person;
and
7. a certificate or other evidence of merger or acquisition, if any of
the Mortgage Loans being purchased were acquired by Seller by merger
or acquisition.
The Seller shall bear the risk of loss of any closing documents and
Mortgage Loan documents until such time as they are received by the Purchaser or
its attorneys or designees, as applicable.
SECTION 11. COSTS.
The Purchaser shall pay any commissions due its salesmen and the legal
fees and expenses of its attorneys. All other costs and expenses incurred in
connection with the transfer and delivery of the Mortgage Loans including
recording fees, fees for recording Assignments of Mortgages, fees for title
policy endorsements and continuations and, if applicable, the Seller's
attorney's fees, shall be paid by the Seller.
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER.
The Seller will keep in full effect its existence, rights and franchises
as a corporation under the laws of the state of its incorporation except as
permitted herein, and will obtain and preserve its qualification to do business
as a foreign corporation in each jurisdiction in which such qualification is or
shall be necessary to protect the validity and enforceability of this Agreement,
or any of the Mortgage Loans and to perform its duties under this Agreement. In
the event Seller or any of its successors or assigns (i) consolidates with or
merges into any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, or (ii) transfers or
conveys all or substantially all of its properties and assets to any Person,
then, and in each such case, proper provision shall be made so that the
successors and assigns of Seller assume the obligations of Seller set forth in
this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any
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Person succeeding to the business of the Seller, shall be the successor of the
Seller hereunder, without the execution or filing of any paper or any further
act on the part of any of the parties hereto, anything herein to the contrary
notwithstanding; provided, however, that the successor or surviving Person shall
have a tangible net worth of at least $30,000,000.
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST.
The sale and delivery on any Closing Date of the Mortgage Loans described
on the applicable Mortgage Loan Schedule is mandatory from and after the date of
the execution of this Agreement or a Commitment Letter, as the case may be, it
being specifically understood and agreed that each Mortgage Loan is unique and
identifiable and that an award of money damages would be insufficient to
compensate the Purchaser for the losses and damages incurred by the Purchaser
(including damages to prospective purchasers of the Mortgage Loans) in the event
of the Seller's failure to deliver (i) each of the Mortgage Loans or (ii) one or
more Qualified Substitute Mortgage Loans or (iii) one or more Mortgage Loans
otherwise acceptable to the Purchaser on or before such Closing Date. The Seller
hereby grants to the Purchaser a lien on and a continuing security interest in
each Mortgage Loan set forth on the Initial Portfolio Mortgage Loan Schedule and
each document and instrument evidencing each such Mortgage Loan to secure the
performance by the Seller of its obligations under this Agreement, and the
Seller agrees that it shall hold such Mortgage Loans in custody for the
Purchaser subject to the Purchaser's (i) right to reject any Mortgage Loan (or
Qualified Substitute Mortgage Loan) under the terms of this Agreement and to
require another Mortgage Loan (or Qualified Substitute Mortgage Loan) to be
substituted therefor, and (ii) obligation to pay the Initial Purchase Price plus
accrued interest as set forth in Section 4 hereof for the Mortgage Loans. All
rights and remedies of the Purchaser under this Agreement are distinct from, and
cumulative with, any other rights or remedies under this Agreement or afforded
by law or equity and all such rights and remedies may be exercised concurrently,
independently or successively.
SECTION 14. NOTICES.
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed, by registered or certified
mail, return receipt requested, or, if by other means, when received by the
other party at the address as follows:
(i) if to the Seller:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
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(ii) if to the Purchaser:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. SEVERABILITY CLAUSE.
Any part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be conferred by this Agreement, the
parties shall negotiate, in good faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Agreement without regard to such invalidity.
SECTION 16. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. GOVERNING LAW.
This Agreement shall be deemed to have been made in the State of
California. The Agreement shall be construed in accordance with the laws of the
State of California and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with the substantive laws of the
State of California (without regard to conflicts of laws principles), except to
the extent preempted by Federal law.
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SECTION 18. INTENTION OF THE PARTIES.
It is the intention of the parties that the Purchaser is purchasing, and
the Seller is selling the Mortgage Loans and not a debt instrument of the Seller
or another security. Accordingly, the parties hereto each intend to treat the
transaction for Federal income tax purposes as a sale by the Seller, and a
purchase by the Purchaser, of the Mortgage Loans.
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF PURCHASE AGREEMENT.
This Agreement shall bind and inure to the benefit of and be enforceable
by the Seller and the Purchaser and the respective permitted successors and
assigns of the Seller and the successors and assigns of the Purchaser. This
Agreement shall not be assigned, pledged or hypothecated by the Seller to a
third party without the consent of the Purchaser. Subject to any applicable
requirements of the Residential Servicing Agreement, this Agreement may be
assigned, pledged or hypothecated by the Purchaser without the prior consent of
the Seller. If the Purchaser assigns all or any of its rights as Purchaser
hereunder, the assignee of the Purchaser will become the "Purchaser" hereunder
to the extent of such assignment, provided that at no time shall there be more
than fifteen (15) persons having the status of "Purchaser" hereunder. Any
assignment by the Purchaser shall be accompanied by the delivery and execution
of an Assignment and Assumption Agreement (the "Assignment and Assumption
Agreement") substantially in the form attached hereto as Exhibit G. Subject to
any applicable requirements of the Residential Servicing Agreement, the Servicer
shall be required to remit all amounts required to be remitted to the Purchaser
hereunder to said assignee commencing with the first Remittance Date falling
after receipt of said copy of the related Assignment and Assumption Agreement
provided that the Servicer receives said copy no later than three (3) Business
Days immediately prior to the first day of the month of the related Remittance
Date.
SECTION 20. WAIVERS.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
SECTION 21. ENTIRE AGREEMENT; AMENDMENT.
This Agreement (including the Schedules and Exhibits annexed hereto or
referred to herein) and any Commitment Letter duly executed by the parties
hereto contain the entire agreement between the parties with respect to the
transactions contemplated hereby and supersede all prior agreements, written or
oral, with respect thereto. No amendment, modification or alteration of the
terms or provisions of this Agreement shall be binding unless the same shall be
in writing and duly executed by the authorized representatives of the parties
hereto, provided, however, that as long as any Series A Preferred Shares remain
outstanding, no material amendment to or modification or
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alteration of this Agreement may be entered into or approved by the Purchaser
without the approval of a majority of the Independent Directors.
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to them
in this Agreement and include the plural as well as the singular, and the use of
any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a document are to
designated Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
(d) reference to a Subsection without further reference to a Section is a
reference to such Subsection as contained in the same Section in which the
reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular provision;
and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
SECTION 23. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at any closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process but solely for the
purposes set forth in this Agreement. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
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SECTION 24. FURTHER AGREEMENTS.
The Seller and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of this
Agreement.
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE.
The Seller shall execute a blanket assignment of the Mortgages underlying
each Mortgage Loan sold to the Purchaser pursuant to this Agreement or a duly
executed Commitment Letter. Upon the written request of Purchaser (whether due
to the proposed sale of any Mortgage Loan by Purchaser or otherwise), or to the
extent deemed necessary by the Servicer in connection with servicing a Mortgage
Loan pursuant to the terms of the Residential Servicing Agreement, the Seller
shall promptly prepare and execute individual Assignments of Mortgage to be
recorded in all appropriate public offices for real property records in all the
counties or other comparable jurisdictions in which any or all of the Mortgaged
Properties are situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Purchaser or Purchaser's
designee, but in any event, at the Seller's expense for a single recordation
with respect to each Assignment of Mortgage.
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IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL
CORPORATION
/s/ J. MICHAEL HOLMES
By: ---------------------
Name: J. MICHAEL HOLMES
Title: EXECUTIVE VICE PRESIDENT/
CHIEF FINANCIAL OFFICER
PEOPLE'S BANK OF CALIFORNIA
/s/ J. MICHAEL HOLMES
By: ---------------------
Name: J. MICHAEL HOLMES
Title: EXECUTIVE VICE PRESIDENT/
CHIEF FINANCIAL OFFICER
/s/ WILLIAM W. FLADER
By: ---------------------
Name: WILLIAM W. FLADER
Title: EXECUTIVE VICE PRESIDENT
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EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include each
of the following items (to the extent such items are applicable and exist within
the Seller's Mortgage File), which shall be available for inspection by the
Purchaser and any prospective Purchaser, and which shall be delivered to the
Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan Purchase
and Warranties Agreement to which this Exhibit is attached (the "Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I hereto, a lost note affidavit, executed by an
officer of the Seller, with a copy of the original note attached
thereto) bearing all intervening endorsements, endorsed "Pay to the
order of ____________ without recourse" (except as otherwise
provided in the Agreement) and signed in the name of the Seller by
an authorized officer. To the extent that there is no room on the
face of the Mortgage Notes for endorsements, the endorsement may be
contained on an allonge, if state law so allows. If the Mortgage
Loan was acquired by the Seller in a merger, the endorsement must be
by "[Seller], successor by merger to [name of predecessor]". If the
Mortgage Loan was acquired or originated by the Seller while doing
business under another name, the endorsement must be by "[Seller],
formerly known as [previous name]".
2. The original of any guarantee executed in connection with the
Mortgage Note.
3. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation, a photocopy of such Mortgage certified by
the Seller to be true and correct will be delivered; if such
Mortgage has been lost or if such public recording office retains
the original recorded Mortgage, the Seller shall deliver or cause to
be delivered to the Purchaser, a photocopy of such Mortgage,
certified by such public recording office to be a true and complete
copy of the original recorded Mortgage.
4. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon or
certified copies of such documents if the originals thereof are
unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all Mortgage Loans and signed in the name of
the Seller by an
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authorized officer. If the Mortgage Loan was acquired by the Seller
in a merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage Loan
was acquired or originated by the Seller while doing business under
another name, the Assignment of Mortgage must be by "[Seller],
formerly known as [previous name]". With respect to Co-op Loans, the
Assignment of Mortgage shall include an assignment of Security
Instruments.
6. Originals of all intervening assignments of the Mortgage with
evidence of recording thereon if such intervening assignment has
been recorded.
7. The original mortgagee policy of title insurance or, in the event
such original title policy is unavailable, a certified true copy of
the related policy binder or commitment for title certified to be
true and complete by the title insurance company.
8. Any original security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
9. The original hazard insurance policy and, if required by law, flood
insurance policy, in accordance with Section 8.02(f) of the
Agreement.
10. Residential loan application.
11. Mortgage Loan closing statement.
12. Verification of employment and income.
13. Verification of acceptable evidence of source and amount of down
payment.
14. Credit report on the Mortgagor.
15. Residential appraisal report.
16. Photograph of the Mortgaged Property.
17. Survey of the Mortgaged Property, if any.
18. To the extent applicable, copy of each instrument necessary to
complete identification of any exception set forth in the exception
schedule in the title policy, i.e., map or plat, restrictions,
easements, sewer agreements, home association declarations, etc.
A-2
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19. All required disclosure statements.
20. If available, termite report, structural engineer's report, water
portability and septic certification.
21. Sales contract, if any.
22. Tax receipts, insurance premium receipts, ledger sheets, insurance
claim files, correspondence, current and historical computerized
data files, and all other processing, underwriting and closing
papers and records which are customarily contained in a mortgage
loan file and which are required to document the Mortgage Loan or to
service the Mortgage Loan.
23. For Mortgage Loans with original LTV's greater than 80%, evidence of
a Primary Insurance Policy.
The Servicer (as defined in the Agreement) retains possession of the
originals of those items identified in Items 9-23 of this Exhibit A.
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EXHIBIT B
B-1
<PAGE>
EXHIBIT C
FORM OF SELLER'S OFFICER'S CERTIFICATE
I, _____________, hereby certify that I am the duly elected Executive Vice
President of People's Bank of California, a federal savings bank organized under
the laws of the United States (the "Seller") and further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete copy of
the restated Federal Stock Charter of the Seller which is in full force and
effect on the date hereof and which has been in effect without amendment,
waiver, rescission or modification since
2. Attached hereto as Exhibit 2 is a true, correct and complete copy of
the bylaws of the Seller which are in effect on the date hereof and which have
been in effect without amendment, waiver, rescission or modification since
_____________.
3. Attached hereto as Exhibit 3 is an original certificate of good
standing of the Seller issued within ten days of the date hereof, and no event
has occurred since the date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete copy of
the corporate resolutions of the Board of Directors or Committees thereof of the
Seller authorizing the Seller to execute and deliver each of the Residential
Mortgage Loan Purchase and Warranties Agreement, dated as of __________, 1997,
by and between People's Preferred Capital Corporation (the "Purchaser") and the
Seller (the "Purchase Agreement"), the Commitment Letter, dated as of _______,
by and between the Purchaser and the Seller [if applicable] and to endorse the
mortgage notes and execute the assignments of mortgages by original or facsimile
signature, and such resolutions are in effect on the date hereof and have been
in effect without amendment, waiver, rescission or modification since
5. Either (i) no consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Seller of or compliance by the Seller with the Purchase
Agreement [and the Commitment Letter], the sale of the mortgage loans or the
consummation of the transactions contemplated by the Purchase Agreement; or (ii)
any required consent, approval, authorization or order has been obtained by the
Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement [or the Commitment Letter]
conflicts or will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws of the
Seller, the terms of any indenture or other agreement or instrument to which the
Seller is a party or by which it is bound or to which it is subject, or any
statute or order, rule, regulations, writ, injunction or decree of any court,
governmental authority or regulatory body to which the Seller is subject or by
which it is bound.
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<PAGE>
7. To the best of my knowledge, there is no action, suit, proceeding or
investigation pending or threatened against the Seller which, in my judgment,
either in any one instance or in the aggregate, may result in any material
adverse change in the business, operations, financial condition, properties or
assets of the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted or in any
material liability on the part of the Seller or which would draw into question
the validity of the Purchase Agreement [or the Commitment Letter] or the
mortgage loans or of any action taken or to be taken in connection with the
transactions contemplated hereby, or which would be likely to impair materially
the ability of the Seller to perform under the terms of the Purchase Agreement
[and the Commitment Letter].
8. Each person listed on Exhibit 5 attached hereto who, as an officer or
representative of the Seller, signed the Purchase Agreement [and the Commitment
Letter] and any other document delivered prior to or on the date hereof in
connection with any purchase described in the Purchase Agreement was, at the
respective times of such signing and delivery, and is now, a duly elected or
appointed, qualified and acting officer or representative of the Seller, who
holds the office set forth opposite his or her name on Exhibit 5, and the
signatures of such persons appearing on such documents are their genuine
signatures.
9. The Seller is duly authorized to engage in the transactions described
and contemplated in the Purchase Agreement [and the Commitment Letter].
C-2
<PAGE>
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of
the Seller.
Dated:____________, 1997 By:_________________________________
Name: J. Michael Holmes
[Seal] Title: Executive Vice President
I, William W. Flader, an Executive Vice President of People's Bank of
California, hereby certify that J. Michael Holmes is the duly elected, qualified
and acting Executive Vice President of the Seller and that the signature
appearing above is his genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:____________, 1997 By:_________________________________
Name: William W. Flader
Title: Executive Vice President
C-3
<PAGE>
EXHIBIT 5
TO SELLER'S OFFICER'S CERTIFICATE
Name Title Signature
- ------------------------- ------------------------ ------------------------
C-4
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER
_________________, 1997
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Dear Sirs:
You have requested my opinion, as General Counsel to People's Bank of
California (the "Seller"), with respect to certain matters in connection with
the sale by the Seller of the Mortgage Loans pursuant to that certain
Residential Mortgage Loan Purchase and Warranties Agreement by and between the
Seller and People's Preferred Capital Corporation (the "Purchaser"), dated as of
__________, 1997 (the "Purchase Agreement") which sale is in the form of whole
loans, delivered pursuant to the Purchase Agreement and serviced pursuant to a
Residential Servicing Agreement, dated as of __________, 1997, by and between
Temple-Inland Mortgage Corporation, the Seller and the Purchaser (the "Servicing
Agreement"). Capitalized terms not otherwise defined herein have the meanings
set forth in the Purchase Agreement and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement [and, if applicable, the Commitment Letter
dated ______________________;]
2. the Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as I have deemed necessary
and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon the
representations and warranties of the Seller contained in the Purchase
Agreement. I have assumed the authenticity of all documents submitted to me as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents.
D-1
<PAGE>
Based upon the foregoing, it is my opinion that:
1. The Seller is a federal savings bank duly organized, validly
existing and in good standing under the laws of the United States
and is qualified to transact business in, and is in good standing
under, the laws of the United States.
2. The Seller has the power to engage in the transactions contemplated
by the Purchase Agreement [and, if applicable, the Commitment Letter
dated ____________________;] and all requisite power, authority and
legal right to execute and deliver the Purchase Agreement and to
perform and observe the terms and conditions of such agreements.
3. The Purchase Agreement has been duly authorized, executed and
delivered by the Seller and is a legal, valid and binding agreement
enforceable in accordance with its respective terms against the
Seller, subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder
or with the Purchaser's ownership of the Mortgage Loans.
4. The Seller has been duly authorized to allow certain specified
officers to execute any and all documents by original signature in
order to complete the transactions contemplated by the Purchase
Agreement and by original or facsimile signature in order to execute
the endorsements to the Mortgage Notes and the Assignments of
Mortgages, and the original or facsimile signature of the officer of
the Seller executing the endorsements to the Mortgage Notes and the
Assignments of Mortgages represents the legal and valid signature of
said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of any court
or governmental agency or body is required for the execution,
delivery and performance by the Seller of or compliance by the
Seller with the Purchase Agreement and the sale of the Mortgage
Loans or the consummation of the transactions contemplated by the
Purchase Agreement or (ii) any required consent, approval,
authorization or order has been obtained by the Seller.
6. Neither the consummation of the transactions contemplated by, nor
the fulfillment of the terms of, the Purchase Agreement conflicts or
will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws
of the Seller, the terms of any indenture or other agreement or
instrument to which the Seller is a party or by which it is bound or
to which it is subject, or violates any statute or order, rule,
regulations, writ, injunction or decree of any court,
D-2
<PAGE>
governmental authority or regulatory body to which the Seller is
subject or by which it is bound.
7. There is no action, suit, proceeding or investigation pending or, to
the best of my knowledge, threatened against the Seller which, in my
judgment, either in any one instance or in the aggregate, may result
in any material adverse change in the business, operations,
financial condition, properties or assets of the Seller or in any
material impairment of the right or ability of the Seller to carry
on its business substantially as now conducted or in any material
liability on the part of the Seller or which would draw into
question the validity of the Purchase Agreement or the Mortgage
Loans or of any action taken or to be taken in connection with the
transactions contemplated thereby, or which would be likely to
impair materially the ability of the Seller to perform under the
terms of the Purchase Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the manner
contemplated by the Purchase Agreement is sufficient to fully
transfer to the Purchaser all right, title and interest of the
Seller thereto as noteholder and mortgagee.
I am licensed to practice law in the State of California and express no
opinion as to the laws of any jurisdiction other than the State of California or
the federal banking laws of the United States; accordingly, my opinions extend
only to questions of law of such jurisdictions. I note that certain of the
agreements upon which I express an opinion herein are governed by the laws of a
jurisdiction other than the State of California. I have assumed with your
consent for the purposes of giving these opinions that the law of any state
other than the State of California which may be applied to such agreements is
substantially identical to the laws of the State of California. The opinions
expressed herein are subject to statutory, regulatory and case law developments
after the date hereof.
This opinion is given to you for your sole benefit, and no other person or
entity is entitled to rely hereon.
Very truly yours,
--------------------------------
Doreen J. Blauschild
General Counsel
D-3
<PAGE>
EXHIBIT E
______________________, 1997
Federal Home Loan Bank of
San Francisco (the "Association")
600 California Street
San Francisco, California 94108
Attention:
-------------------------
-------------------------
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that People's Bank of California, a federal
savings bank, organized pursuant to the laws of the United States (the "Bank")
has committed to sell to People's Preferred Capital Corporation under a
Residential Mortgage Loan Purchase and Warranties Agreement, dated as of
__________, 1997, certain mortgage loans owned by the Bank. The Bank warrants
that the mortgage loans to be sold to People's Preferred Capital Corporation are
in addition to and beyond any collateral required to secure advances made by the
Association to the Bank.
The Bank acknowledges that the mortgage loans to be sold to People's
Preferred Capital Corporation shall not be used as additional or substitute
collateral for advances made by the Association. People's Preferred Capital
Corporation understands that the balance of the Bank's mortgage loan portfolio
may be used as collateral or additional collateral for advances made by the
Association, and confirms that it has no interest therein.
E-1
<PAGE>
Execution of this letter by the Association shall constitute a full and
complete release of any security interest, claim, or lien which the Association
may have against the mortgage loans to be sold to People's Preferred Capital
Corporation.
Very truly yours,
--------------------------------------
By: __________________________________
Name: ________________________________
Title: _______________________________
Date:_________________________________
Acknowledged and approved:
FEDERAL HOME LOAN BANK OF
SAN FRANCISCO
By: _________________________
Name: _______________________
Title: ______________________
Date:________________________
E-2
<PAGE>
EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. RELEASE OF SECURITY INTEREST
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
People's Preferred Capital Corporation from People's Bank of California pursuant
to that certain Residential Mortgage Loan Purchase and Warranties Agreement,
dated as of __________, 1997, and certifies that all notes, mortgages,
assignments and other documents in its possession relating to such Mortgage
Loans have been delivered and released to People's Bank of California or its
designees, as of the date and time of the sale of such Mortgage Loans to
People's Preferred Capital Corporation.
Name and Address of Financial Institution
- ------------------------------------
(name)
- ------------------------------------
(Address)
By:_________________________________
II. CERTIFICATION OF RELEASE
People's Bank of California hereby certifies to People's Preferred Capital
Corporation that, as of the date and time of the sale of the above-mentioned
Mortgage Loans to People's Preferred Capital Corporation, the security interests
in the Mortgage Loans released by the above-named financial institution comprise
all security interests relating to or affecting any and all such Mortgage Loans.
People's Bank of California warrants that, as of such time, there are and will
be no other security interests affecting any or all of such Mortgage Loans.
-----------------------------------
By: _______________________________
Title: ____________________________
Date:______________________________
F-1
<PAGE>
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT, dated _________, between
____________, a __________ corporation ("Assignor") and __________, a
________________ corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of which
hereby are acknowledged, and of the mutual covenants herein contained, the
parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee, as
purchaser, all of the right, title and interest of Assignor with respect to the
mortgage loans listed on Exhibit A attached hereto (the "Mortgage Loans"), and
with respect to such Mortgage Loans, in, to and under (a) that certain
Residential Mortgage Loan Purchase and Warranties Agreement dated __________,
1997 by and between People's Bank of California (the "Seller") and People's
Preferred Capital Corporation (the "Purchaser") (the "Purchase Agreement"), and
(b) that certain Assignment, Assumption and Recognition Agreement dated as of
_______, 1997, by and between the Seller, the Purchaser and Temple-Inland
Mortgage Corporation (the "Servicer") (the "Residential Servicing Agreement";
the Residential Servicing Agreement and the Purchase Agreement are collectively
referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with, the
Assignee that:
a. The Assignor is the lawful owner of the Mortgage Loans with
the full right to transfer the Mortgage Loans free from any
and all claims and encumbrances whatsoever;
b. The Assignor has not received notice of, and has no knowledge
of, any offsets, counterclaims or other defenses available to
the Seller with respect to the Agreements or the Mortgage
Loans;
c. The Assignor has not waived or agreed to any waiver under, or
agreed to any amendment or other modification of, the
Agreements. The Assignor has no knowledge of, and has not
received notice of, any waivers under or amendments or other
modifications of, or assignments of rights or obligations
under, the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of
the Mortgage Loans or any interest in the Mortgage Loans, or
solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans, or any interest in
the Mortgage Loans or otherwise approached or negotiated with
respect to the Mortgage Loans, or any interest in the Mortgage
with any person in any manner, or
G-1
<PAGE>
made any general solicitation by means of general advertising
or in any other manner, or taken any other action which would
constitute a distribution of the Mortgage Loans under the
Securities Act of 1933, as amended (the "1933 Act") or which
would render the disposition of the Mortgage Loans a violation
of Section 5 of the 1933 Act or require registration pursuant
thereto.
3. The Assignee warrants and represents to, and covenants with, the
Assignor and the Seller pursuant to the Agreements that:
a. The Assignee is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, and has all requisite corporate power and
authority to acquire, own and purchase the Mortgage Loans;
b. The Assignee has full corporate power and authority to
execute, deliver and perform under this Assignment and
Assumption Agreement, and to consummate the transactions set
forth herein. The execution, delivery and performance of the
Assignee of this Assignment and Assumption Agreement, and the
consummation by it of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action of
the Assignee. This Assignment and Assumption Agreement has
been duly executed and delivered by the Assignee and
constitutes the valid and legally binding obligation of the
Assignee enforceable against the Assignee in accordance with
its respective terms;
c. To the best of Assignee's knowledge, no material consent,
approval, order or authorization of, or declaration, filing or
registration with, any governmental entity is required to be
obtained or made by the Assignee in connection with the
execution, delivery or performance by the Assignee of this
Assignment and Assumption Agreement, or the consummation by it
of the transactions contemplated hereby;
d. The Assignee agrees to be bound, as Purchaser, by all of the
terms, covenants and conditions of the Agreements, the
Mortgage Loans, and from and after the date hereof, the
Assignee assumes for the benefit of each of the Seller and the
Assignor all of the Assignor' s obligations as Purchaser
thereunder, including, without limitation, the limitation on
assignment set forth in Section 19 of the Purchase Agreement;
e. The Assignee understands that the Mortgage Loans have not been
registered under the 1933 Act or the securities laws of any
state;
G-2
<PAGE>
f. The purchase price being paid by the Assignee for the Mortgage
Loans is in excess of $250,000 and will be paid by cash
remittance of the full purchase price within sixty (60) days
of the sale;
g. The Assignee is acquiring the Mortgage Loans for investment
for its own account only and not for any other person;
h. The Assignee considers itself a sophisticated institutional
investor having such knowledge and experience in financial and
business matters that it is capable of evaluating the merits
and risks of investment in the Mortgage Loans;
I. The Assignee has been furnished with all information regarding
the Mortgage Loans that it has requested from the Assignor or
the Seller;
j. Neither the Assignee nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of
the Mortgage Loans or any interest in the Mortgage Loans, or
solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans or any interest in the
Mortgage Loans, or otherwise approached or negotiated with
respect to the Mortgage Loans or any interest in the Mortgage
Loans with any person in any manner which would constitute a
distribution of the Mortgage Loans under the 1933 Act or which
would render the disposition of the Mortgage Loans a violation
of Section 5 of the 1933 Act or require registration pursuant
thereto, nor will it act, nor has it authorized or will it
authorize any person to act, in such manner with respect to
the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit plan
("Plan") within the meaning of section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")
or a plan (also "Plan") within the meaning of section
4975(e)(1) of the Internal Revenue Code of 1986 ("Code"), and
the Assignee is not directly or indirectly purchasing the
Mortgage Loans on behalf of, investment manager of, as named
fiduciary of, as Trustee of, or with assets of, a Plan; or (2)
the Assignee's purchase of the Mortgage Loans will not result
in a prohibited transaction under section 406 of ERISA or
section 4975 of the Code.
G-3
<PAGE>
4. (a) The Assignee's address for purposes of all notices and
correspondence related to the Mortgage Loans and the Agreements is:
---------------------------
---------------------------
---------------------------
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are:
---------------------------
---------------------------
---------------------------
(b) The Assignor's address for purposes for all notices and correspondence
related to the Mortgage Loans and this Agreement is:
---------------------------
---------------------------
---------------------------
5. This Agreement shall be construed in accordance with the substantive
laws of the State of California (without regard to conflicts of laws principles)
and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with such laws, except to the extent preempted by
federal law.
6. This Agreement shall inure to the benefit of the successors and assigns
of the parties hereto. This Agreement may not be assigned by the Assignee
without the express written consent of the Assignor. Any entity into which the
Assignor or Assignee may be merged or consolidated shall, without the
requirement for any further writing, be deemed the Assignor or Assignee,
respectively, hereunder.
7. No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
8. This Agreement shall survive the conveyance of the Mortgage Loans and
the assignment of the Agreements by the Assignor.
G-4
<PAGE>
9. Notwithstanding the assignment of the Agreements by either the Assignor
or Assignee, this Agreement shall not be deemed assigned by the Assignor or the
Assignee unless assigned by separate written instrument.
10. For the purpose for facilitating the execution of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute and be one
and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be executed by their duly authorized officers as of the date first
above written.
- --------------------------------- ---------------------------------
Assignor Assignee
By: _____________________________ By: ______________________________
Its: ____________________________ Its: _____________________________
Taxpayer Identification Taxpayer Identification
No.: _______________ No.: ________________
G-5
<PAGE>
EXHIBIT H
INITIAL PORTFOLIO MORTGAGE LOAN SCHEDULE
H-1
<PAGE>
EXHIBIT I
FORM OF COMMITMENT LETTER
[Date]
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Ladies and Gentlemen:
People's Preferred Capital Corporation, a Maryland corporation
("Purchaser"), hereby agrees to purchase from you ("Seller"), and you hereby
agree to sell, transfer, assign and convey to Purchaser, on ________________
(the "Closing Date"), all of your right, title and interest in and to those
residential mortgage loans (the "Mortgage Loans") set forth on Schedule I (the
"Mortgage Loan Schedule") attached hereto, the related Mortgage Files and all
rights and obligations of Seller arising under the documents contained therein,
subject to the terms and conditions set forth in this Commitment Letter and in
that certain Residential Mortgage Loan Purchase and Warranties Agreement, dated
as of ______________, 1997 (the "Purchase Agreement"), by and between Purchaser
and Seller.
The Mortgage Loans shall have an aggregate principal balance on
____________ (the "Cutoff Date") of $_______, or such amount as Purchaser and
Seller shall agree upon as evidenced by the aggregate principal balance of the
Mortgage Loans accepted by Purchaser on the Closing Date. The purchase price
payable by Purchaser to Seller at the Closing in consideration for the Mortgage
Loans set forth on the Mortgage Loan Schedule shall be $_______ (the "Purchase
Price"), or such other amount as Purchaser and Seller shall agree upon as
evidenced by the aggregate principal balance of the Mortgage Loans accepted by
Purchaser on the Closing Date.
I-1
<PAGE>
The purchase and sale of the Mortgage Loans contemplated hereby shall be
consummated by Purchaser and Seller subject to and in accordance with the terms
and conditions of the Purchase Agreement, including, without limitation, the
representations and warranties of Seller contained in Section 8 thereof and the
provisions relating to the purchase and sale of Mortgage Loans and delivery of
related documents in connection therewith set forth in Sections 4, 5, 6, 9 and
10 thereof. Capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Purchase Agreement.
Very truly yours,
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By: ______________________________________
Name:
Title:
Agreed and accepted as of the day first written above:
PEOPLE'S BANK OF CALIFORNIA
By: ____________________________
Name:
Title:
I-2
<PAGE>
Exhibit 10(a)(i)
FIRST AMENDMENT TO RESIDENTIAL MORTGAGE
LOAN PURCHASE AND WARRANTIES AGREEMENT
THIS FIRST AMENDMENT TO RESIDENTIAL MORTGAGE LOAN PURCHASE AND
WARRANTIES AGREEMENT ("First Amendment") is made and entered into effective as
of the 2nd day of June, 1998, by and between PEOPLE'S BANK OF CALIFORNIA, a
federal savings bank ("Seller"), and PEOPLE'S PREFERRED CAPITAL CORPORATION, a
Maryland corporation ("Purchaser"), with reference the following recitals:
R E C I T A L S
A. Seller and Purchaser entered into that certain Residential Mortgage
Loan Purchase and Warranties Agreement dated as of October 3, 1997 (the
"Agreement"), whereby Seller agreed to sell and Purchaser agreed to buy Mortgage
Loans (as defined in the Agreement) from Seller from time to time. Capitalized
terms used herein and not otherwise defined shall have the meanings ascribed to
such terms in the Agreement.
B. The Agreement provides that the Mortgage Loans sold to Purchaser
would be serviced by Temple-Inland Mortgage Corporation ("Temple") as Servicer.
The parties now desire to amend the Agreement to provide that some of the
Mortgage Loans shall be serviced by Seller.
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants and agreements of the parties, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby conclusively
acknowledged, Seller and Purchaser agree as follows:
1. With respect to all Mortgage Loans Seller sold to Purchaser on June
2, 1998, November 23, 1998, and February 23, 1999, pursuant to Commitment
Letters of same dates, respectively, Seller shall be deemed to be the Servicer
and shall service such Mortgage Loans in accordance with Paragraph 3
hereinbelow.
2. With respect to all Mortgage Loans that Seller may from time to time
sell to Purchaser pursuant to the Agreement after February 23, 1999, the
Servicer shall mean either Seller or Temple, as shall be designated in the
Commitment Letter for such purchase and sale.
3. Notwithstanding anything to the contrary in the Agreement, for those
Mortgage Loans Seller sold to Purchaser as set forth in Paragraph 1 hereinabove
and for those Mortgage Loans that Seller may hereafter sell to Purchaser and for
which Seller shall be designated as the Servicer as set forth in Paragraph 2
hereinabove, such Mortgage Loans shall be serviced by Seller consistent with the
terms of that certain Commercial Servicing Agreement by and between Seller and
Purchaser dated as of October 3, 1997, a copy of which is attached hereto as
Exhibit "A", as shall be applicable to residential Mortgage Loans; provided,
however, that with respect to Mortgage Loans to be serviced by Seller as
provided in this First Amendment, the
<PAGE>
following terms in such Commercial Servicing Agreement shall have the meanings
set forth below:
a. "Mortgage Loan" shall mean a "Mortgage Loan" as defined in
the Agreement.
b. "Servicing Fee Rate" shall mean with respect to an
Adjustable Rate Mortgage Loan, 0.375% per annum and with respect to fixed rate
and balloon Mortgage Loans, 0.25% per annum.
c. "Mortgage File" shall mean the description of "Mortgage
File" set forth in Exhibit "A" to the Agreement.
4. Except as expressly modified in this First Amendment, the terms and
conditions of the Agreement shall remain unchanged and in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment effective as of the day and year first above written.
"SELLER"
PEOPLE'S BANK OF CALIFORNIA, a federal savings bank
By: /s/ J. Michael Holmes
--------------------------------------------
Its: EXEC. V.P. & C.F.O
-------------------------------------------
By: /s/ Rudolf P. Guenzel
--------------------------------------------
Its: President & CEO
-------------------------------------------
"PURCHASER"
PEOPLE'S PREFERRED CAPITAL CORPORATION,
a Maryland corporation
By: /s/ J. Michael Holmes
--------------------------------------------
Its: EXEC. V.P. & C.F.O
-------------------------------------------
<PAGE>
Exhibit 10.(b)
- --------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
PEOPLE'S PREFERRED CAPITAL CORPORATION
PURCHASER
PEOPLE'S BANK OF CALIFORNIA
SELLER
DATED AS OF OCTOBER 3, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Definitions................................................ 1
SECTION 2. Agreement to Purchase Initial Portfolio.................... 9
SECTION 3. Subsequent Purchases....................................... 10
SECTION 4. Payment of Purchase Price.................................. 10
SECTION 5. Examination of Mortgage Files.............................. 10
SECTION 6. Conveyance from Seller to Purchaser........................ 11
SUBSECTION 6.01 Possession of Servicing Files...................... 11
SUBSECTION 6.02 Books and Records.................................. 11
SUBSECTION 6.03 Delivery of Custodian's File....................... 11
SECTION 7. Servicing of the Mortgage Loans............................ 12
SECTION 8. Representations, Warranties and Covenants of the
Seller; Remedies for Breach................................ 13
SUBSECTION 8.01 Representations and Warranties Regarding the Seller 13
SUBSECTION 8.02 Representations and Warranties Regarding
Individual Mortgage Loans.................................. 15
SUBSECTION 8.03 Remedies for Breach of Representations and
Warranties................................................. 25
SECTION 9. Closing.................................................... 27
SECTION 10. Closing Documents.......................................... 28
SECTION 11. Costs...................................................... 29
SECTION 12. Merger or Consolidation of the Seller...................... 29
SECTION 13. Mandatory Delivery; Grant of Security Interest............. 29
SECTION 14. Notices.................................................... 30
SECTION 15. Severability Clause........................................ 31
SECTION 16. Counterparts............................................... 31
SECTION 17. Governing Law.............................................. 31
SECTION 18. Intention of the Parties................................... 31
SECTION 19. Successors and Assigns; Assignment of Purchase Agreement... 31
SECTION 20. Waivers.................................................... 32
SECTION 21. Entire Agreement, Amendment................................ 32
SECTION 22. General Interpretive Principles............................ 32
SECTION 23. Reproduction of Documents.................................. 33
SECTION 24. Further Agreements......................................... 33
SECTION 25. Recordation of Assignments of Mortgage..................... 33
i
<PAGE>
EXHIBITS
EXHIBIT A Contents of Each Mortgage File
EXHIBIT B Commercial Mortgage Servicing Agreement
EXHIBIT C Form of Seller's Officer's Certificate
EXHIBIT D Form of Opinion of Counsel to the Seller
EXHIBIT E Notice of Sale and Release of Collateral
EXHIBIT F Form of Security Release Certification
EXHIBIT G Form of Assignment and Assumption Agreement
EXHIBIT H Initial Portfolio Mortgage Loan Schedule
EXHIBIT I Form of Commitment Letter
ii
<PAGE>
COMMERCIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
This COMMERCIAL MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the
"Agreement"), dated as of October 3, 1997, by and between People's Preferred
Capital Corporation, a Maryland corporation, having an office at 5900 Wilshire
Boulevard, Los Angeles, California 90036 (the "Purchaser") and People's Bank of
California, a federal stock savings bank organized under the laws of the United
States, having an office at 5900 Wilshire Boulevard, Los Angeles, California
90036 (the "Seller").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller, from time to time, certain conventional
commercial mortgage loans (the "Mortgage Loans") on a servicing retained basis
as described herein, and which shall be delivered as whole loans;
WHEREAS, each Mortgage Loan is secured by a mortgage, deed of trust or
other security instrument creating a first lien on a commercial property
indicated on the Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of the
conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the promises and mutual agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Purchaser and the Seller agree
as follows:
SECTION 1. DEFINITIONS.
For purposes of this Agreement and any Commitment Letter (as defined
herein) the following capitalized terms shall have the respective meanings set
forth below. Other capitalized terms used in this Agreement and not defined
herein shall have the respective meanings set forth in the Commercial Servicing
Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of
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voting securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agreement" means this Commercial Mortgage Loan Purchase and Warranties
Agreement and all amendments hereof and supplements hereto.
"ALTA" means The American Land Title Association or any successor thereto.
"Ancillary Income" means all late charges, assumption fees, escrow account
benefits, reinstatement fees, and similar types of fees arising from or in
connection with any Mortgage, to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"Appraised Value" means the value of the Mortgaged Property set forth in
an appraisal made in connection with the origination of the related Mortgage
Loan as the value of the Mortgaged Property or such later appraisal, if
applicable.
"Assignment and Assumption Agreement" has the meaning set forth in Section
19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered in
blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking and savings and loan institutions, in the State of
California or the state in which the Seller's servicing operations are located,
are authorized or obligated by law or executive order to be closed.
"Classified" is used herein generally to describe a Mortgage Loan which is
deemed substandard, doubtful or loss with respect to collectibility.
"Closing Date" means the Initial Closing Date and any other date on which
the parties hereto shall agree to close a sale of Mortgage Loans hereunder as
set forth in a duly executed Commitment Letter.
"Code" means Internal Revenue Code of 1986, as amended.
"Commercial Servicing Agreement" means the agreement, attached as Exhibit
B hereto, to be entered into by the Purchaser and the Seller, as servicer,
providing for the Seller to service the Mortgage Loans as specified by the
Commercial Servicing Agreement.
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"Commitment Letter" means a letter agreement executed by the Purchaser and
the Seller providing for the purchase and sale of Mortgage Loans and
substantially in the form of Exhibit I hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate trust account created and
maintained pursuant to the Commercial Servicing Agreement.
"Cut-off Date" means the Initial Cut-off Date and any other date as of
which the principal balance of Mortgage Loans will be determined for purposes of
calculating the Purchase Price for the purchase and sale of Mortgage Loans,
which date shall be set forth in the related Commitment Letter.
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Due Date" means the day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained
pursuant to the Commercial Servicing Agreement with respect to each Mortgage
Loan, as specified in the Commercial Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, any payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document (whether referred to as escrow, impound or
otherwise), including without limitation the amounts constituting ground rents,
taxes, assessments, water rates, sewer rents, municipal charges, mortgage
insurance premiums, fire and hazard insurance premiums.
"Independent Directors" means the members of the Board of Directors of the
Purchaser who are not current employees or officers of the Purchaser or current
employees, officers or directors of the Seller or any affiliate of the Seller.
In addition, any members of the Board of Directors of the Purchaser elected by
holders of the preferred stock of the Purchaser, including the Series A
Preferred Shares, will be deemed to be "Independent Directors" for purposes of
approving actions requiring the approval of a majority of the Independent
Directors.
"Initial Closing Date" means October 3, 1997, or such other date as the
parties hereto may mutually agree.
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"Initial Cut-off Date" means September 22, 1997.
"Initial Portfolio Mortgage Loan Schedule" means the schedule of Mortgage
Loans to be purchased by the Purchaser on the Initial Closing Date, attached
hereto as Exhibit H.
"Initial Portfolio Purchase Price" means the amount set forth in Section 2
of this Agreement.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Interest Rate Adjustment Date" means, with respect to each Variable Rate
Mortgage Loan, the date, specified in the related Mortgage Note, on which the
Mortgage Interest Rate is adjusted.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage Loan,
the ratio (expressed as a percentage) of the original principal amount of the
Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged Property
at origination and (b) if the Mortgage Loan was made to finance the acquisition
of the related Mortgaged Property, the purchase price of the Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note, including any riders, addendums, assumptions, modifications or
extensions thereto, which creates a first lien on an unsubordinated estate in
fee simple in real property securing the Mortgage Note; except that with respect
to real property located in jurisdictions in which the use of leasehold estates
for commercial properties is a widely accepted practice, the mortgage, deed of
trust or other instrument securing the Mortgage Note may secure and create a
first lien upon a leasehold estate of the Mortgagor.
"Mortgage File" means the items pertaining to a particular Mortgage Loan
referred to in Exhibit A annexed hereto, and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of a Variable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
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"Mortgage Loan" means an individual Mortgage Loan which is the subject of
this Agreement, each Mortgage Loan originally sold and subject to this Agreement
being identified on Exhibit H attached hereto, and each Mortgage Loan sold
pursuant to a Commitment Letter being identified on the applicable Mortgage Loan
Schedule, and each of which Mortgage Loan includes without limitation the
Mortgage File, the Monthly Payments, Principal Prepayments, Liquidation
Proceeds, Condemnation Proceeds, Insurance Proceeds, and all other rights,
benefits, proceeds and obligations arising from or in connection with such
Mortgage Loan, excluding replaced or repurchased mortgage loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan, the
following documents pertaining to such Mortgage Loan:
a. The original Mortgage Note (or, with respect to the Mortgage Loans
listed on Schedule I to Exhibit A hereto, a lost note affidavit,
executed by an officer of the Seller, with a copy of the original
note attached thereto) bearing all intervening endorsements,
endorsed "Pay to the order of ( IN BLANK ) without recourse" and
signed in the name of the Seller by an authorized officer. To the
extent that there is no room on the face of the Mortgage Notes for
endorsements, the endorsement may be contained on an allonge, if
state law so allows. If the Mortgage Loan was acquired by the Seller
in a merger, the endorsement must be by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the endorsement must be by "[Seller], formerly known as [previous
name]"; and
b. The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all of the Mortgage Loans in form and
substance acceptable for recording endorsed and signed in the name
of the Seller. If the Mortgage Loan was acquired by the Seller in a
merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage Loan
was acquired or originated by the Seller while doing business under
another name, the Assignment of Mortgage must be by "[Seller],
formerly known as [previous name]".
c. The original of any guarantee executed in connection with the
Mortgage Note.
d. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation, a photocopy of such Mortgage certified by
the Seller to be true and correct will be delivered; if such
Mortgage has been lost or if such public recording office retains
the original recorded Mortgage, the Seller shall deliver or cause to
be delivered to the Purchaser, a photocopy of such Mortgage,
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certified by such public recording office to be a true and complete
copy of the original recorded Mortgage.
e. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon if
such agreements have been recorded, or certified copies of such
documents if the originals are unavailable.
f. Originals of all intervening Assignments of the Mortgage with
evidence of recording thereon, or if any such intervening assignment
has not been returned from the applicable recording office, a
photocopy of each such assignment certified by the Seller to be true
and correct will be delivered, or if such assignment has been lost
or if such public recording office retains the original recorded
assignments of mortgage, the Seller shall deliver or cause to be
delivered to the Purchaser, a photocopy of such intervening
assignment, certified by such public recording office to be a true
and complete copy of the original recorded intervening assignment.
g. The original mortgagee policy of title insurance or, in the event
such original title policy is unavailable, a certified true copy of
the related policy binder or commitment for title certified to be
true and complete by the title insurance company; provided that the
original mortgagee policy of title insurance shall be delivered
promptly after receipt by the Seller thereof but in no event later
than one hundred twenty (120) days from and after the Closing Date.
h. Any other security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
"Mortgage Loan Schedule" means (a) the Initial Portfolio Mortgage Loan
Schedule attached hereto as Exhibit H and (b) any schedule of Mortgage Loans in
similar form attached to and constituting part of a duly executed Commitment
Letter, in each case setting forth at least the following information with
respect to each Mortgage Loan: (1) the Seller's Mortgage Loan identifying
number; (2) the Mortgagor's name; (3) the street address of the Mortgaged
Property including the state; (4) the type of commercial property constituting
the Mortgaged Property; (5) the type of Mortgage Loan (i.e., whether the
Mortgage Loan bears interest at a fixed or variable rate); (6) the original
months to maturity or the remaining months to maturity from the applicable
Cut-off Date, in any case based on the original amortization schedule and, if
different, the maturity expressed in the same manner but based on the actual
amortization schedule; (7) the Loan-to-Value Ratio at origination; (8) the
Mortgage Interest Rate as of the applicable Cut-off Date; (9) the stated
maturity date; (10) the amount of the Monthly Payment as of the applicable
Cut-off Date; (11) the original principal amount of the Mortgage Loan; (12) the
principal balance of the Mortgage Loan as of the close of business on the
applicable Cut-off Date; (13) a code indicating the purpose of the loan (i.e.,
purchase and refinance); (14) the Interest Rate Adjustment Date with respect to
any Variable Rate Mortgage Loan, frequency of interest rate adjustments,
interest rate caps, floors and ceilings; (15) the Servicing Fee Rate; and (16)
with respect to any Variable Rate Mortgage Loan, the index and
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margin pursuant to which the Mortgage Interest Rate is determined. With respect
to the Mortgage Loans in the aggregate, the Mortgage Loan Schedule shall set
forth the following information, as of the applicable Cut-off Date: (1) the
number of Mortgage Loans; (2) the current aggregate outstanding principal
balance of the Mortgage Loans; (3) the weighted average interest rate; and (4)
the weighted average servicing fee.
"Mortgage Note" means the note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage, including any amendment, modification or
addendum thereto.
"Mortgaged Property" means the real property (or leasehold estate, if
applicable) securing repayment of the debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Non-accrual Status" refers to Mortgage Loans that are 90 days or more
past due in the payment of principal or interest.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as required
by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Seller, reasonably acceptable to the Purchaser.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price to be paid on the applicable Closing Date
by the Purchaser to the Seller in consideration for the Mortgage Loans to be
purchased by the Purchaser on such Closing Date (including, without limitation,
the Initial Portfolio Purchase Price to be paid by Purchaser at the Initial
Closing) as set forth in this Agreement or a duly executed Commitment Letter, as
the case may be.
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"Purchaser" means People's Preferred Capital Corporation or its successor
in interest or assigns or any successor to the Purchaser under this Agreement as
herein provided.
"Qualified Appraiser" means an appraiser who had no interest, direct or
indirect in the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or disapproval of the
Mortgage Loan, and such appraiser and the appraisal made by such appraiser both
satisfy the requirements of Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Property was appraised.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and in the two highest rating
categories by Best's with respect to hazard and flood insurance .
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to be
substituted by the Seller for a Deleted Mortgage Loan which must, on the date of
such substitution, (i) have an outstanding principal balance, after deduction of
all payments collected as of the date of substitution (or in the case of a
substitution of more than one mortgage loan for a Deleted Mortgage Loan, an
aggregate principal balance), not in excess of the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall will be deposited in
the Custodial Account by the Seller in the month of substitution); (ii) have a
Mortgage Interest Rate and a remaining term to maturity, each of which is as
reasonably comparable as possible to the Mortgage Interest Rate and remaining
term to maturity of the Deleted Mortgage Loan; (iii) be of the same type as the
Deleted Mortgage Loan; and (iv) comply with each representation and warranty
(respecting individual Mortgage Loans) set forth in Section 8.02 hereof.
"Remittance Date" means the date specified in the Commercial Servicing
Agreement.
"Repurchase Price" means, with respect to any Mortgage Loan, a price equal
to (i) the unpaid principal balance of such Mortgage Loan plus (ii) interest net
of servicing fees, on such unpaid principal balance of such Mortgage Loan at the
Mortgage Interest Rate from the last date through which interest has been paid
and distributed to the Purchaser to the date of repurchase, less amounts
received or advanced, if any, by the Seller in respect of such repurchased
Mortgage Loan.
"Seller" means People's Bank of California, its successors in interest and
assigns.
"Series A Preferred Shares" means the ___% Noncumulative Exchangeable
Preferred Stock, Series A, par value $0.01 per share, of the Purchaser.
"Servicing Fee" means, with respect to each Mortgage Loan, subject to the
Commercial Servicing Agreement, the amount of the annual fee the Purchaser shall
pay to the Seller, which shall for a period of one full month be equal to
one-twelfth of the product of (a) the Servicing Fee Rate
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and (b) the outstanding principal balance of such Mortgage Loan. Such fee shall
be payable monthly, and shall be pro rated for any portion of a month during
which the Mortgage Loan is serviced by the Seller under the Servicing Agreement.
The obligation of the Purchaser to pay the Servicing Fee is limited to, and the
Servicing Fee is payable solely from, the interest portion (including recoveries
with respect to interest from Liquidation Proceeds, to the extent permitted by
this Agreement) of such Monthly Payment collected by the Seller, or as otherwise
provided under this Agreement. In addition to the Servicing Fee, the Seller
shall be entitled to retain all Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Seller during the period in which the Seller is acting as
servicer pursuant to the Commercial Servicing Agreement consisting of originals
of all documents in the Mortgage File which are not delivered to the Purchaser
or its designee and copies of the Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan the unpaid
principal balance as of the applicable date of determination of such balance.
"Variable Rate Mortgage Loan" means any individual Mortgage Loan purchased
pursuant to this Agreement the interest rate of which adjusts periodically based
on the index identified in the Mortgage Note.
SECTION 2. AGREEMENT TO PURCHASE INITIAL PORTFOLIO.
The Seller hereby agrees to sell, transfer, assign, set over and convey to
the Purchaser on the Initial Closing Date, without recourse, but subject to the
terms of this Agreement, all right, title and interest of the Seller in and to
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
the related Mortgage Files and all rights and obligations arising under the
documents contained therein. Mortgage Loans on the Initial Portfolio Mortgage
Loan Schedule shall have an aggregate principal balance on the Initial Cut-off
Date in an amount no less than $__________.
The Initial Portfolio Purchase Price payable by the Purchaser in
consideration for the Mortgage Loans listed on the Initial Portfolio Mortgage
Loan Schedule shall be equal to the actual aggregate unpaid principal balance of
the Mortgage Loans as of the Initial Cut-off Date as accepted by the Purchaser
on the Initial Closing Date plus interest accrued on such Mortgage Loans at the
weighted average Mortgage Interest Rate from the last interest paid to date for
each such Mortgage Loan to and including the day prior to the Initial Closing
Date.
SECTION 3. SUBSEQUENT PURCHASES.
From time to time, by executing a Commitment Letter substantially in the
form of Exhibit I hereto, the Seller shall sell, transfer, assign, set over and
convey to the Purchaser, without recourse,
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but subject to the terms of this Agreement, and the Purchaser will purchase, all
the right, title and interest of the Seller, as of the applicable Closing Date,
in and to the Mortgage Loans set forth in the Mortgage Loan Schedule attached to
such Commitment Letter, and the Purchaser shall pay to Seller the Purchase Price
set forth in such Commitment Letter on such Closing Date.
SECTION 4. PAYMENT OF PURCHASE PRICE.
The estimated Purchase Price computed as of the Initial Cut-off Date and
other Cut-off Dates, as applicable, shall be paid on the applicable Closing Date
by wire transfer of immediately available funds. The difference, if any, between
such estimated Purchase Price and the actual Purchase Price computed as of the
applicable Closing Date shall be paid by Seller or Purchaser to the other, as
the case may be, no later than ten business days after the applicable Closing
Date.
The Purchaser shall, with respect to any Mortgage Loan purchased hereunder
or pursuant to a duly executed Commitment Letter, be entitled to (l) all
principal due after the applicable Cut-off Date, (2) all other recoveries of
principal collected on or after the applicable Cut-off Date, and (3) all
payments of interest on the Mortgage Loans net of applicable Servicing Fees
collected on or after the applicable Cut-off Date. The outstanding principal
balance of each Mortgage Loan as of the applicable Cut-off Date is determined
after application of payments of principal collected on or before such Cut-off
Date, together with any unscheduled principal prepayments collected prior to
such Cut-off Date.
SECTION 5. EXAMINATION OF MORTGAGE FILES.
Prior to the date hereof or the date of any duly executed Commitment
Letter, as the case may be, the Seller has or shall have (a) delivered to the
Purchaser or its designee in escrow, for examination with respect to each
Mortgage Loan to be purchased, the related Mortgage File, including a copy of
the Assignment of Mortgage, pertaining to each Mortgage Loan, or (b) made the
related Mortgage File available to the Purchaser for examination at the Seller's
offices or such other location as shall otherwise be agreed upon by the
Purchaser and the Seller. The fact that the Purchaser or its designee has
conducted or has failed to conduct any partial or complete examination of the
Mortgage Files shall not affect the Purchaser's (or any of its successor's)
rights to demand repurchase, substitution or other relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
SUBSECTION 6.01. POSSESSION OF SERVICING FILES.
The Servicing Files relating to any Mortgage Loans purchased by Purchaser
hereunder or pursuant to a duly executed Commitment Letter shall be retained by
the Seller in accordance with the terms of the Commercial Servicing Agreement
and, as provided therein, shall be appropriately identified in the Seller's
computer system and/or books and records, as appropriate, to clearly reflect the
sale of the related Mortgage Loan to the Purchaser.
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SUBSECTION 6.02. BOOKS AND RECORDS.
Record title to each Mortgage Loan as of the applicable Closing Date shall
be in the name of the Seller or the Purchaser or one or more of its designees,
as the Purchaser shall select. Notwithstanding the foregoing, each Mortgage and
related Mortgage Note shall be possessed solely by the Purchaser or the
appropriate designee of the Purchaser, as the case may be. All rights arising
out of the Mortgage Loans including, but not limited to, all funds received by
the Seller after the applicable Cut-off Date on or in connection with a Mortgage
Loan shall be vested in the Purchaser or one or more of its designees; provided,
however, that all funds received on or in connection with a Mortgage Loan shall
be received and held by the Seller in trust for the benefit of the Purchaser or
its designee, as the case may be, as the owner of the Mortgage Loans pursuant to
the terms of this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's balance
sheet and other financial statements as a sale of assets by the Seller.
SUBSECTION 6.03. DELIVERY OF MORTGAGE LOAN DOCUMENTS.
On or prior to each Closing Date, the Seller shall deliver and release to
the Purchaser or its designee on the Closing Date the Mortgage Loan Documents
with respect to each Mortgage Loan sold to the Purchaser and set forth on the
Mortgage Loan Schedule, except as otherwise provided in the Commercial Servicing
Agreement.
The Seller shall forward to the Purchaser or its designee original
documents evidencing an assumption, modification, consolidation, conversion or
extension of any Mortgage Loan entered into in accordance with the Commercial
Servicing Agreement within thirty (30) days of their execution, provided,
however, that the Seller shall provide the Purchaser or its designee with a
certified true copy of any such document submitted for recordation within thirty
(30) days of its execution, and shall promptly provide the original of any
document submitted for recordation or a copy of such document certified by the
appropriate public recording office to be a true and complete copy of the
original within ninety (90) days of its submission for recordation (provided,
that with respect to assignments of the Mortgages reflecting the assignment from
the Seller to the Purchaser, one final assignment shall be executed by Seller in
blanket non-recordable form, and no other forms of assignment of such Mortgages
shall be executed or recorded unless and until the Purchaser shall request
execution of individual Assignments of Mortgages pursuant to and in accordance
with Section 25 hereof).
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the submission for
recordation, and in the event that the Seller does not cure such failure within
30 days of discovery or receipt of written notification of such failure from the
Purchaser, the related Mortgage Loan shall, upon the request of the Purchaser,
be repurchased by the Seller at the price and in the manner specified in
Subsection 8.03. The foregoing repurchase obligation shall not
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apply in the event that the Seller cannot deliver, or cause to be delivered,
such original or copy of any document submitted for recordation to the
appropriate public recording office within the specified period due to a delay
caused by the recording office in the applicable jurisdiction; provided that the
Seller shall instead deliver, or cause to be delivered, a recording receipt of
such recording office or, if such recording receipt is not available, an
officer's certificate of a servicing officer of the Seller, confirming that such
documents have been accepted for recording. Notwithstanding anything herein to
the contrary, under the circumstances described in the preceding sentence, the
Seller shall continue to make all reasonable efforts to obtain the original of
any document submitted for recordation to the appropriate public recording
office.
The Seller shall pay all initial recording fees, if any, for the
Assignments of Mortgage and any other fees or costs in transferring all original
documents to the Purchaser or its designee. The Purchaser or its designee shall
be responsible for recording the Assignments of Mortgage and shall be reimbursed
by the Seller for the reasonable costs associated therewith pursuant to the
preceding sentence.
SECTION 7. SERVICING OF THE MORTGAGE LOANS.
The Mortgage Loans have been sold by the Seller to the Purchaser on a
servicing retained basis.
The Seller will service the Mortgage Loans pursuant to and in accordance
with the terms and conditions contained in the Commercial Servicing Agreement.
The Purchaser and the Seller shall execute the Commercial Servicing Agreement on
or before the Initial Closing Date in the form attached hereto as Exhibit B.
Pursuant to the Commercial Servicing Agreement, the Seller shall begin
servicing the Mortgage Loans on behalf of the Purchaser and shall be entitled to
the Servicing Fee and any Ancillary Income with respect to such Mortgage Loans
from the Closing Date with respect to the sale and purchase thereof until the
termination of the Commercial Servicing Agreement with respect to any of the
Mortgage Loans as set forth in the Commercial Servicing Agreement. The Seller
shall conduct such servicing in accordance with the terms of the Commercial
Servicing Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER REMEDIES FOR
BREACH.
SUBSECTION 8.01. REPRESENTATIONS AND WARRANTIES REGARDING THE SELLER.
The Seller represents, warrants and covenants to the Purchaser that as of
the date hereof and as of the Closing Date:
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(a) DUE ORGANIZATION AND AUTHORITY; ENFORCEABILITY. The Seller is a
stock savings bank duly organized, validly existing and in good
standing under the laws of the United States and has all licenses
necessary to carry on its business as now being conducted and is
licensed, qualified and in good standing in each state wherein it
owns or leases any material properties or where a Mortgaged Property
is located, if the laws of such state require licensing or
qualification in order to conduct business of the type conducted by
the Seller, and in any event the Seller is in compliance with the
laws of any such state to the extent necessary to ensure the
enforceability of the related Mortgage Loan in accordance with the
terms of this Agreement; the Seller has the full corporate power,
authority and legal right to hold, transfer and convey the Mortgage
Loans and to execute and deliver this Agreement and to perform its
obligations hereunder; the execution, delivery and performance of
this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Seller and the
consummation of the transactions contemplated hereby have been duly
and validly authorized; this Agreement and all agreements
contemplated hereby have been duly executed and delivered and
constitute the valid, legal, binding and enforceable obligations of
the Seller subject to bankruptcy laws and other similar laws of
general application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder,
regardless of whether such enforcement is sought in a proceeding in
equity or at law; and all requisite corporate action has been taken
by the Seller to make this Agreement and all agreements contemplated
hereby valid and binding upon the Seller in accordance with their
terms;
(b) ORDINARY COURSE OF BUSINESS. The consummation of the transactions
contemplated by this Agreement are in the ordinary course of
business of the Seller, and the transfer, assignment and conveyance
of the Mortgage Notes and the Mortgages by the Seller pursuant to
this Agreement are not subject to the bulk transfer or any similar
statutory provisions in effect in any applicable jurisdiction;
(c) NO CONFLICTS. Neither the execution and delivery of this Agreement,
the sale of the Mortgage Loans to the Purchaser, the consummation of
the transactions contemplated hereby, nor the fulfillment of or
compliance with the terms and conditions of this Agreement, will
conflict with or result in a breach of any of the terms, conditions
or provisions of the Seller's charter or bylaws or any legal
restriction or any agreement or instrument to which the Seller is
now a party or by which it is bound, or constitute a default or
result in an acceleration under any of the foregoing, or result in
the violation of any law, rule, regulation, order, judgment or
decree to which the Seller or its property is subject, or result in
the creation or imposition of any lien, charge or encumbrance that
would have an adverse effect upon any of its properties pursuant to
the terms of any mortgage, contract, deed of trust or other
instrument, or impair the ability of the Purchaser to realize on the
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Mortgage Loans, impair the value of the Mortgage Loans, impair the
ability of the Purchaser to realize the full amount of any mortgage
insurance benefits accruing pursuant to this Agreement or impair the
ability of the Seller to perform its obligations hereunder;
(d) ABILITY TO PERFORM: SOLVENCY. The Seller does not believe, nor does
it have any reason or cause to believe, that it cannot perform each
and every covenant contained in this Agreement. The Seller is
solvent and the sale of the Mortgage Loans will not cause the Seller
to become insolvent. The sale of the Mortgage Loans is not
undertaken with the intent to hinder, delay or defraud any of the
Seller's creditors;
(e) NO LITIGATION PENDING. There is no action, suit, proceeding or
investigation pending or threatened against the Seller, before any
court, administrative agency or other tribunal asserting the
invalidity of this Agreement or the Commercial Servicing Agreement,
seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or the Commercial Servicing Agreement
or which, either in any one instance or in the aggregate, could
result in any material adverse change in the business, operations,
financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry
on its business substantially as now conducted, or in any material
liability on the part of the Seller, or which would draw into
question the validity of this Agreement or the Commercial Servicing
Agreement or any Mortgage Loan or of any action taken or to be taken
in connection with the obligations of the Seller contemplated
herein, or which would be likely to impair materially the ability of
the Seller to perform under the terms of this Agreement or the
Commercial Servicing Agreement;
(f) NO CONSENT REQUIRED. No consent, approval, authorization or order
of, or registration or filing with, or notice to any court or
governmental agency or body is required for the execution, delivery
and performance by the Seller of or compliance by the Seller with
this Agreement or the Mortgage Loans, the delivery of a portion of
the Mortgage Files to the Purchaser or its designee or the sale of
the Mortgage Loans or the consummation of the transactions
contemplated by this Agreement, or if required, such approval has
been obtained prior to the Closing Date;
(g) SELECTION PROCESS. The Mortgage Loans were selected from among the
outstanding commercial mortgage loans in the Seller's portfolio as
of the applicable Closing Date as to which the representations and
warranties set forth in Subsection 8.02 could be made and such
selection was not made in a manner so as to affect adversely the
interests of the Purchaser;
(h) INITIAL PORTFOLIO. The aggregate characteristics of the Mortgage
Loans are as set forth under the heading " Business and
Strategy--Description of Initial Portfolio"
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in the Prospectus relating to the Series A Preferred Shares of the
Purchaser dated September 30, 1997;
(i) NO UNTRUE INFORMATION. Neither this Agreement nor any information,
statement, tape, diskette, report, form, or other document furnished
or to be furnished pursuant to this Agreement or in connection with
the transactions contemplated hereby contains or will contain any
untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or
therein not misleading; and
(j) NO BROKERS. The Seller has not dealt with any broker, investment
banker, agent or other person that may be entitled to any commission
or compensation in connection with the sale of the Mortgage Loans.
SUBSECTION 8.02. REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
MORTGAGE LOANS.
The Seller hereby represents and warrants to the Purchaser that, as to
each Mortgage Loan, as of the applicable Closing Date for such Mortgage Loans
(or as of such other date as may be specified below), that:
(a) MORTGAGE LOANS AS DESCRIBED. The information set forth in the
Mortgage Loan Schedule is complete, true and correct in all material
respects as of the date indicated thereon;
(b) PAYMENTS CURRENT; STATUS. All payments required to be made up to,
but not including, the applicable Cut-off Date for the Mortgage Loan
under the terms of the Mortgage Note have been made and credited. No
payment required under the Mortgage Loan is delinquent nor has any
payment under the Mortgage Loan been 30 days or more delinquent more
than once within the period falling twelve (12) months prior to the
applicable Cut-off Date. The Mortgage Loan is not, and has not been
at any time in the preceding twelve months, (i) Classified, (ii) in
Non-accrual Status or (iii) renegotiated due to the financial
deterioration of the Mortgagor;
(c) NO OUTSTANDING CHARGES. There are no defaults in complying with the
terms of the Mortgage, and all taxes, governmental assessments,
insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing have
been paid, or an escrow of funds or payment plan has been
established in an amount sufficient to pay for every such item which
remains unpaid and which has been assessed but is not yet due and
payable. The Seller has not advanced funds, or induced, solicited or
knowingly received any advance of funds by a party other than the
Mortgagor, directly or indirectly, for the payment of any amount
required under the Mortgage Loan, except for interest accruing from
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the date of the Mortgage Note or date of disbursement of the
Mortgage Loan proceeds, whichever is earlier, to the day which
precedes by one month the Due Date of the first installment of
principal and interest;
(d) ORIGINAL TERMS UNMODIFIED. The terms of the Mortgage Note and
Mortgage have not been impaired, waived, altered or modified in any
respect, from the date of origination except as contained in the
Mortgage Loan Documents and the terms of which are reflected in the
Mortgage Loan Schedule, if applicable. The substance of any such
waiver, alteration or modification has been approved by the title
insurer, if any, to the extent required by the policy, and its terms
are reflected on the Mortgage Loan Schedule, if applicable. No
Mortgagor has been released, in whole or in part, except in
connection with an assumption agreement, which assumption agreement
is part of the Mortgage Loan File delivered to the Purchaser or its
designee and the terms of which are reflected in the Mortgage Loan
Schedule;
(e) NO DEFENSES. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without
limitation the defense of usury, nor will the operation of any of
the terms of the Mortgage Note or the Mortgage, or the exercise of
any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable, in whole or in part and no such right of
rescission, set-off, counterclaim or defense has been asserted with
respect thereto, and no Mortgagor is now or was, at the time of
origination of the related Mortgage Loan, a debtor in any state or
Federal bankruptcy or insolvency proceeding;
(f) HAZARD INSURANCE. Pursuant to the terms of the Mortgage, all
buildings or other improvements upon the Mortgaged Property are
insured by a generally acceptable insurer against loss by fire,
hazards of extended coverage. If required by the Flood Disaster
Protection Act of 1973, as amended, the Mortgage Loan is covered by
a flood insurance policy, meeting the requirements of the Federal
Insurance Administration, as well as all additional requirements set
forth in the Commercial Servicing Agreement attached hereto as
Exhibit B. All individual insurance policies contain a standard
mortgagee clause naming the Seller and its successors and assigns as
mortgagee, and all premiums thereon have been paid. The Mortgage
obligates the Mortgagor thereunder to maintain the hazard insurance
policy at the Mortgagor's cost and expense, and on the Mortgagor's
failure to do so, authorizes the holder of the Mortgage to obtain
and maintain such insurance at such Mortgagor's cost and expense,
and to seek reimbursement therefor from the Mortgagor. Where
required by state law or regulation, the Mortgagor has been given an
opportunity to choose the carrier of the required hazard insurance.
To the best knowledge of the Seller, the hazard insurance policy is
the valid and binding obligation of the insurer, is in full force
and effect, and will be in full force and effect and inure to the
benefit of the Purchaser upon the consummation of the transactions
contemplated by this Agreement. No action, inaction or event has
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occurred and no state of facts exists or has existed that has
resulted or could result in the exclusion from, denial of, or
defense to coverage under any hazard insurance policy (including,
without limitation, any exclusions, denials or defenses which would
limit or reduce the availability of the timely payment of the full
amount of the loss otherwise due thereunder to the insured) whether
arising out of actions, representations, errors, omissions,
negligence, or fraud of the Seller, the related Mortgagor or any
party involved in the application for such coverage, including the
appraisal, plans and specifications and other exhibits or documents
submitted therewith to the insurer under such insurance policy, or
for any other reason under such coverage, but not including the
failure of such insurer to pay by reason of such insurer's breach of
such insurance policy or such insurer's financial inability to pay.
The Seller has not engaged in, and has no knowledge of the
Mortgagor's having engaged in, any act or omission which would
impair the coverage of any such policy, the benefits of the
endorsement provided for herein, or the validity and binding effect
of either including, without limitation, no unlawful fee,
commission, kickback or other unlawful compensation or value of any
kind has been or will be received, retained or realized by any
attorney, firm or other person or entity, and no such unlawful items
have been received, retained or realized by the Seller;
(g) COMPLIANCE WITH APPLICABLE LAWS. Any and all requirements of any
federal, state or local law applicable to the Mortgage Loan have
been complied with in all material respects, the consummation of the
transactions contemplated hereby will not involve the violation of
any such laws or regulations, and the Seller shall maintain in its
possession, available for the Purchaser's inspection, and shall
deliver to the Purchaser upon demand, evidence of compliance with
all such requirements;
(h) NO SATISFACTION OF MORTGAGE. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the
Mortgaged Property has not been released from the lien of the
Mortgage, in whole or in part, nor has any instrument been executed
that would effect any such release, cancellation, subordination or
rescission. Neither the Seller, the Servicer nor any other Person
has waived the performance by the Mortgagor of any action, if the
Mortgagor's failure to perform such action would cause the Mortgage
Loan to be in default, nor has the Seller, the Servicer nor any
other Person waived any default resulting from any action or
inaction by the Mortgagor;
(i) LOCATION AND TYPE OF MORTGAGED PROPERTY. The Mortgaged Property is
located in the state identified in the Mortgage Loan Schedule and
consists of a real property improved by a commercial or multi-family
(greater than four residential units) facility erected thereon.
(j) VALID FIRST LIEN. The Mortgage is a valid, subsisting, enforceable
and perfected first lien on the Mortgaged Property, including all
buildings, improvements and fixtures
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on the Mortgaged Property and/or all installations and mechanical,
electrical, plumbing, heating and air conditioning systems located
in or annexed to such buildings, and all additions, alterations and
replacements made at any time with respect to the foregoing as set
forth in each Mortgage. The lien of the Mortgage is subject only to:
(1) the lien of current real property taxes and assessments not
yet due and payable;
(2) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the
date of recording acceptable to prudent mortgage lending
institutions generally and specifically referred to in the
lender's title insurance policy delivered to the originator of
the Mortgage Loan and (a) specifically referred to or
otherwise considered in the appraisal made for the originator
of the Mortgage Loan or (b) which do not adversely affect the
Appraised Value of the Mortgaged Property set forth in such
appraisal; and
(3) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage or the use,
enjoyment, value or marketability of the related Mortgaged
Property.
Any security agreement, chattel mortgage or equivalent document
related to and delivered in connection with the Mortgage Loan
establishes and creates a valid, subsisting, enforceable and
perfected first lien and first priority security interest on the
property described therein and the Seller has full right to sell and
assign the same to the Purchaser. The Mortgaged Property was not, as
of the date of origination of the Mortgage Loan, subject to a
mortgage, deed of trust, deed to secure debt or other security
instrument creating a lien subordinate to the lien of the Mortgage
(except any such subordinate loan which was created in connection
with the origination of the related Mortgage Loan details of which
are contained in the related Mortgage File);
(k) VALIDITY OF MORTGAGE DOCUMENTS. The Mortgage Note and the Mortgage
and any other agreement executed and delivered by a Mortgagor in
connection with a Mortgage Loan are genuine, and each is the legal,
valid and binding obligation of the maker thereof enforceable in
accordance with its terms. To the best knowledge of the Seller, all
parties to the Mortgage Note, the Mortgage and any other such
related agreement had legal capacity to enter into the Mortgage Loan
and to execute and deliver the Mortgage Note, the Mortgage and any
such agreement, and the Mortgage Note, the Mortgage and any other
such related agreement have been duly and properly executed by such
parties. To the best knowledge of the Seller, no
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fraud, error, omission, misrepresentation, negligence or similar
occurrence with respect to a Mortgage Loan has taken place on the
part of any Person, including without limitation, the Mortgagor, any
appraiser, any builder or developer, or any other party involved in
the origination of the Mortgage Loan;
(l) FULL DISBURSEMENT OF PROCEEDS. The Mortgage Loan has been closed and
the proceeds of the Mortgage Loan have been fully disbursed and
there is no requirement for future advances thereunder, and any and
all requirements as to completion of any on-site or off-site
improvement and as to disbursements of any escrow funds therefor
have been complied with. All costs, fees and expenses incurred in
making or closing the Mortgage Loan and the recording of the
Mortgage were paid, and the Mortgagor is not entitled to any refund
of any amounts paid or due under the Mortgage Note or Mortgage;
(m) OWNERSHIP. The Seller or its Affiliate is the sole owner of record
and holder of the Mortgage Loan and the indebtedness evidenced by
each Mortgage Note, except for the assignments of mortgage which
have been sent for recording, and upon recordation the Purchaser
will be the sole owner of record and holder of each Mortgage and the
indebtedness evidenced by each Mortgage Note, and upon the sale of
the Mortgage Loans to the Purchaser, the Seller will retain the
Mortgage Files or any part thereof with respect thereto not
delivered to the Purchaser or its designee in trust only for the
purpose of servicing and supervising the servicing of each Mortgage
Loan. The Mortgage Loan is not assigned or pledged, and the Seller
has good, indefeasible and marketable title thereto, and has full
right to transfer and sell the Mortgage Loan to the Purchaser free
and clear of any encumbrance, equity, participation interest, lien,
pledge, charge, claim or security interest, and has full right and
authority subject to no interest or participation of, or agreement
with, any other party, to sell and assign each Mortgage Loan
pursuant to this Agreement and following the sale of each Mortgage
Loan, the Purchaser will own such Mortgage Loan free and clear of
any encumbrance, equity, participation interest, lien, pledge,
charge, claim or security interest except as created by Purchaser.
The Seller intends to relinquish all rights to possess, control and
monitor the Mortgage Loan, except indirectly for purposes of
servicing the Mortgage Loan as set forth in the Commercial Servicing
Agreement. After the Closing Date, the Seller will have no right to
modify or alter the terms of the sale of the Mortgage Loan and the
Seller will have no obligation or right to repurchase the Mortgage
Loan or substitute another Mortgage Loan, except as provided in this
Agreement;
(n) DOING BUSINESS. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise,
are (or, during the period in which they held and disposed of such
interest, were) (1) in compliance with any and all applicable
licensing requirements of the laws of the state wherein the
Mortgaged Property is located, and (2) either (i) organized under
the laws of such state, or (ii)
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qualified to do business in such state, or (iii) a federal savings
and loan association, a savings bank or a national bank having a
principal office in such state, or (3) not doing business in such
state;
(o) LTV. The original LTV of each Mortgage Loan was not more than 80%;
(p) TITLE INSURANCE. The Mortgage Loan is covered by an ALTA lender's
title insurance policy or other form of policy or insurance and each
such title insurance policy is issued by a title insurer qualified
to do business in the jurisdiction where the Mortgaged Property is
located, insuring the Seller, its successors and assigns, as to the
first priority lien of the Mortgage in the original principal amount
of the Mortgage Loan, subject only to the exceptions contained in
clauses (1), (2) and (3) of paragraph (j) of this Subsection 8.02,
and against any loss by reason of the invalidity or unenforceability
of the lien resulting from the provisions of the Mortgage providing
for adjustment to the Mortgage Interest Rate and Monthly Payment.
Where required by state law or regulation, the Mortgagor has been
given the opportunity to choose the carrier of the required mortgage
title insurance. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress, and against encroachments
by or upon the Mortgaged Property or any interest therein. The
Seller, its successor and assigns, are the sole insurers of such
lender's title insurance policy, and such lender's title insurance
policy is valid and remains in full force and effect and will be in
force and effect upon the consummation of the transactions
contemplated by this Agreement. No claims have been made under such
lender's title insurance policy and, neither the Seller nor, to the
best knowledge of Seller, any other prior holder of the related
Mortgage has done, by act or omission, anything which would impair
the coverage of such lender's title insurance policy, including
without limitation, no unlawful fee, commission, kickback or other
unlawful compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm or other person
or entity, and no such unlawful items have been received, retained
or realized by the Seller;
(q) NO DEFAULTS. There is no default, breach, violation or event which
would permit acceleration existing under the Mortgage or the
Mortgage Note and no event which, with the passage of time or with
notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event which would permit
acceleration, and neither the Seller nor its predecessors have
waived any default, breach, violation or event which would permit
acceleration;
(r) NO MECHANICS' LIENS. With respect to each Mortgage Loan, to the best
knowledge of the Seller, there are no mechanics' or similar liens or
claims which have been filed for work, labor or material (and no
rights are outstanding that under law could
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give rise to such liens) affecting the Mortgaged Property which are
or may be liens prior to, or equal or coordinate with, the lien of
the related Mortgage;
(s) LOCATION OF IMPROVEMENTS; NO ENCROACHMENTS. With respect to each
Mortgage Loan, to the best knowledge of the Seller, all improvements
which were considered in determining the Appraised Value of the
Mortgaged Property lay wholly within the boundaries and building
restriction lines of the Mortgaged Property, and no improvements on
adjoining properties encroach upon the Mortgaged Property. To the
best knowledge of Seller, no improvement located on or being part of
the Mortgaged Property is in violation of any applicable zoning law
or regulation;
(t) ORIGINATION; PAYMENT TERMS. The Mortgage Loan was originated by a
savings and loan association, a savings bank, a commercial bank,
credit union, insurance company or similar institution which is
supervised and examined by a federal or state authority. To the best
knowledge of the Seller, the documents, instruments and agreements
submitted for loan underwriting were not falsified and contain no
untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the information
and statements therein not misleading. Principal payments on the
Mortgage Loan commenced no more than sixty (60) days after funds
were disbursed in connection with the Mortgage Loan. The Mortgage
Interest Rate for each Mortgage Loan are as set forth on the
applicable Mortgage Loan Schedule. The Mortgage Note is payable each
month in equal monthly installments of principal and interest, which
installments of interest are subject to change if the Mortgage Loan
is an Variable Rate Mortgage Loan due to the adjustments to the
Mortgage Interest Rate on each Interest Rate Adjustment Date, with
interest calculated and payable in arrears, sufficient to amortize
the Mortgage Loan fully by the stated maturity date, over an
original term of not more than thirty years from commencement of
amortization.
(u) CUSTOMARY PROVISIONS. The Mortgage contains customary and
enforceable provisions such as to render the rights and remedies of
the holder thereof adequate for the realization against the
Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of
trust, by trustee's sale, and (ii) otherwise by judicial
foreclosure. For Mortgage Loans secured by Mortgage Property in
California, there is no homestead or other exemption available to a
Mortgagor which would interfere with the right to sell the Mortgaged
Property at a trustee's sale or the right to foreclose the Mortgage,
subject to applicable federal and state laws and judicial precedent
with respect to bankruptcy and right of redemption or similar law;
(v) CONFORMANCE WITH UNDERWRITING STANDARDS. The Mortgage Loan was
underwritten in accordance with the underwriting standards of the
Seller or one of its predecessors in interest in effect at the time
the Mortgage Loan was originated. The
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Mortgage Note and Mortgage are on forms acceptable to the Purchaser,
in the Purchaser's sole discretion, as evidenced by the Purchaser's
purchase of the related Mortgage Loans, and, the Seller has not made
any representations to a Mortgagor that are inconsistent with the
Mortgage and the Mortgage Note;
(w) OCCUPANCY OF THE MORTGAGED PROPERTY. As of the Closing Date, to the
best of Seller's knowledge, the Mortgaged Property is lawfully
occupied under applicable law. To the best knowledge of Seller, all
inspections, licenses and certificates required to be made or issued
with respect to all occupied portions of the Mortgaged Property and,
with respect to the use and occupancy of the same, including but not
limited to certificates of occupancy and fire underwriting
certificates, have been made or obtained from the appropriate
authorities;
(x) NO ADDITIONAL COLLATERAL. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding
Mortgage and the security interest of any applicable security
agreement or chattel mortgage referred to in clause (j) above;
(y) DEEDS OF TRUST. In the event the Mortgage constitutes a deed of
trust, a trustee, authorized and duly qualified under applicable law
to serve as such, has been properly designated and currently so
serves and is named in the Mortgage, and no fees or expenses are or
will become payable by the Purchaser to the trustee under the deed
of trust, except in connection with a trustee's sale after default
by the Mortgagor;
(z) VALUE AND MARKETABILITY. The Seller has no actual knowledge of any
circumstances or conditions with respect to the Mortgage, the
Mortgaged Property, the Mortgagor, the Mortgage File or the
Mortgagor's credit standing that can reasonably be expected to cause
the Mortgage Loan to become delinquent, or adversely affect the
value or marketability of the Mortgage Loan;
(aa) DELIVERY OF MORTGAGE DOCUMENTS. The Mortgage Note, the Mortgage, the
Assignment of Mortgage and any other Mortgage Loan Documents for
each Mortgage Loan have been delivered to the Purchaser or its
designee. The Seller is in possession of a complete, true and
accurate Mortgage File in compliance with Exhibit A hereto, except
for such documents the originals of which have been delivered to the
Purchaser or its designee;
(bb) [Reserved]
(cc) TRANSFER OF MORTGAGE LOANS. The Assignment of Mortgage or a blanket
assignment for all of the Mortgage Loans is in recordable form and
is acceptable for recording under the laws of the jurisdiction in
which the Mortgaged Property is located;
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(dd) ASSUMABILITY. Either (i) the Mortgage Loan Documents provide that a
related Mortgage Loan may only be assumed if the party assuming such
Mortgage Loan meets certain credit requirements stated in the
Mortgage Loan Documents, or (ii) the Mortgage Note with respect to
such Mortgage Loan contains a "due-on-sale" provision which prevents
the assumption of the Mortgage Loan by a proposed transferee and
accelerates the payment of the outstanding principal balance of such
Mortgage Loan;
(ee) NO BUYDOWN PROVISIONS; NO GRADUATED PAYMENTS OR CONTINGENT
INTERESTS. The Mortgage Loan does not contain provisions pursuant to
which Monthly Payments are paid or partially paid with funds
deposited in any separate account established by the Seller, the
Mortgagor, or anyone on behalf of the Mortgagor, or paid by any
source other than the Mortgagor nor does it contain any other
similar provisions which may constitute a "buydown" provision. The
Mortgage Loan is not a graduated payment mortgage loan and the
Mortgage Loan does not have a shared appreciation or other
contingent interest feature;
(ff) [Reserved]
(gg) MORTGAGED PROPERTY UNDAMAGED; NO CONDEMNATION PROCEEDINGS. There is
no proceeding pending or, to the best knowledge of Seller,
threatened for the total or partial condemnation of the Mortgaged
Property. The Mortgaged Property is undamaged by waste, fire,
earthquake or earth movement, windstorm, flood, tornado or other
casualty so as to affect adversely the value of the Mortgaged
Property as security for the Mortgage Loan or the use for which the
premises were intended and each Mortgaged Property is in good
repair;
(hh) COLLECTION PRACTICES; ESCROW DEPOSITS; INTEREST RATE ADJUSTMENTS.
The origination and collection practices used by the Seller with
respect to the Mortgage Loan have been in all material respects in
compliance with Accepted Servicing Practices, applicable laws and
regulations, and have been in all material respects legal and
proper. With respect to escrow deposits and Escrow Payments, all
such payments are in the possession of, or under the control of, the
Seller and there exist no deficiencies in connection therewith for
which customary arrangements for repayment thereof have not been
made. All Escrow Payments have been collected in full compliance
with state and federal law and the provisions of the related
Mortgage Note and Mortgage. An escrow of funds is not prohibited by
applicable law and has been established in an amount sufficient to
pay for every item that remains unpaid and has been assessed but is
not yet due and payable if required under the Mortgage Loan. No
escrow deposits or Escrow Payments or other charges or payments due
the Seller have been capitalized under the Mortgage or the Mortgage
Note. All Mortgage Interest Rate adjustments to the Monthly Payment,
if the Mortgage Loan is an Variable Rate Mortgage Loan, have been
made in strict
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compliance with state and federal law and the terms of the related
Mortgage and Mortgage Note on the related Interest Rate Adjustment
Date. With respect to each Variable Rate Mortgage Loan, the Mortgage
Interest Rate adjusts monthly, semi-annually or annually as set
forth in the Mortgage Note. If, pursuant to the terms of the
Mortgage Note, another index was selected for determining the
Mortgage Interest Rate, the same index was used with respect to each
Mortgage Note which required a new index to be selected, and such
selection did not conflict with the terms of the related Mortgage
Note. The Seller executed and delivered any and all notices required
under applicable law and the terms of the related Mortgage Note and
Mortgage regarding the Mortgage Interest Rate and the Monthly
Payment adjustments. Any interest required to be paid pursuant to
state, federal and local law has been properly paid and credited;
(ii) OTHER INSURANCE POLICIES. In connection with the placement of any
hazard insurance, no commission, fee, or other compensation has been
or will be received by the Seller or by any officer, director, or
employee of the Seller or any designee of the Seller or any
corporation in which the Seller or any officer, director, or
employee had a financial interest at the time of placement of such
insurance;
(jj) NO VIOLATION OF ENVIRONMENTAL LAWS. To the best knowledge of Seller,
there is no pending action or proceeding directly involving the
Mortgaged Property in which compliance with any environmental law,
rule or regulation is an issue, there is no violation of any
environmental law, rule or regulation with respect to the Mortgaged
Property, and nothing further remains to be done to satisfy in full
all requirements of each such law, rule or regulation constituting a
prerequisite to use and enjoyment of said property;
(kk) [Reserved]
(ll) APPRAISAL. The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan
by a Qualified Appraiser who had no interest, direct or indirect in
the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or
disapproval of the Mortgage Loan and, if applicable on the date the
Mortgage Loan was originated, the appraisal and appraiser both
satisfy the requirements of Title XI of the Federal Institutions
Reform, Recovery, and Enforcement Act of 1989 and the regulations
promulgated thereunder.
(mm) [Reserved]
(nn) [Reserved]
(oo) [Reserved]
24
<PAGE>
(pp) [Reserved]
(qq) PRIOR SERVICING. Each Mortgage Loan has been serviced in all
material respects in compliance with Accepted Servicing Practices;
provided that, in the event of any breach of the representation and
warranty set forth in this Subsection (qq), the Seller shall not be
required to repurchase any such Mortgage Loan unless such breach
had, and continues to have, a material and adverse effect on the
value of the related Mortgage Loan or the interest of the Purchaser
therein.
SUBSECTION 8.03 REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
It is understood and agreed that the representations and warranties set
forth in Subsections 8.1 and 8.2 shall survive the sale of the Mortgage Loans to
the Purchaser and shall inure to the benefit of the Purchaser, notwithstanding
any restrictive or qualified endorsement on any Mortgage Note or Assignment of
Mortgage or the examination or failure to examine any Mortgage File. Upon
discovery by either the Seller or the Purchaser of a breach of any of the
foregoing representations and warranties which materially and adversely affects
the interests of the Purchaser in the related Mortgage Loan, the party
discovering such breach shall give prompt written notice to the other.
The Seller, promptly after discovery of a breach of any such
representation or warranty, shall notify the Purchaser of such breach and the
details thereof. Within sixty (60) days of the earlier of (i) notice by the
Seller pursuant to the immediately preceding sentence or (ii) notice by the
Purchaser to the Seller of any breach of a representation or warranty with
respect to a Mortgage Loan, the Seller shall use its best efforts promptly to
cure such breach in all material respects. If such breach can ultimately be
cured but is not reasonably expected to be cured within the 60 day period,
Seller shall have such additional time as is reasonably determined by Purchaser
(not to exceed 120 days) to cure or correct such breach provided Seller has
commenced curing or correcting such breach and is diligently pursuing same. If
such breach cannot be or has not been cured, the Seller shall, upon the
expiration of the cure period described above, at the Purchaser's option and
subject to the provisions of this Subsection 8.3, repurchase such Mortgage Loan
at the Repurchase Price, unless the Seller elects to substitute a Qualified
Substitute Mortgage Loan for such Mortgage Loan pursuant to this Subsection 8.3.
The Seller may, at the Seller's option and provided that the Seller has a
Qualified Substitute Mortgage Loan, rather than repurchase the Mortgage Loan as
provided above, remove such Mortgage Loan (a "Deleted Mortgage Loan") and
substitute in its place a Qualified Substitute Mortgage Loan or Loans. If the
Seller has no Qualified Substitute Mortgage Loan, it shall repurchase the
deficient Mortgage Loan. Any repurchase of a Mortgage Loan or Mortgage Loans
pursuant to the foregoing provisions of this Subsection 8.3 shall be
accomplished by either (a) if the Commercial Servicing Agreement is in effect,
deposit in the Custodial Account of the amount of the Repurchase Price for
payment to the Purchaser on the next scheduled Remittance Date, after deducting
therefrom any amount received in respect of such repurchased Mortgage Loan or
Loans and being held in the Custodial Account for future distribution or (b) if
the Commercial Servicing Agreement is no longer in effect, by direct remittance
of the Repurchase Price to the Purchaser or its designee in accordance with the
Purchaser's instructions.
25
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At the time of repurchase or substitution, the Purchaser and the Seller
shall arrange for the reassignment of the Deleted Mortgage Loan to the Seller
and the delivery to the Seller of any documents held by the Purchaser or its
designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to such
Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the related Mortgage Loan Schedule to
reflect the withdrawal of the Deleted Mortgage Loan from this Agreement, and, in
the case of substitution, identify a Qualified Substitute Mortgage Loan and
amend the related Mortgage Loan Schedule to reflect the addition of such
Qualified Substitute Mortgage Loan to this Agreement. In connection with any
such substitution, the Seller shall be deemed to have made as to such Qualified
Substitute Mortgage Loan the representations and warranties set forth in this
Agreement except that all such representations and warranties set forth in this
Agreement shall be deemed made as of the date of such substitution. The Seller
shall effect such substitution by delivering to the Purchaser or its designee
for such Qualified Substitute Mortgage Loan the documents required by Subsection
6.3, with the Mortgage Note endorsed as required by Subsection 6.3. The Seller
shall deposit in the Custodial Account the Monthly Payment, or in the event that
the Commercial Servicing Agreement is no longer in effect, remit directly to the
Purchaser or its designee in accordance with the Purchaser's instructions the
Monthly Payment less the Servicing Fee collected, if any, on such Qualified
Substitute Mortgage Loan or Loans in the month following the date of such
substitution. Monthly Payments collected with respect to Qualified Substitute
Mortgage Loans in the month of substitution shall be retained by the Seller. For
the month of substitution, payments to the Purchaser shall include the Monthly
Payment collected on any Deleted Mortgage Loan in the month of substitution, and
the Seller shall thereafter be entitled to retain all amounts subsequently
received by the Seller in respect of such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the amount
(if any) by which the aggregate principal balance of all Qualified Substitute
Mortgage Loans as of the date of substitution is less than the aggregate Stated
Principal Balance of all Deleted Mortgage Loans (after application of principal
payments collected as of the date of substitution). The amount of such shortfall
shall be distributed by the Seller directly to the Purchaser or its designee in
accordance with the Purchaser's instructions within two (2) Business Days of
such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments, and other costs and expenses (but excluding any consequential,
indirect damages, special, exemplary or punitive damages ("Special Damages"),
except for such Special Damages which Purchaser is required by law to pay to a
third party, resulting from any claim, demand, defense or assertion based on or
grounded upon, or resulting from, a breach of the Seller representations and
warranties contained in this Agreement. It is understood and agreed that the
obligations of the Seller set forth in this Subsection 8.3 to cure, substitute
for or repurchase a defective Mortgage Loan and to indemnify the Purchaser as
provided in this Subsection 8.3
26
<PAGE>
constitute the sole remedies of the Purchaser respecting a breach of the
foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of the
breach of any representations and warranties made in Subsections 8.1 and 8.2
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with this
Agreement.
SECTION 9. CLOSING.
The closing for the purchase and sale of any Mortgage Loans shall take
place on (i) the Initial Closing Date with respect to the purchase and sale of
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
(ii) on the Closing Date set forth in a duly executed Commitment Letter with
respect to the purchase and sale of Mortgage Loans pursuant thereto. At the
Purchaser's option, any closing shall be either: by telephone, confirmed by
letter or wire as the parties shall agree, or conducted in person, at such place
as the parties shall agree.
The closing for the purchase and sale of Mortgage Loans to be purchased on
any Closing Date shall be subject to each of the following conditions:
(a) all of the representations and warranties of the Seller under this
Agreement shall be true and correct as of such Closing Date, no
default shall have occurred and no event shall have occurred which,
with notice or the passage of time or both, would constitute a
default under this Agreement;
(b) the Purchaser shall have received, or the Purchaser's attorneys
shall have received in escrow, all closing documents as specified in
Section 10 of this Agreement, in such forms as are agreed upon and
acceptable to the Purchaser, duly executed by all signatories other
than the Purchaser as required pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the Purchaser or its
designee all Mortgage Loan Documents with respect to each Mortgage
Loan not otherwise required under the Commercial Servicing Agreement
to be in possession of, and actually in the possession of the Seller
in its capacity as servicer; and
(d) all other terms and conditions of this Agreement shall have been
complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the Seller
on the applicable Closing Date the applicable Purchase Price, plus accrued
interest pursuant to Section 4 of this Agreement, by wire transfer of
immediately available funds to the account designated by the Seller.
27
<PAGE>
SECTION 10. CLOSING DOCUMENTS.
The closing documents for the Mortgage Loans to be purchased on any
Closing Date shall consist of fully executed originals of the following
documents:
1. this Agreement (and on all subsequent Closing Dates, a Commitment
Letter in the form of Exhibit I hereto);
2. on the Initial Closing Date only, the Commercial Servicing
Agreement, dated as of the applicable Cut-off Date, in the form of
Exhibit B hereto;
3. on the Initial Closing Date only, a Custodial Account Letter
Agreement or a Custodial Account Certification, as applicable, as
required under the Commercial Servicing Agreement;
4. on the Initial Closing Date only, an Escrow Account Letter Agreement
or an Escrow Account Certification, as applicable, as required under
the Commercial Servicing Agreement;
5. an Officer's Certificate, in the form of Exhibit C hereto, including
all attachments thereto;
6. an Opinion of Counsel of the Seller (who may be an employee of the
Seller), in the form of Exhibit D hereto;
7. a Security Release Certification, in the form of Exhibit F hereto
executed by any person, as requested by the Purchaser, if any of the
Mortgage Loans have at any time been subject to any security
interest, pledge or hypothecation for the benefit of such person;
and
8. a certificate or other evidence of merger or acquisition, if any of
the Mortgage Loans being purchased were acquired by Seller by merger
or acquisition.
The Seller shall bear the risk of loss of any closing documents and
Mortgage Loan documents until such time as they are received by the Purchaser or
its attorneys or designees, as applicable.
SECTION 11. COSTS.
The Purchaser shall pay any commissions due its salesmen and the legal
fees and expenses of its attorneys. All other costs and expenses incurred in
connection with the transfer and delivery of the Mortgage Loans including
recording fees, fees for recording Assignments of Mortgages, fees
28
<PAGE>
for title policy endorsements and continuations and, if applicable, the Seller's
attorney's fees, shall be paid by the Seller.
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER.
The Seller will keep in full effect its existence, rights and franchises
as a corporation under the laws of the state of its incorporation except as
permitted herein, and will obtain and preserve its qualification to do business
as a foreign corporation in each jurisdiction in which such qualification is or
shall be necessary to protect the validity and enforceability of this Agreement,
or any of the Mortgage Loans and to perform its duties under this Agreement. In
the event Seller or any of its successors or assigns (i) consolidates with or
merges into any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, or (ii) transfers or
conveys all or substantially all of its properties and assets to any Person,
then, and in each such case, proper provision shall be made so that the
successors and assigns of Seller assume the obligations of Seller set forth in
this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the Seller,
shall be the successor of the Seller hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided, however, that the
successor or surviving Person shall have a tangible net worth of at least
$30,000,000.
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST.
The sale and delivery on any Closing Date of the Mortgage Loans described
on the applicable Mortgage Loan Schedule is mandatory from and after the date of
the execution of this Agreement or a Commitment Letter, as the case may be, it
being specifically understood and agreed that each Mortgage Loan is unique and
identifiable and that an award of money damages would be insufficient to
compensate the Purchaser for the losses and damages incurred by the Purchaser
(including damages to prospective purchasers of the Mortgage Loans) in the event
of the Seller's failure to deliver (i) each of the Mortgage Loans or (ii) one or
more Qualified Substitute Mortgage Loans or (iii) one or more Mortgage Loans
otherwise acceptable to the Purchaser on or before such Closing Date. The Seller
hereby grants to the Purchaser a lien on and a continuing security interest in
each Mortgage Loan set forth on the Initial Portfolio Mortgage Loan Schedule and
each document and instrument evidencing each such Mortgage Loan to secure the
performance by the Seller of its obligations under this Agreement, and the
Seller agrees that it shall hold such Mortgage Loans in custody for the
Purchaser subject to the Purchaser's (i) right to reject any Mortgage Loan (or
Qualified Substitute Mortgage Loan) under the terms of this Agreement and to
require another Mortgage Loan (or Qualified Substitute Mortgage Loan) to be
substituted therefor, and (ii) obligation to pay the Initial Purchase Price plus
accrued interest as set forth in Section 4 hereof for the Mortgage Loans. All
rights and remedies of the Purchaser under this Agreement are distinct from, and
cumulative with, any other rights or remedies under this Agreement or afforded
by law
29
<PAGE>
or equity and all such rights and remedies may be exercised concurrently,
independently or successively.
SECTION 14. NOTICES.
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed, by registered or certified
mail, return receipt requested, or, if by other means, when received by the
other party at the address as follows:
(i) if to the Seller:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
(ii) if to the Purchaser:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. SEVERABILITY CLAUSE.
Any part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be conferred by this Agreement, the
parties shall negotiate, in good faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Agreement without regard to such invalidity.
30
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SECTION 16. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. GOVERNING LAW.
This Agreement shall be deemed to have been made in the State of
California. The Agreement shall be construed in accordance with the laws of the
State of California and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with the substantive laws of the
State of California (without regard to conflicts of laws principles), except to
the extent preempted by Federal law.
SECTION 18. INTENTION OF THE PARTIES.
It is the intention of the parties that the Purchaser is purchasing, and
the Seller is selling the Mortgage Loans and not a debt instrument of the Seller
or another security. Accordingly, the parties hereto each intend to treat the
transaction for Federal income tax purposes as a sale by the Seller, and a
purchase by the Purchaser, of the Mortgage Loans.
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF PURCHASE AGREEMENT.
This Agreement shall bind and inure to the benefit of and be enforceable
by the Seller and the Purchaser and the respective permitted successors and
assigns of the Seller and the successors and assigns of the Purchaser. This
Agreement shall not be assigned, pledged or hypothecated by the Seller to a
third party without the consent of the Purchaser. Subject to any applicable
requirement in the Commercial Servicing Agreement, this Agreement may be
assigned, pledged or hypothecated by the Purchaser without the prior consent of
the Seller. If the Purchaser assigns all or any of its rights as Purchaser
hereunder, the assignee of the Purchaser will become the "Purchaser" hereunder
to the extent of such assignment, provided that at no time shall there be more
than fifteen (15) persons having the status of "Purchaser" hereunder. Any
assignment by the Purchaser shall be accompanied by the delivery and execution
of an Assignment and Assumption Agreement (the "Assignment and Assumption
Agreement") substantially in the form attached hereto as Exhibit G. Subject to
any applicable requirement in the Commercial Servicing Agreement, the Servicer
shall be required to remit all amounts required to be remitted to the Purchaser
hereunder to said assignee commencing with the first Remittance Date falling
after receipt of said copy of the related Assignment and Assumption Agreement
provided that the Seller receives said copy no later than three (3) Business
Days immediately prior to the first day of the month of the related Remittance
Date.
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SECTION 20. WAIVERS.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
SECTION 21. ENTIRE AGREEMENT; AMENDMENT.
This Agreement (including the Schedules and Exhibits annexed hereto or
referred to herein) and any Commitment Letter duly executed by the parties
hereto contain the entire agreement between the parties with respect to the
transactions contemplated hereby and supersede all prior agreements, written or
oral, with respect thereto. No amendment, modification or alteration of the
terms or provisions of this Agreement shall be binding unless the same shall be
in writing and duly executed by the authorized representatives of the parties
hereto, provided, however, that as long as any Series A Preferred Shares remain
outstanding, no material amendment to or modification or alteration of this
Agreement may be entered into or approved by the Purchaser without the approval
of a majority of the Independent Directors.
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to them
in this Agreement and include the plural as well as the singular, and the use of
any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a document are to
designated Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
(d) reference to a Subsection without further reference to a Section is a
reference to such Subsection as contained in the same Section in which the
reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular provision;
and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
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SECTION 23. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at any closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process but solely for the
purposes set forth in this Agreement. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
SECTION 24. FURTHER AGREEMENTS.
The Seller and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of this
Agreement.
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE.
The Seller shall execute a blanket assignment of the Mortgages underlying
each Mortgage Loan sold to the Purchaser pursuant to this Agreement or a duly
executed Commitment Letter. Upon the written request of Purchaser (whether due
to the proposed sale of any Mortgage Loan by Purchaser or otherwise), or to the
extent deemed necessary by the servicer in connection with servicing a Mortgage
Loan pursuant to the terms of the Commercial Servicing Agreement, the Seller
shall promptly prepare and execute individual Assignments of Mortgage to be
recorded in all appropriate public offices for real property records in all the
counties or other comparable jurisdictions in which any or all of the Mortgaged
Properties are situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Purchaser or Purchaser's
designee, but in any event, at the Seller's expense for a single recordation
with respect to each Assignment of Mortgage.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By: /s/ J. MICHAEL HOLMES
-------------------------
Name: J. MICHAEL HOLMES
Title: EXECUTIVE VICE PRESIDENT/
CHIEF FINANCIAL OFFICER
PEOPLE'S BANK OF CALIFORNIA
By: /s/ J. MICHAEL HOLMES
-------------------------
Name: J. MICHAEL HOLMES
Title: EXECUTIVE VICE PRESIDENT/
CHIEF FINANCIAL OFFICER
By: /s/ WILLIAM W. FLADER
-------------------------
Name: WILLIAM W. FLADER
Title: EXECUTIVE VICE PRESIDENT
34
<PAGE>
EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include each
of the following items (to the extent such items are applicable and exist within
the Seller's Mortgage File), which shall be available for inspection by the
Purchaser and any prospective Purchaser, and which shall be delivered to the
Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan Purchase
and Warranties Agreement to which this Exhibit is attached (the "Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I hereto, a lost note affidavit, executed by an
officer of the Seller, with a copy of the original note attached
thereto) bearing all intervening endorsements, endorsed "Pay to the
order of ____________ without recourse" (except as otherwise
provided in the Agreement) and signed in the name of the Seller by
an authorized officer. To the extent that there is no room on the
face of the Mortgage Notes for endorsements, the endorsement may be
contained on an allonge, if state law so allows. If the Mortgage
Loan was acquired by the Seller in a merger, the endorsement must be
by "[Seller], successor by merger to [name of predecessor]". If the
Mortgage Loan was acquired or originated by the Seller while doing
business under another name, the endorsement must be by "[Seller],
formerly known as [previous name]".
2. The original of any guarantee executed in connection with the
Mortgage Note.
3. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation, a photocopy of such Mortgage certified by
the Seller to be true and correct will be delivered; if such
Mortgage has been lost or if such public recording office retains
the original recorded Mortgage, the Seller shall deliver or cause to
be delivered to the Purchaser, a photocopy of such Mortgage,
certified by such public recording office to be a true and complete
copy of the original recorded Mortgage.
4. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon or
certified copies of such documents if the originals thereof are
unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all Mortgage Loans endorsed and signed in the
name of the Seller by an authorized officer. If the Mortgage Loan
was acquired by the Seller in a merger,
A-1
<PAGE>
the Assignment of Mortgage must be made by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as
[previous name]".
6. Originals of all intervening assignments of the Mortgage with
evidence of recording thereon if such intervening assignment has
been recorded.
7. The original mortgagee policy of title insurance or, in the event
such original title policy is unavailable, a certified true copy of
the related policy binder or commitment for title certified to be
true and complete by the title insurance company.
8. Any original security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
9. The original hazard insurance policy and, if required by law, flood
insurance policy, in accordance with Section 8.02(f) of the
Agreement.
10. Mortgage Loan closing statement.
11. Credit report on the Mortgagor.
12. All appraisal and inspection reports, if applicable.
13. Photograph of the Mortgaged Property.
14. To the extent applicable, copy of each instrument necessary to
complete identification of any exception set forth in the exception
schedule in the title policy, i.e., map or plat, restrictions,
easements, sewer agreements, home association declarations, etc.
15. All required disclosure statements.
16. Sales contract, if any.
17. Tax receipts, insurance premium receipts, ledger sheets, insurance
claim files, correspondence, current and historical computerized
data files, and all other processing, underwriting and closing
papers and records which are customarily contained in a mortgage
loan file and which are required to document the Mortgage Loan or to
service the Mortgage Loan.
18. Property operating statements in Seller's possession.
A-2
<PAGE>
19. Corporate authorization documents and good standing certifications
in Seller's possession.
20. Borrower and key principal financial statements in Seller's
possession.
A-3
<PAGE>
EXHIBIT B
B-1
<PAGE>
EXHIBIT C
FORM OF SELLER'S OFFICER'S CERTIFICATE
I, _____________, hereby certify that I am the duly elected Executive Vice
President of People's Bank of California, a federal savings bank organized under
the laws of the United States (the "Seller") and further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete copy of
the restated Federal Stock Charter of the Seller which is in full force and
effect on the date hereof and which has been in effect without amendment,
waiver, rescission or modification since
2. Attached hereto as Exhibit 2 is a true, correct and complete copy of
the bylaws of the Seller which are in effect on the date hereof and which have
been in effect without amendment, waiver, rescission or modification since
_____________.
3. Attached hereto as Exhibit 3 is an original certificate of good
standing of the Seller issued within ten days of the date hereof, and no event
has occurred since the date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete copy of
the corporate resolutions of the Board of Directors or Committees thereof of the
Seller authorizing the Seller to execute and deliver each of the Commercial
Mortgage Loan Purchase and Warranties Agreement, dated as of __________, 1997,
by and between People's Preferred Capital Corporation (the "Purchaser") and the
Seller (the "Purchase Agreement"), the Commitment Letter, dated as of _______,
by and between the Purchaser and the Seller [if applicable] and to endorse the
mortgage notes and execute the assignments of mortgages by original or facsimile
signature, and such resolutions are in effect on the date hereof and have been
in effect without amendment, waiver, rescission or modification since
5. Either (i) no consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Seller of or compliance by the Seller with the Purchase
Agreement [and the Commitment Letter], the sale of the mortgage loans or the
consummation of the transactions contemplated by the Purchase Agreement; or (ii)
any required consent, approval, authorization or order has been obtained by the
Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement [or the Commitment Letter]
conflicts or will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws of the
Seller, the terms of any indenture or other agreement or instrument to which the
Seller is a party or by which it is bound or to which it is subject, or any
statute or order, rule, regulations, writ, injunction or decree of any court,
governmental authority or regulatory body to which the Seller is subject or by
which it is bound.
C-1
<PAGE>
7. To the best of my knowledge, there is no action, suit, proceeding or
investigation pending or threatened against the Seller which, in my judgment,
either in any one instance or in the aggregate, may result in any material
adverse change in the business, operations, financial condition, properties or
assets of the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted or in any
material liability on the part of the Seller or which would draw into question
the validity of the Purchase Agreement [or the Commitment Letter] or the
mortgage loans or of any action taken or to be taken in connection with the
transactions contemplated hereby, or which would be likely to impair materially
the ability of the Seller to perform under the terms of the Purchase Agreement
[and the Commitment Letter].
8. Each person listed on Exhibit 5 attached hereto who, as an officer or
representative of the Seller, signed the Purchase Agreement [and the Commitment
Letter] and any other document delivered prior to or on the date hereof in
connection with any purchase described in the Purchase Agreement was, at the
respective times of such signing and delivery, and is now, a duly elected or
appointed, qualified and acting officer or representative of the Seller, who
holds the office set forth opposite his or her name on Exhibit 5, and the
signatures of such persons appearing on such documents are their genuine
signatures.
9. The Seller is duly authorized to engage in the transactions described
and contemplated in the Purchase Agreement [and the Commitment Letter].
C-2
<PAGE>
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of
the Seller.
Dated:____________, 1997 By:_________________________________
Name: J. Michael Holmes
[Seal] Title: Executive Vice President
I, William W. Flader, an Executive Vice President of People's Bank of
California, hereby certify that J. Michael Holmes is the duly elected, qualified
and acting Executive Vice President of the Seller and that the signature
appearing above is his genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:____________, 1997 By:_________________________________
Name: William W. Flader
Title: Executive Vice President
C-3
<PAGE>
EXHIBIT 5
TO SELLER'S OFFICER'S CERTIFICATE
Name Title Signature
- ------------------------- ------------------------ ------------------------
C-4
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER
_________________, 1997
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Dear Sirs:
You have requested my opinion, as General Counsel to People's Bank of
California (the "Seller"), with respect to certain matters in connection with
the sale by the Seller of the Mortgage Loans pursuant to that certain Commercial
Mortgage Loan Purchase and Warranties Agreement by and between the Seller and
People's Preferred Capital Corporation (the "Purchaser"), dated as of
__________, 1997 (the "Purchase Agreement") which sale is in the form of whole
loans, delivered pursuant to the Purchase Agreement and serviced pursuant to a
Commercial Servicing Agreement, dated as of __________, 1997, by and between the
Seller and the Purchaser (the "Servicing Agreement"). Capitalized terms not
otherwise defined herein have the meanings set forth in the Purchase Agreement
and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement and, if applicable, the Commitment Letter;
2. the Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as I have deemed necessary
and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon the
representations and warranties of the Seller contained in the Purchase
Agreement. I have assumed the authenticity of all documents submitted to me as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents.
Based upon the foregoing, it is my opinion that:
D-1
<PAGE>
1. The Seller is a federal savings bank duly organized, validly
existing and in good standing under the laws of the United States
and is qualified to transact business in, and is in good standing
under, the laws of the United States.
2. The Seller has the power to engage in the transactions contemplated
by the Purchase Agreement and, if applicable, the Commitment Letter,
and all requisite power, authority and legal right to execute and
deliver the Purchase Agreement and to perform and observe the terms
and conditions of such agreements.
3. The Purchase Agreement has been duly authorized, executed and
delivered by the Seller and is a legal, valid and binding agreement
enforceable in accordance with its respective terms against the
Seller, subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder
or with the Purchaser's ownership of the Mortgage Loans.
4. The Seller has been duly authorized to allow certain specified
officers to execute any and all documents by original signature in
order to complete the transactions contemplated by the Purchase
Agreement and by original or facsimile signature in order to execute
the endorsements to the Mortgage Notes and the Assignments of
Mortgages, and the original or facsimile signature of the officer of
the Seller executing the endorsements to the Mortgage Notes and the
Assignments of Mortgages represents the legal and valid signature of
said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of any court
or governmental agency or body is required for the execution,
delivery and performance by the Seller of or compliance by the
Seller with the Purchase Agreement and the sale of the Mortgage
Loans or the consummation of the transactions contemplated by the
Purchase Agreement or (ii) any required consent, approval,
authorization or order has been obtained by the Seller.
6. Neither the consummation of the transactions contemplated by, nor
the fulfillment of the terms of, the Purchase Agreement conflicts or
will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws
of the Seller, the terms of any indenture or other agreement or
instrument to which the Seller is a party or by which it is bound or
to which it is subject, or violates any statute or order, rule,
regulations, writ, injunction or decree of any court, governmental
authority or regulatory body to which the Seller is subject or by
which it is bound.
D-2
<PAGE>
7. There is no action, suit, proceeding or investigation pending or, to
the best of my knowledge, threatened against the Seller which, in my
judgment, either in any one instance or in the aggregate, may result
in any material adverse change in the business, operations,
financial condition, properties or assets of the Seller or in any
material impairment of the right or ability of the Seller to carry
on its business substantially as now conducted or in any material
liability on the part of the Seller or which would draw into
question the validity of the Purchase Agreement or the Mortgage
Loans or of any action taken or to be taken in connection with the
transactions contemplated thereby, or which would be likely to
impair materially the ability of the Seller to perform under the
terms of the Purchase Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the manner
contemplated by the Purchase Agreement is sufficient to fully
transfer to the Purchaser all right, title and interest of the
Seller thereto as noteholder and mortgagee.
I am licensed to practice law in the State of California and express no
opinion as to the laws of any jurisdiction other than the State of California or
the federal banking laws of the United States; accordingly, my opinions extend
only to questions of law of such jurisdictions. I note that certain of the
agreements upon which I express an opinion herein are governed by the laws of a
jurisdiction other than the State of California. I have assumed with your
consent for the purposes of giving these opinions that the law of any state
other than the State of California which may be applied to such agreements is
substantially identical to the laws of the State of California. The opinions
expressed herein are subject to statutory, regulatory and case law developments
after the date hereof.
This opinion is given to you for your sole benefit, and no other person or
entity is entitled to rely hereon.
Very truly yours,
--------------------------------
Doreen J. Blauschild
General Counsel
D-3
<PAGE>
EXHIBIT E
______________________, 1997
Federal Home Loan Bank of
San Francisco (the "Association")
600 California Street
San Francisco, California 94108
Attention:
-------------------------
-------------------------
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that People's Bank of California, a banking
corporation, organized pursuant to the laws of the United States (the "Bank")
has committed to sell to People's Preferred Capital Corporation under a
Commercial Mortgage Loan Purchase and Warranties Agreement, dated as of
__________, 1997, certain mortgage loans owned by the Bank. The Bank warrants
that the mortgage loans to be sold to People's Preferred Capital Corporation are
in addition to and beyond any collateral required to secure advances made by the
Association to the Bank.
The Bank acknowledges that the mortgage loans to be sold to People's
Preferred Capital Corporation shall not be used as additional or substitute
collateral for advances made by the Association. People's Preferred Capital
Corporation understands that the balance of the Bank's mortgage loan portfolio
may be used as collateral or additional collateral for advances made by the
Association, and confirms that it has no interest therein.
E-1
<PAGE>
Execution of this letter by the Association shall constitute a full and
complete release of any security interest, claim, or lien which the Association
may have against the mortgage loans to be sold to People's Preferred Capital
Corporation.
Very truly yours,
--------------------------------------
By: __________________________________
Name: ________________________________
Title: _______________________________
Date:_________________________________
Acknowledged and approved:
FEDERAL HOME LOAN BANK OF
SAN FRANCISCO
By: _________________________
Name: _______________________
Title: ______________________
Date:________________________
E-2
<PAGE>
EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. RELEASE OF SECURITY INTEREST
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
People's Preferred Capital Corporation from People's Bank of California pursuant
to that certain Commercial Mortgage Loan Purchase and Warranties Agreement,
dated as of __________, 1997, and certifies that all notes, mortgages,
assignments and other documents in its possession relating to such Mortgage
Loans have been delivered and released to People's Bank of California or its
designees, as of the date and time of the sale of such Mortgage Loans to
People's Preferred Capital Corporation.
Name and Address of Financial Institution
- ------------------------------------
(name)
- ------------------------------------
(Address)
By:_________________________________
II. CERTIFICATION OF RELEASE
People's Bank of California hereby certifies to People's Preferred Capital
Corporation that, as of the date and time of the sale of the above-mentioned
Mortgage Loans to People's Preferred Capital Corporation, the security interests
in the Mortgage Loans released by the above-named financial institution comprise
all security interests relating to or affecting any and all such Mortgage Loans.
Peoples's Bank of California warrants that, as of such time, there are and will
be no other security interests affecting any or all of such Mortgage Loans.
----------------------------------
By: _______________________________
Title: ____________________________
Date:______________________________
F-1
<PAGE>
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT, dated _________, between
_______________________, a __________ corporation ("Assignor") and
_______________, a ________________ corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of which
hereby are acknowledged, and of the mutual covenants herein contained, the
parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee, as
purchaser, all of the right, title and interest of Assignor with respect to the
mortgage loans listed on Exhibit A attached hereto (the "Mortgage Loans"), and
with respect to such Mortgage Loans, in, to and under (a) that certain
Commercial Mortgage Loan Purchase and Warranties Agreement dated __________,
1997 by and between People's Bank of California (the "Seller") and People's
Preferred Capital Corporation (the "Purchaser") (the "Purchase Agreement"), and
(b) that certain Commercial Servicing Agreement dated as of _______, 1997, by
and between the Purchaser and the Seller ("Servicer") (the "Commercial Servicing
Agreement"; the Commercial Servicing Agreement and the Purchase Agreement are
collectively referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with, the
Assignee that:
a. The Assignor is the lawful owner of the Mortgage Loans with
the full right to transfer the Mortgage Loans free from any
and all claims and encumbrances whatsoever;
b. The Assignor has not received notice of, and has no knowledge
of, any offsets, counterclaims or other defenses available to
the Seller with respect to the Agreements or the Mortgage
Loans;
c. The Assignor has not waived or agreed to any waiver under, or
agreed to any amendment or other modification of, the
Agreements. The Assignor has no knowledge of, and has not
received notice of, any waivers under or amendments or other
modifications of, or assignments of rights or obligations
under, the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of
the Mortgage Loans or any interest in the Mortgage Loans, or
solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans, or any interest in
the Mortgage Loans or otherwise approached or negotiated with
respect to the Mortgage Loans, or any interest in the Mortgage
with any person in any manner, or made any general
solicitation by means of general advertising or in any other
G-1
<PAGE>
manner, or taken any other action which would constitute a
distribution of the Mortgage Loans under the Securities Act of
1933, as amended (the "1933 Act") or which would render the
disposition of the Mortgage Loans a violation of Section 5 of
the 1933 Act or require registration pursuant thereto.
3. The Assignee warrants and represents to, and covenants with, the
Assignor and the Seller pursuant to the Agreements that:
a. The Assignee is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, and has all requisite corporate power and
authority to acquire, own and purchase the Mortgage Loans;
b. The Assignee has full corporate power and authority to
execute, deliver and perform under this Assignment and
Assumption Agreement, and to consummate the transactions set
forth herein. The execution, delivery and performance of the
Assignee of this Assignment and Assumption Agreement, and the
consummation by it of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action of
the Assignee. This Assignment and Assumption Agreement has
been duly executed and delivered by the Assignee and
constitutes the valid and legally binding obligation of the
Assignee enforceable against the Assignee in accordance with
its respective terms;
c. To the best of Assignee's knowledge, no material consent,
approval, order or authorization of, or declaration, filing or
registration with, any governmental entity is required to be
obtained or made by the Assignee in connection with the
execution, delivery or performance by the Assignee of this
Assignment and Assumption Agreement, or the consummation by it
of the transactions contemplated hereby;
d. The Assignee agrees to be bound, as Purchaser, by all of the
terms, covenants and conditions of the Agreements, the
Mortgage Loans, and from and after the date hereof, the
Assignee assumes for the benefit of each of the Seller and the
Assignor all of the Assignor' s obligations as Purchaser
thereunder, including, without limitation, the limitation on
assignment set forth in Section 19 of the Purchase Agreement;
e. The Assignee understands that the Mortgage Loans have not been
registered under the 1933 Act or the securities laws of any
state;
G-2
<PAGE>
f. The purchase price being paid by the Assignee for the Mortgage
Loans is in excess of $250,000 and will be paid by cash
remittance of the full purchase price within sixty (60) days
of the sale;
g. The Assignee is acquiring the Mortgage Loans for investment
for its own account only and not for any other person;
h. The Assignee considers itself a sophisticated institutional
investor having such knowledge and experience in financial and
business matters that it is capable of evaluating the merits
and risks of investment in the Mortgage Loans;
I. The Assignee has been furnished with all information regarding
the Mortgage Loans that it has requested from the Assignor or
the Seller;
j. Neither the Assignee nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of
the Mortgage Loans or any interest in the Mortgage Loans, or
solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans or any interest in the
Mortgage Loans, or otherwise approached or negotiated with
respect to the Mortgage Loans or any interest in the Mortgage
Loans with any person in any manner which would constitute a
distribution of the Mortgage Loans under the 1933 Act or which
would render the disposition of the Mortgage Loans a violation
of Section 5 of the 1933 Act or require registration pursuant
thereto, nor will it act, nor has it authorized or will it
authorize any person to act, in such manner with respect to
the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit plan
("Plan") within the meaning of section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")
or a plan (also "Plan") within the meaning of section
4975(e)(1) of the Internal Revenue Code of 1986 ("Code"), and
the Assignee is not directly or indirectly purchasing the
Mortgage Loans on behalf of, investment manager of, as named
fiduciary of, as Trustee of, or with assets of, a Plan; or (2)
the Assignee's purchase of the Mortgage Loans will not result
in a prohibited transaction under section 406 of ERISA or
section 4975 of the Code.
G-3
<PAGE>
4. (a) The Assignee's address for purposes of all notices and
correspondence related to the Mortgage Loans and the Agreements is:
---------------------------
---------------------------
---------------------------
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are:
---------------------------
---------------------------
---------------------------
(b) The Assignor's address for purposes for all notices and correspondence
related to the Mortgage Loans and this Agreement is:
---------------------------
---------------------------
---------------------------
5. This Agreement shall be construed in accordance with the substantive
laws of the State of California (without regard to conflicts of laws principles)
and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with such laws, except to the extent preempted by
federal law.
6. This Agreement shall inure to the benefit of the successors and assigns
of the parties hereto. This Agreement may not be assigned by the Assignee
without the express written consent of the Assignor. Any entity into which the
Assignor or Assignee may be merged or consolidated shall, without the
requirement for any further writing, be deemed the Assignor or Assignee,
respectively, hereunder.
7. No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
8. This Agreement shall survive the conveyance of the Mortgage Loans and
the assignment of the Agreements by the Assignor.
G-4
<PAGE>
9. Notwithstanding the assignment of the Agreements by either the Assignor
or Assignee, this Agreement shall not be deemed assigned by the Assignor or the
Assignee unless assigned by separate written instrument.
10. For the purpose for facilitating the execution of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute and be one
and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be executed by their duly authorized officers as of the date first
above written.
- --------------------------------- ---------------------------------
Assignor Assignee
By: _____________________________ By: ______________________________
Its: ____________________________ Its: _____________________________
Taxpayer Identification Taxpayer Identification
No.: _______________ No.: ________________
G-5
<PAGE>
EXHIBIT H
INITIAL PORTFOLIO MORTGAGE LOAN SCHEDULE
H-1
<PAGE>
EXHIBIT I
FORM OF COMMITMENT LETTER
[Date]
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Ladies and Gentlemen:
People's Preferred Capital Corporation, a Maryland corporation
("Purchaser"), hereby agrees to purchase from you ("Seller"), and you hereby
agree to sell, transfer, assign and convey to Purchaser, on ________________
(the "Closing Date"), all of your right, title and interest in and to those
commercial mortgage loans (the "Mortgage Loans") set forth on Schedule I (the
"Mortgage Loan Schedule") attached hereto, the related Mortgage Files and all
rights and obligations of Seller arising under the documents contained therein,
subject to the terms and conditions set forth in this Commitment Letter and in
that certain Commercial Mortgage Loan Purchase and Warranties Agreement, dated
as of ______________, 1997 (the "Purchase Agreement"), by and between Purchaser
and Seller.
The Mortgage Loans shall have an aggregate principal balance on
____________ (the "Cutoff Date") of $_______, or such amount as Purchaser and
Seller shall agree upon as evidenced by the aggregate principal balance of the
Mortgage Loans accepted by Purchaser on the Closing Date. The purchase price
payable by Purchaser to Seller at the Closing in consideration for the Mortgage
Loans set forth on the Mortgage Loan Schedule shall be $_______ (the "Purchase
Price"), or such other amount as Purchaser and Seller shall agree upon as
evidenced by the aggregate principal balance of the Mortgage Loans accepted by
Purchaser on the Closing Date.
I-1
<PAGE>
The purchase and sale of the Mortgage Loans contemplated hereby
shall be consummated by Purchaser and Seller subject to and in accordance
with the terms and conditions of the Purchase Agreement, including,
without limitation, the representations and warranties of Seller contained
in Section 8 thereof and the provisions relating to the purchase and sale
of Mortgage Loans and delivery of related documents in connection
therewith set forth in Sections 4, 5, 6, 9 and 10 thereof. Capitalized
terms used but not defined herein shall have the meanings ascribed to such
terms in the Purchase Agreement.
Very truly yours,
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By: ________________________________
Name:
Title:
Agreed and accepted as of the day first written above:
PEOPLE'S BANK OF CALIFORNIA
By: ____________________________
Name:
Title:
I-2
<PAGE>
Exhibit 10.(d)
ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT
This is an Assignment, Assumption and Recognition Agreement (the
"Agreement") made this 3rd day of October, 1997, among People's Bank of
California (the "Seller"), People's Preferred Capital Corporation (the
"Purchaser"), and Temple-Inland Mortgage Corporation (the "Servicer").
In consideration of the mutual promises contained herein, the parties
hereto agree as follows with respect to the mortgage loans (the "Mortgage
Loans") identified on the Mortgage Loan Schedule attached hereto as Schedule A.
The Mortgage Loans are currently being serviced by the Servicer, pursuant to
that certain Loan Servicing Agreement, dated as of March 31, 1997 (the
"Servicing Agreement"), among the Servicer, and the Seller as Investor
thereunder. A true, accurate and complete copy of the Servicing Agreement is
attached hereto as Exhibit Two.
WARRANTIES
1. The Seller and Purchaser warrant and represent to the Servicer that
attached hereto as Exhibit One is a true, accurate and complete copy of the
Residential Mortgage Loan Purchase and Warranties Agreement (the "Purchase
Agreement"), dated as of October 3, 1997 between the Seller and the Purchaser,
with respect to Seller's sale and Purchaser's purchase of the Mortgage Loans.
The Purchase Agreement is in full force and effect as of the date hereof and no
notice of termination has been given thereunder.
2. The Seller warrants and represents to Servicer that immediately prior
to payment of the purchase price for the Mortgage Loans as specified in the
Purchase Agreement, the Seller is the lawful owner of the Mortgage Loans and has
the full right to transfer the Mortgage Loans subject to Article Seven of the
Servicing Agreement, free from any and all claims and encumbrances whatsoever.
ASSIGNMENT AND ASSUMPTION
3. (a) Seller grants, transfers and assigns to the Purchaser all of its
right, title and interest in and to the Mortgage Loans pursuant to the Purchase
Agreement, and the Purchaser hereby assumes all of the Seller's obligations as
Investor under the Servicing Agreement with respect to the Mortgage Loans from
and after the date hereof.
(b) It is hereby acknowledged and agreed that the Purchaser,
pursuant to this Agreement and the execution of the Purchase Agreement, shall be
entitled to all payments of principal and interest on the Mortgage Loans
collected after September 22, 1997.
RECOGNITION OF THE PURCHASER
4. From and after the date hereof, the Seller and the Servicer shall
recognize the Purchaser
<PAGE>
as the owner of the Mortgage Loans. The Servicer shall service the Mortgage
Loans for the Purchaser as if the Purchaser and the Servicer had entered into a
separate servicing agreement for the servicing of the Mortgage Loans in the form
of the Servicing Agreement with the Seller, the terms of which are incorporated
herein by reference with respect to the Mortgage Loans, and as if the Purchaser
is the Investor thereunder; provided, however, that (i) it is the intention of
the Seller, the Servicer and the Purchaser that this Agreement will be a
separate and distinct servicing agreement, and the entire agreement, among the
Servicer, the Seller and the Purchaser with respect to the servicing of the
Mortgage Loans, shall be binding upon and for the benefit of the respective
successors and assigns of such parties hereto; (ii) the Servicer shall remit all
payments and proceeds (that the Purchaser is entitled to pursuant to the
provisions of this Agreement and the Servicing Agreement) with respect to the
Mortgage Loans to Account Number 91-220806, ABA Number 322270466 (short name:
Peoples Bk Ca LA), Attention: J. Michael Holmes.
REPRESENTATIONS OF THE SELLER
5. The Seller hereby represents and warrants that the representations and
warranties contained in Article V of that certain Mortgage Servicing Purchase
and Sale Agreement between Seller and Servicer dated as of March 31, 1997 ("P &
S Agreement") were true and correct with respect to the Mortgage Loans on the
date such representations and warranties were made by the Seller pursuant to the
P & S Agreement.
NOTICES
6. All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered or mailed by
registered mail, postage prepaid, return receipt requested, to the following
addresses: if to the Purchaser, addressed to the Purchaser at 5900 Whilshire
Boulevard, 16th Floor, Los Angeles, CA 90036, Attention: J. Michael Holmes, or
to such other address as the Purchaser may designate in writing to the Seller;
or if to the Seller, addressed to the Seller at 5900 Wilshire Boulevard 16th
Floor, Los Angeles, CA 90036, Attention: J. Michael Holmes, or to such other
address as the Seller may designate in writing; or if to the Servicer, addressed
to the Interim Servicer at 301 Congress Avenue, Suite 375, Austin, Texas 78701,
Attention: Richard Magel or to such other address as the Interim Servicer may
designate in writing.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and
year first above written.
PEOPLE'S BANK OF CALIFORNIA,
Seller
By: /s/ J. Michael Holmes
-------------------------
Name: J. Michael Holmes
-----------------------
Title: Executive Vice President/
-------------------------
Chief Financial Officer
-------------------------
By: /s/ William W. Flader
------------------------
Name: William W. Flader
----------------------
Title: Executive Vice President
---------------------------
PEOPLE'S PREFERRED CAPITAL
CORPORATION,
Purchaser
By: /s/ J. Michael Holmes
--------------------------
Name: J. Michael Holmes
------------------------
Title: Exexutive Vice President/
-------------------------
Chief Financial Officer
-----------------------
TEMPLE-INLAND MORTGAGE
CORPORATION,
Servicer
By: /s/ Richard K. Magel
------------------------
Name: Richard K. Magel
----------------------
Title: Senior Vice President
------------------------
<PAGE>
SCHEDULE A
MORTGAGE LOAN SCHEDULE
<PAGE>
Exhibit 10.(e)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICING AGREEMENT
BETWEEN
PEOPLE'S PREFERRED CAPITAL CORPORATION
PURCHASER
PEOPLE'S BANK OF CALIFORNIA
SELLER
DATED AS OF OCTOBER 3, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS
Section 1. Definitions............................................... 1
ARTICLE II
SERVICING
Section 2.01 Seller to Act as Servicer................................. 5
Section 2.02 Liquidation of Mortgage Loans............................. 6
Section 2.03 Collection of Mortgage Loan Payments...................... 7
Section 2.04 Establishment of and Deposits to Custodial Account........ 8
Section 2.05 Permitted Withdrawals From Custodial Account.............. 9
Section 2.06 Establishment of and Deposits to Escrow Account........... 10
Section 2.07 Permitted Withdrawals From Escrow Account................. 10
Section 2.08 Payment of Taxes, Insurance and Other Charges,............
Tax Contracts........................................ 11
Section 2.09 Protection of Accounts.................................... 12
Section 2.10 Maintenance of Hazard Insurance........................... 12
Section 2.11 Maintenance of Mortgage Impairment Insurance.............. 13
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions.....
Insurance............................................ 14
Section 2.13 Inspections............................................... 14
Section 2.14 Restoration of Mortgaged Property......................... 14
Section 2.15 Deteriorating Mortgage Loans.............................. 15
Section 2.16 Title, Management and Disposition of REO Property......... 15
Section 2.17 Permitted Withdrawals with respect to REO Property........ 16
Section 2.18 Real Estate Owned Reports................................. 17
Section 2.19 [Reserved]................................................ 17
Section 2.20 Reports Of Foreclosures and Abandonments.................. 17
Section 2.21 Notification of Adjustments............................... 17
Section 2.22 Notification of Maturity Date............................. 17
ARTICLE III
PAYMENTS TO PURCHASER
Section 3.01 Remittances............................................... 18
Section 3.02 Statements to Purchaser................................... 18
<PAGE>
ARTICLE IV
GENERAL SERVICING PROCEDURES
Section 4.01 Transfers of Mortgaged Property........................... 19
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files... 20
Section 4.03 Servicing Compensation.................................... 20
Section 4.04 Annual Statement as to Compliance......................... 20
Section 4.05 Annual Independent Public Accountants' Servicing Report... 21
Section 4.06 Right to Examine Seller Records........................... 21
ARTICLE V
SELLER TO COOPERATE
Section 5.01 Provision of Information.................................. 21
Section 5.02 Financial Statements; Servicing Facilities................ 21
ARTICLE VI
TERMINATION
Section 6.01 Damages................................................... 22
Section 6.02 Termination............................................... 22
Section 6.03 Termination Without Cause................................. 22
ARTICLE VII
BOOKS AND RECORDS
Section 7.01 Possession of Servicing Files............................. 23
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
Section 8.01 Indemnification........................................... 23
Section 8.02 Limitation on Liability of Seller and Others.............. 24
Section 8.03 Limitation on Registration and Assignment by Seller....... 24
Section 8.04 Assignment by Purchaser................................... 25
Section 8.05 Merger or Consolidation of the Seller..................... 25
Section 8.06 Successor to the Seller................................... 25
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
Section 9.01 Due Organization and Authority............................ 26
Section 9.02 No Conflicts.............................................. 27
Section 9.03 Ability to Perform........................................ 27
Section 9.04 No Litigation Pending..................................... 27
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Section 9.05 No Consent Required....................................... 27
Section 9.06 Assistance................................................ 27
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
Section 10.01 Due Organization and Authority............................ 28
Section 10.02 Ordinary Course of Business............................... 28
Section 10.03 No Conflicts.............................................. 28
Section 10.04 Ability to Service........................................ 28
Section 10.05 Ability to Perform........................................ 28
Section 10.06 No Litigation Pending..................................... 28
Section 10.07 No Consent Required....................................... 29
Section 10.08 No Untrue Information..................................... 29
Section 10.09 Reasonable Servicing Fee.................................. 29
Section 10.10 Financial Statements...................................... 29
Section 10.11 Conflict of Interest...................................... 29
ARTICLE XI
DEFAULT
Section 11.01 Events of Default......................................... 30
Section 11.02 Waiver of Defaults........................................ 31
ARTICLE XII
MISCELLANEOUS PROVISIONS
Section 12.01 Notices................................................... 31
Section 12.02 Waivers................................................... 32
Section 12.03 Entire Agreement; Amendment............................... 32
Section 12.04 Execution; Binding Effect................................. 32
Section 12.05 Headings.................................................. 32
Section 12.06 Applicable Law............................................ 32
Section 12.07 Relationship of Parties................................... 33
Section 12.08 Severability of Provisions................................ 33
Section 12.09 Exhibits.................................................. 33
<PAGE>
EXHIBITS
EXHIBIT A Form of Monthly Remittance Advice
EXHIBIT B Form of Custodial Account Certification
EXHIBIT C Form of Custodial Account Letter Agreement
EXHIBIT D Form of Escrow Account Certification
EXHIBIT E Form of Escrow Account Letter Agreement
<PAGE>
COMMERCIAL SERVICING AGREEMENT
This Commercial Servicing Agreement (the "Servicing Agreement" or the
"Agreement") is entered into as of October 3, 1997, by and between PEOPLE'S BANK
OF CALIFORNIA (the "Seller"), a federal stock savings bank incorporated under
the laws of the United States, and PEOPLE'S PREFERRED CAPITAL CORPORATION, a
Maryland corporation (the "Purchaser").
WHEREAS, the Purchaser and the Seller entered into a Commercial Mortgage
Loan Purchase and Warranties Agreement dated as of October 3, 1997 (the
"Purchase Agreement") pursuant to which the Purchaser agreed to purchase from
the Seller certain commercial, first mortgage loans (the "Mortgage Loans") to be
delivered as whole loans, with the Seller retaining servicing rights in
connection with the purchase of such Mortgage Loans; and
WHEREAS, the Purchaser desires to have the Seller service the Mortgage
Loans, the Seller desires to service and administer the Mortgage Loans on behalf
of the Purchaser, and the parties desire to provide the terms and conditions of
such servicing by the Seller.
NOW, THEREFORE, in consideration of the mutual promises and agreements set
forth herein and for other good and valuable consideration, the receipt and the
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein
have the respective meanings set forth in the Purchase Agreement. The following
terms are defined as follows:
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Ancillary Income" means all late charges, reconveyance fees,
not-sufficient funds charges, optional insurance fees, assumption fees, escrow
account benefits, reinstatement fees, and similar types of fees arising from or
in connection with any Mortgage Loan to the extent not otherwise payable to the
Mortgagee under applicable law or pursuant to the terms of the related Mortgage
Note.
"Best's" means Best's Key Rating Guide.
"BIF" means The Bank Insurance Fund, or any successor thereto.
<PAGE>
"Closing Date" means the Initial Closing Date and any other date as is
mutually agreed upon by the parties hereto.
"Code" means the Internal Revenue Code of 1986, as amended.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"Cut-off Date" means September 22, 1997 and the last business day of each
calendar month.
"Errors and Omissions Insurance Policy" means an errors and omissions
insurance policy to be maintained by the Seller pursuant to Section 2.12.
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.06.
"Escrow Payment" means, with respect to any Mortgage Loan, any payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document (whether referred to as escrow, impound or
otherwise), including, without limitation, the amounts constituting ground
rents, taxes, assessments, water rates, sewer rents, municipal charges, mortgage
insurance premiums, fire and hazard insurance premiums.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any successor
thereto.
"Fidelity Bond" means a fidelity bond to be maintained by the Seller
pursuant to Section 2.12.
"Initial Closing Date" means October 3, 1997, or such other date as the
parties hereto may mutually agree.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale,
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foreclosure sale or otherwise, or the sale of the related Mortgaged Property if
the Mortgaged Property is acquired in satisfaction of the Mortgage Loan.
"Monthly Remittance Advice" means the monthly remittance advice, in the
form of Exhibit A annexed hereto, to be provided to the Purchaser pursuant to
Section 3.02.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Nonrecoverable Advance" means any advance of principal and interest
previously made or proposed to be made in respect of a Mortgage Loan which, in
the good faith judgment of the Seller, will not or, in the case of a proposed
advance of principal and interest, would not, be ultimately recoverable from
related Insurance Proceeds, Liquidation Proceeds or otherwise. The determination
by the Seller that it has made a Nonrecoverable Advance or that any proposed
advance of principal and interest, if made, would constitute a Nonrecoverable
Advance, shall be evidenced by an Officers' Certificate delivered to the
Purchaser.
"OTS" means Office of Thrift Supervision, or any successor thereto.
"Officer's Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as required
by this Agreement.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled due date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Agreement" means the Commercial Mortgage Loan Purchase and
Warranties Agreement between the Purchaser and the Seller related to the
purchase of the Mortgage Loans dated as of October 3, 1997.
"Qualified Depository" means a depository the accounts of which are
insured by the FDIC through the BIF or the SAIF, and shall include the Seller.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact the applicable
insurance business and to write the insurance provided, and in the two
highest rating categories by Best's with respect to hazard and flood
insurance.
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"Record Date" means the close of business of the last Business Day of the
month preceding the month of the related Remittance Date.
"Remittance Date" means the 18th day (or if such 18th day is not a
Business Day, the first Business Day immediately following) of any month
following a Cut-off Date, beginning with the first Remittance Date on October
18, 1997.
"REO Property" means a Mortgaged Property acquired by the Seller on behalf
of the Purchaser through foreclosure or by deed in lieu of foreclosure, as
described in Section 2.16.
"SAIF" means the Savings Association Insurance Fund, or any successor
thereto.
"Servicing Advances" means all customary, reasonable and necessary "out
of pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Seller of its servicing
obligations, including, but not limited to, the cost of (a) the preservation,
restoration and protection of the Mortgaged Property, (b) any enforcement or
judicial proceedings, including foreclosures, (c) the management and
liquidation of the Mortgaged Property if the Mortgaged Property is acquired
in satisfaction of the Mortgage and (d) compliance with the obligations under
Sections 2.08, 2.10 and 2.16.
"Servicing Agreement" means this agreement between the Purchaser and the
Seller for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means, with respect to each Mortgage Loan, the amount of
the annual fee the Purchaser shall pay to the Seller, which shall, for a period
of one (1) full month, be equal to one-twelfth of the product of the Servicing
Fee Rate and (2) the Stated Principal Balance of such Mortgage Loan. Such fee
shall be payable monthly, computed on the basis of the same principal amount and
period in respect of which any related interest payment on a Mortgage Loan is
computed and shall be pro rated for any portion of a month during which the
Mortgage Loan is serviced by the Seller under this Agreement. The obligation of
the Purchaser to pay the Servicing Fee is limited to, and the Servicing Fee is
payable solely from, the interest portion (including recoveries with respect to
interest from Liquidation Proceeds, to the extent permitted by Section 4.03) of
such Monthly Payment collected by the Seller, or as otherwise provided under
Section 4.03.
"Servicing Fee Rate" means, with respect to each Mortgage Loan serviced
pursuant to this Agreement 0.25%. per annum.
"Servicing File" means, with respect to each Mortgage Loan, the file
retained by the Seller consisting of originals of all documents in the Mortgage
File which are not delivered to the Purchaser or its designee and copies of the
Mortgage Loan Documents listed on Exhibit A to the Purchase Agreement.
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<PAGE>
"Servicing Officer" means any officer of the Seller involved in or
responsible for, the administration and servicing of the Mortgage Loans whose
name appears on a list of servicing officers furnished by the Seller to the
Purchaser upon request, as such list may from time to time be amended.
"Termination Fee" means the amount paid by the Purchaser to the Seller in
the event of the Seller's termination, without cause, as servicer. Such fee
shall equal the percentage amount set forth in Section 6.03 hereof of the then
current aggregate unpaid principal balance of the related Mortgage Loans.
ARTICLE II
SERVICING
SECTION 2.01 SELLER TO ACT AS SERVICER. From and after the Closing Date,
the Seller, as an independent contractor, shall service and administer the
Mortgage Loans and shall have full power and authority, acting alone, to do any
and all things in connection with such servicing and administration which the
Seller may deem necessary or desirable, consistent with the terms of this
Agreement and with Accepted Servicing Practices.
Consistent with the terms of this Agreement, the Seller may waive,
modify or vary any term of any Mortgage Loan or consent to the postponement
of compliance with any such term or in any manner grant indulgence to any
Mortgagor if in the Seller's reasonable and prudent determination such
waiver, modification, postponement or indulgence is not materially adverse to
the Purchaser, provided, however, that unless the Seller has obtained the
prior written consent of the Purchaser, the Seller shall not permit any
modification with respect to any Mortgage Loan that would change the Mortgage
Interest Rate, defer or forgive the payment of principal or interest, reduce
or increase the outstanding principal balance (except for actual payments of
principal) or change the final maturity date on such Mortgage Loan. Without
limiting the generality of the foregoing, the Seller shall continue, and is
hereby authorized and empowered, to execute and deliver on behalf of itself
and the Purchaser, all instruments of satisfaction or cancellation, or of
partial or full release, discharge and all other comparable instruments, with
respect to the Mortgage Loans and with respect to the Mortgaged Properties.
If reasonably required by the Seller, the Purchaser shall furnish the Seller
with any powers of attorney and other documents necessary or appropriate to
enable the Seller to carry out its servicing and administrative duties under
this Agreement.
In servicing and administering the Mortgage Loans, the Seller shall
employ procedures (including collection procedures) and exercise the same
care that it customarily employs and exercises in servicing and administering
mortgage loans for its own account, giving due consideration to Accepted
Servicing Practices where such practices do not conflict with the
requirements of this Agreement, and the Purchaser's reliance on the Seller.
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The Seller shall keep at its servicing office books and records in
which, subject to such reasonable regulations as it may prescribe, the Seller
shall note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be
made unless such transfer is in compliance with the terms hereof. For the
purposes of this Agreement, Seller shall be under no obligation to deal with
any Person with respect to this Agreement or the Mortgage Loans unless the
Seller has been notified of such transfers as provided in this Section 2.01.
The Purchaser may sell and transfer, in whole or in part, the Mortgage Loans,
provided that no such sale and transfer shall be binding upon the Seller
unless such transferee shall agree in writing in the form of the Assignment
and Assumption Agreement attached to the Purchase Agreement as Exhibit G, to
be bound by the terms of this Agreement and the Purchase Agreement, and an
executed copy of the same shall have been delivered to the Seller. Upon
receipt thereof, the Seller shall mark its books and records to reflect the
ownership of the Mortgage Loans by such assignee, and the previous Purchaser
shall be released from its obligations hereunder, subject to receipt by
Seller of all unpaid but due Servicing Advances, Servicing Fees and other
payments due to Seller on or before the date of such transfer pursuant to
this Agreement. The Seller shall be required to remit all amounts required to
be remitted to the Purchaser hereunder to said transferee commencing with the
first Remittance Date falling after receipt of said copy of the related
Assignment and Assumption Agreement provided that the Seller receives said
copy no later than three (3) Business Days immediately prior to the first day
of the month of the related Remittance Date. This Agreement shall be binding
upon and inure to the benefit of the Purchaser and the Seller and their
permitted successors, assignees and designees.
The Servicing File retained by the Seller pursuant to this Agreement shall
be appropriately marked and identified in the Seller's computer system to
clearly reflect the sale of the related Mortgage Loan to the Purchaser. The
Seller shall release from its custody the contents of any Servicing File
retained by it only in accordance with this Agreement, except when such release
is required in connection with a repurchase of any such Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement.
The Seller must have an internal quality control program that verifies, on
a regular basis, the existence and accuracy of the legal documents, credit
documents, property appraisals, and underwriting decisions. The program must be
capable of evaluating and monitoring the overall quality of its loan production
and servicing activities. The program is to ensure that the Mortgage Loans are
serviced in accordance with prudent mortgage banking practices and accounting
principles; guard against dishonest, fraudulent, or negligent acts; and guard
against errors and omissions by officers, employees, or other authorized
persons.
SECTION 2.02 LIQUIDATION OF MORTGAGE LOANS. In the event that any payment
due under any Mortgage Loan and not postponed pursuant to Section 2.01 is not
paid when the same becomes due and payable, or in the event the Mortgagor fails
to perform any other covenant or obligation under the Mortgage Loan and such
failure continues beyond any applicable grace period, the Seller shall take such
action as (1) the Seller would take under similar circumstances with respect to
a similar mortgage loan held for its own account for investment, (2) shall be
consistent with Accepted Servicing Practices and (3) the Seller shall determine
prudently to be in the best interest of
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Purchaser. In addition to the foregoing, in the event that any payment due under
any Mortgage Loan is not postponed pursuant to Section 2.01 and remains
delinquent for a period of ninety (90) days or any other default continues for a
period of ninety (90) days beyond the expiration of any grace or cure period (or
such other period as is required by law in the jurisdiction where the related
Mortgaged Property is located), the Seller shall commence and be responsible for
the processing of foreclosure proceedings, PROVIDED THAT, prior to commencing
foreclosure proceedings, the Seller shall notify the Purchaser in writing of the
Seller's intention to do so, and the Seller shall not commence foreclosure
proceedings if the Purchaser objects to such action within ten (10) Business
Days of receiving such notice or, if the provisions of the next two paragraphs
apply, in any event without the prior written consent of Purchaser, and
PROVIDED, FURTHER, that the Seller may, in its good faith business judgement,
determine to commence foreclosure proceedings earlier than the expiration of the
foregoing grace or cure period, subject to the requirements of the preceding
proviso. In such connection, the Seller shall from its own funds make all
necessary and proper Servicing Advances, provided, however, that the Seller
shall not be required to expend its own funds in connection with any foreclosure
or towards the restoration or preservation of any Mortgaged Property, unless it
shall determine (a) that such preservation, restoration and/or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan to Purchaser after
reimbursement to itself for such expenses and (b) that such expenses will be
recoverable by it either through Liquidation Proceeds (in respect of which it
shall have priority for purposes of withdrawals from the Custodial Account
pursuant to Section 2.05) or through Insurance Proceeds (in respect of which it
shall have similar priority). The Purchaser shall execute any instruments or
documents reasonably necessary in furtherance of all actions to be taken by
Seller pursuant to this Section 2.02.
Notwithstanding anything to the contrary contained herein, in connection
with a foreclosure, in the event the Seller has reasonable cause to believe that
a Mortgaged Property is contaminated by hazardous or toxic substances or wastes,
or if the Purchaser otherwise requests an environmental inspection or review of
such Mortgaged Property to be conducted by a qualified inspector, the Seller
shall cause the Mortgaged Property to be so inspected at the expense of the
Purchaser. Upon completion of the inspection, the Seller shall promptly provide
the Purchaser with a written report of the environmental inspection.
After reviewing the environmental inspection report, the Purchaser shall
determine how the Seller shall proceed with respect to the Mortgaged Property.
In the event (a) the environmental inspection report indicates that the
Mortgaged Property is contaminated by hazardous or toxic substances or wastes
and (b) the Purchaser directs the Seller to proceed with foreclosure or
acceptance of a deed in lieu of foreclosure, the Seller shall be reimbursed for
all reasonable costs associated with such foreclosure or acceptance of a deed in
lieu of foreclosure and any related environmental clean up costs, as applicable,
from the related Liquidation Proceeds, or if the Liquidation Proceeds are
insufficient to fully reimburse the Seller, the Seller shall be entitled to be
reimbursed from amounts in the Custodial Account pursuant to Section 2.05 hereof
and to the extent amounts in the Custodial Account are insufficient to fully
reimburse the Seller,the Seller shall be entitled to be reimbursed by the
Purchaser for such deficiencies (upon presentation of evidence of such
deficiency). In the event the Purchaser directs the Seller not to proceed with
foreclosure or
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acceptance of a deed in lieu of foreclosure, the Seller shall be reimbursed for
all Servicing Advances made with respect to the related Mortgaged Property from
the Custodial Account pursuant to Section 2.05 hereof.
SECTION 2.03 COLLECTION OF MORTGAGE LOAN PAYMENTS. Continuously from the
Closing Date the Seller shall proceed diligently to collect all payments due
under each of the Mortgage Loans when the same shall become due and payable and
shall take special care in ascertaining and estimating Escrow Payments and all
other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end that the installments
payable by the Mortgagors will be sufficient to pay such charges as and when
they become due and payable.
SECTION 2.04 ESTABLISHMENT OF AND DEPOSITS TO CUSTODIAL ACCOUNT. The
Seller shall segregate and hold all funds collected and received pursuant to the
Mortgage Loans separate and apart from any of its own funds and general assets
and shall establish and maintain one or more Custodial Accounts, in the form of
time deposit or demand accounts, titled "People's Bank of California in trust
for People's Preferred Capital Corporation". The Custodial Account shall be
established with a Qualified Depository acceptable to the Purchaser. Any funds
deposited in the Custodial Account shall at all times be fully insured to the
full extent permitted under applicable law; provided, however, that to the
extent the Custodial Account is established with the Seller, the Seller may
maintain the Custodial Account as a single account. Funds deposited in the
Custodial Account may be drawn on by the Seller in accordance with Section 2.05.
The creation of any Custodial Account shall be evidenced by a certification in
the form of Exhibit B hereto, in the case of an account established with the
Seller, or by a letter agreement in the form of Exhibit C hereto, in the case of
an account held by a depository other than the Seller. A copy of such
certification or letter agreement shall be furnished to the Purchaser and, upon
request, to any subsequent Purchaser.
The Seller shall deposit in the Custodial Account within one Business Day
of receipt, and retain therein, the following collections received by the Seller
and payments made by the Seller after the Closing Date (other than payments of
principal and interest due on or before the Closing Date) or received by the
Seller prior to the Closing Date but allocable to a period subsequent thereto:
(i) all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage;
(iii) all Liquidation Proceeds and any amount received with respect to REO
Property;
(iv) all Insurance Proceeds including amounts required to be deposited
pursuant to Section 2.10 (other than proceeds to be held in the
Escrow Account and applied to the restoration or repair of the
Mortgaged Property or released to the Mortgagor in accordance with
Section 2.14), and Section 2.11;
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(v) all Condemnation Proceeds which are not applied to the restoration
or repair of the Mortgaged Property or released to the Mortgagor in
accordance with Section 2.14;
(vi) any amount required to be deposited in the Custodial Account
pursuant to Section 2.16, 3.01, or 4.02;
(vii) any amounts payable in connection with the repurchase of any
Mortgage Loan pursuant to Section 8.03 of the Purchase Agreement;
and
(viii) any amounts required to be deposited by the Seller pursuant to
Section 2.11 in connection with the deductible clause in any blanket
hazard insurance policy.
The foregoing requirements for deposit into the Custodial Account shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, Ancillary Income need not be deposited by the Seller into the
Custodial Account. Any interest paid on funds deposited in the Custodial Account
by the depository institution shall accrue to the benefit of the Seller and the
Seller shall be entitled to retain and withdraw such interest from the Custodial
Account pursuant to Section 2.05.
SECTION 2.05 PERMITTED WITHDRAWALS FROM CUSTODIAL ACCOUNT. Subject to
Section 2.16 hereof, the Seller shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
(i) to make payments to the Purchaser in the amounts and in the manner
provided for in Section 3.01;
(ii) to pay to itself the Servicing Fee;
(iii) to reimburse itself for unreimbursed Servicing Advances (except to
the extent reimbursed pursuant to Section 2.07), any accrued but
unpaid Servicing Fees and for unreimbursed advances of Seller funds
made pursuant to Section 2.16, the Seller's right to reimburse
itself pursuant to this subclause (iii) with respect to any Mortgage
Loan being limited to related Liquidation Proceeds, Condemnation
Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Seller from the Mortgagor or otherwise relating to
the Mortgage Loan, it being understood that, in the case of any such
reimbursement, the Seller's right thereto shall be prior to the
rights of the Purchaser except that, where the Seller is required to
repurchase a Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement or Section 4.02 of this Agreement, respectively, the
Seller's right to such reimbursement shall be subsequent to the
payment to the Purchaser of the Repurchase Price pursuant to such
sections and all other amounts required to be paid to the Purchaser
with respect to such Mortgage Loan;
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(iv) to pay itself any interest earned on funds deposited in the
Custodial Account (all such interest to be withdrawn monthly not
later than each Remittance Date); and
(v) to clear and terminate the Custodial Account upon the termination of
this Agreement.
In the event that the Custodial Account is interest bearing, on each
Remittance Date, the Seller shall withdraw all funds from the Custodial Account
except for those amounts which, pursuant to Section 3.01, the Seller is not
obligated to remit on such Remittance Date. The Seller may use such withdrawn
funds only for the purposes described in this Section 2.05.
SECTION 2.06 ESTABLISHMENT OF AND DEPOSITS TO ESCROW ACCOUNT. The Seller
shall segregate and hold all funds collected and received pursuant to a Mortgage
Loan constituting Escrow Payments separate and apart from any of its own funds
and general assets and shall establish and maintain one or more Escrow Accounts,
in the form of time deposit or demand accounts. The Escrow Account or Accounts
shall be established with a Qualified Depositary, in a manner which shall
provide maximum available insurance thereunder. Funds deposited in the Escrow
Accounts may be drawn on by the Seller in accordance with Section 2.07. The
creation of any Escrow Account shall be evidenced by a certification in the form
of Exhibit D hereto, in the case of an account established with the Seller, or
by a letter agreement in the form of Exhibit E hereto, in the case of an account
held by a depository other than the Seller. A copy of such certification shall
be furnished to the Purchaser and, upon request, to any subsequent Purchaser.
The Seller shall deposit in the Escrow Account or Accounts within one
Business Day of receipt, and retain therein:
(i) all Escrow Payments collected on account of the Mortgage Loans, for
the purpose of effecting timely payment of any such items as
required under the terms of the Mortgage Loan Documents; and
(ii) all amounts representing Insurance Proceeds or Condemnation Proceeds
which are to be applied to the restoration or repair of any
Mortgaged Property in accordance with the Mortgage Loan Documents.
The Seller shall make withdrawals from the Escrow Account only to effect
such payments as are required under the Mortgage Loan Documents and this
Agreement as set forth in Section 2.07. The Seller shall be entitled to retain
any interest paid on funds deposited in the Escrow Account by the depository
institution, other than interest on escrowed funds required by law to be paid to
the Mortgagor. To the extent required by law, the Seller shall pay from its own
funds interest on escrowed funds to the Mortgagor notwithstanding that the
Escrow Account may be noninterest bearing or that interest paid thereon is
insufficient for such purposes.
SECTION 2.07 PERMITTED WITHDRAWALS FROM ESCROW ACCOUNT. Withdrawals from
each Escrow Account may be made by the Seller only:
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(i) to effect timely payments of ground rents, taxes, assessments, water
rates, mortgage insurance premiums, condominium charges, fire and
hazard insurance premiums or other items constituting Escrow
Payments for the related Mortgage;
(ii) to reimburse the Seller for any Servicing Advance made by the Seller
pursuant to Section 2.08 (except with respect to any expenses
incurred in procuring or transferring Tax Service Contracts) with
respect to a related Mortgage Loan, but only from amounts received
on the related Mortgage Loan which represent late collections of
Escrow Payments thereunder;
(iii) to refund to the related Mortgagor any funds found to be in excess
of the amounts required under the terms of the related Mortgage Loan
or applicable federal or state law or judicial or administrative
ruling;
(iv) for transfer to the Custodial Account and application to reduce the
principal balance of the Mortgage Loan in accordance with the terms
of the related Mortgage and Mortgage Note;
(v) for application to restoration or repair of the related Mortgaged
Property in accordance with the procedures outlined in Section 2.14;
(vi) to pay to the Seller, or any Mortgagor to the extent required by
law, any interest paid on the funds deposited in the Escrow Account;
and
(vii) to clear and terminate the Escrow Account on the termination of this
Agreement.
SECTION 2.08 PAYMENT OF TAXES, INSURANCE AND OTHER CHARGES, TAX CONTRACTS.
With respect to each Mortgage Loan, the Seller shall maintain accurate records
reflecting the status of ground rents, taxes, assessments, water rates, sewer
rents, and other charges, as applicable, which are or may become a lien upon the
Mortgaged Property and the status of fire and hazard insurance coverage to the
extent Escrow Payments are required under the Mortgage Loan Documents, shall
obtain, from time to time, all bills for the payment of such charges (including
renewal premiums) and shall effect payment thereof prior to the applicable
penalty or termination date, employing for such purpose deposits of the
Mortgagor in the Escrow Account which shall have been estimated and accumulated
by the Seller in amounts sufficient for such purposes, as allowed under the
terms of the Mortgage. To the extent that a Mortgage does not provide for Escrow
Payments, the Seller shall determine that any such payments relating to taxes or
maintaining insurance policies are made by the Mortgagor at the time they first
become due. The Seller assumes full responsibility for the payment of all such
bills to the extent it has notice of such bills and shall effect payment of all
such charges irrespective of each Mortgagor's faithful performance in the
payment of same or the making of the Escrow Payments, and the Seller shall make
advances from its own funds to effect such payments, such advances to be
reimbursable to the same extent as Servicing Advances.
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The Seller shall ensure that each of the Mortgage Loans shall be covered
by a Tax Service Contract which shall be assigned to the Purchaser or the
Purchaser's designee at the Seller's expense in the event that the Seller is
terminated as servicer of the related Mortgage Loan(s) hereunder. To the extent
that a Mortgage Loan does not have a Tax Service Contract, the Purchaser shall
procure a Tax Service Contract for such Mortgage Loan and the Seller shall
reimburse the Purchaser upon request for reasonable expenses incurred in
connection therewith.
SECTION 2.09 PROTECTION OF ACCOUNTS. The Seller may transfer the Custodial
Account or the Escrow Account to a different Qualified Depository from time to
time. Such transfer shall be made only upon obtaining the consent of the
Purchaser, which consent shall not be withheld unreasonably.
The Seller shall bear any expenses, losses or damages sustained by the
Purchaser because the Custodial Account and/or the Escrow Account are not demand
deposit accounts.
SECTION 2.10 MAINTENANCE OF HAZARD INSURANCE. The Seller shall cause to be
maintained for each Mortgage Loan, hazard insurance such that all buildings upon
the Mortgaged Property are insured by a generally acceptable insurer against
loss by fire and hazards of extended coverage, in an amount which is at least
equal to the lesser of (i) the maximum insurable value of the improvements
securing such Mortgage Loan and (ii) the greater of (a) the outstanding
principal balance of the Mortgage Loan and (b) an amount such that the proceeds
thereof shall be sufficient to prevent the Mortgagor or the loss payee from
becoming a co-insurer.
If required by the Flood Disaster Protection Act of 1973, as amended, each
Mortgage Loan is covered by a flood insurance policy meeting the requirements of
the current guidelines of the Federal Insurance Administration in effect with a
generally acceptable insurance carrier in an amount representing coverage not
less than the lesser of (i) the outstanding principal balance of the related
Mortgage Loan and (ii) the maximum amount of insurance which is available under
the Flood Disaster Protection Act of 1973, as amended. If at any time during the
term of the Mortgage Loan, the Seller determines in accordance with applicable
law that a Mortgaged Property is located in a special flood hazard area and is
not covered by flood insurance or is covered in an amount less than the amount
required by the Flood Disaster Protection Act of 1973, as amended, the Seller
shall notify the related Mortgagor that the Mortgagor must obtain such flood
insurance coverage, and if said Mortgagor fails to obtain the required flood
insurance coverage within forty five (45) days after such notification, the
Seller shall immediately purchase the required flood insurance on the
Mortgagor's behalf.
The Seller shall cause to be maintained on each Mortgaged Property such
other or additional insurance as may be required pursuant to such applicable
laws and regulations as shall at any time be in force and as shall require such
additional insurance, or pursuant to the requirements of any applicable primary
mortgage guaranty insurer.
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All policies required hereunder shall name the Seller and its successors
and assigns as mortgagee and shall be endorsed with non-contributory standard
mortgagee clauses which shall provide for at least thirty (30) days' prior
written notice of any cancellation, reduction in amount or material change in
coverage.
The Seller shall not interfere with the Mortgagor's freedom of choice in
selecting either his insurance carrier or agent, provided, however, that the
Seller shall not accept any such insurance policies from insurance companies
unless such companies are rated A:VI or better in Best's and are licensed to do
business in the jurisdiction in which the Mortgaged Property is located. The
Seller shall determine that such policies provide sufficient risk coverage and
amounts, that they insure the property owner, and that they properly describe
the property address. To the extent reasonably possible, the Seller shall
furnish to the Mortgagor a formal notice of expiration of any such insurance in
sufficient time for the Mortgagor to arrange for renewal coverage by the
expiration date; provided, however, that in the event that no such notice is
furnished by the Seller, the Seller shall ensure that replacement insurance
policies are in place in the required coverages and the Seller shall be solely
liable to the Purchaser only for any losses in the event such coverage is not
provided.
Pursuant to Section 2.04, any amounts collected by the Seller under any
such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor, in accordance with the Seller's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account subject
to withdrawal pursuant to Section 2.05.
SECTION 2.11 MAINTENANCE OF MORTGAGE IMPAIRMENT INSURANCE. In the event
that the Seller shall obtain and maintain a blanket policy insuring against
losses arising from fire and hazards covered under extended coverage on all of
the Mortgage Loans, then, to the extent such policy provides coverage in an
amount equal to the amount required pursuant to Section 2.10 and otherwise
complies with all other requirements of Section 2.10, it shall conclusively be
deemed to have satisfied its obligations as set forth in Section 2.10. Any
amounts collected by the Seller under any such policy relating to a Mortgage
Loan shall be deposited in the Custodial Account subject to withdrawal pursuant
to Section 2.05. Such policy may contain a deductible clause, in which case, in
the event that there shall not have been maintained on the related Mortgaged
Property a policy complying with Section 2.10, and there shall have been a loss
which would have been covered by such policy, the Seller shall deposit in the
Custodial Account at the time of such loss the amount not otherwise payable
under the blanket policy because of such deductible clause, such amount to be
deposited from the Seller's funds, without reimbursement therefor. Upon request
of the Purchaser, the Seller shall cause to be delivered to the Purchaser a
certified true copy of such policy and a statement from the insurer thereunder
that such policy shall in no event be terminated or materially modified without
thirty (30) days' prior written notice to the Purchaser.
SECTION 2.12 MAINTENANCE OF FIDELITY BOND AND ERRORS AND OMISSIONS
INSURANCE. The Seller shall maintain with responsible companies, at its own
expense, a blanket Fidelity Bond and
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an Errors and Omissions Insurance Policy, with broad coverage on all officers,
employees or other persons acting in any capacity requiring such persons to
handle funds, money, documents or papers relating to the Mortgage Loans ("Seller
Employees"). Any such Fidelity Bond and Errors and Omissions Insurance Policy
shall be in the form of the Mortgage Banker's Blanket Bond and shall protect and
insure the Seller against losses, including forgery, theft, embezzlement, fraud,
errors and omissions and negligent acts of such Seller Employees. Such Fidelity
Bond and Errors and Omissions Insurance Policy also shall protect and insure the
Seller against losses in connection with the release or satisfaction of a
Mortgage Loan without having obtained payment in full of the indebtedness
secured thereby. No provision of this Section 2.12 requiring such Fidelity Bond
and Errors and Omissions Insurance Policy shall diminish or relieve the Seller
from its duties and obligations as set forth in this Agreement. Upon the request
of the Purchaser, the Seller shall cause to be delivered to the Purchaser a
certified true copy of such Fidelity Bond and Errors and Omissions Insurance
Policy and a statement from the surety and the insurer that such Fidelity Bond
and Errors and Omissions Insurance Policy shall in no event be terminated or
materially modified without thirty (30) days' prior written notice to the
Purchaser. In the event that the surety or insurer charges the Seller a fee for
providing such evidence, the Purchaser shall reimburse the Seller for the
reasonable expense incurred by the Seller in furnishing such evidence.
SECTION 2.13 INSPECTIONS. The Seller shall inspect the Mortgaged Property
as often as deemed necessary by the Seller to assure itself that the value of
the Mortgaged Property is being preserved. In addition, if any Mortgage Loan is
more than sixty (60) days delinquent, the Seller immediately shall inspect the
Mortgaged Property and shall conduct subsequent inspections in accordance with
Accepted Servicing Practices. The Seller shall keep a written report of each
such inspection.
SECTION 2.14 RESTORATION OF MORTGAGED PROPERTY. The Seller need not obtain
the approval of the Purchaser prior to releasing any Insurance Proceeds or
Condemnation Proceeds to the Mortgagor to be applied to the restoration or
repair of the Mortgaged Property if such release is in accordance with the terms
of the Mortgage Loan Documents. At a minimum, the Seller shall comply with the
following conditions in connection with any such release of Insurance Proceeds
or Condemnation Proceeds:
(i) the Seller shall receive satisfactory independent verification of
completion of repairs and issuance of any required approvals with
respect thereto;
(ii) the Seller shall take all steps necessary to preserve the priority
of the lien of the Mortgage, including, but not limited to requiring
waivers with respect to mechanics' and materialmen's liens;
(iii) the Seller shall verify that the Mortgage Loan is not in default;
and
(iv) pending repairs or restoration, the Seller shall place the Insurance
Proceeds or Condemnation Proceeds in the Escrow Account.
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If the Purchaser is named as an additional mortgagee, the Seller is hereby
empowered to endorse any loss draft issued in respect of such a claim in the
name of the Purchaser.
SECTION 2.15 DETERIORATING MORTGAGE LOANS. If, during the term of this
Agreement, a Mortgage Loan (or interest therein) becomes at any time in
Nonaccrual Status, the Seller shall notify the Purchaser as part of the Seller's
reporting obligations under this Agreement and shall follow the procedures set
forth in Section 2.02 of this Agreement for realizing upon defaulted Mortgage
Loans.
SECTION 2.16 TITLE, MANAGEMENT AND DISPOSITION OF REO PROPERTY. In the
event that title to any Mortgaged Property is acquired in foreclosure or by deed
in lieu of foreclosure, the deed or certificate of sale shall be taken in the
name of the Purchaser, or in the event the Purchaser is not authorized or
permitted to hold title to real property in the state where the REO Property is
located, or would be adversely affected under the "doing business" or tax laws
of such state by so holding title, the deed or certificate of sale shall be
taken in the name of such Person or Persons as shall be designated by the
Purchaser. The Person or Persons holding such title other than the Purchaser
shall acknowledge in writing that such title is being held as nominee for the
Purchaser.
The Seller shall manage, conserve, protect and operate each REO Property
for the Purchaser solely for the purpose of its prompt disposition and sale. The
Seller, either itself or through an agent selected by the Seller and reasonably
acceptable to the Purchaser, shall manage, conserve, protect and operate the REO
Property in the same manner that it manages, conserves, protects and operates
other foreclosed property for its own account, and in the same manner that
similar property in the same locality as the REO Property is managed. The Seller
shall attempt to sell the same (and may temporarily rent the same for a period
not greater than one (1) year, except as otherwise provided below) on such terms
and conditions as the Seller deems to be in the best interest of the Purchaser.
The Seller shall use its best efforts to dispose of the REO Property as
soon as possible and shall sell such REO Property in any event within one year
after title has been taken to such REO Property, unless the Seller determines,
and gives an appropriate notice to the Purchaser to such effect, that a longer
period is necessary for the orderly liquidation of such REO Property. If a
period longer than one (1) year is permitted under the foregoing sentence and is
necessary to sell any REO Property, the Seller shall report monthly to the
Purchaser as to the progress being made in selling such REO Property.
The Seller shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the improvements which are a part of such property,
liability insurance and, to the extent required and available under the Flood
Disaster Protection Act of 1973, as amended, flood insurance in the amount
required above.
The disposition of REO Property shall be carried out by the Seller at such
price, and upon such terms and conditions, as the Seller deems to be in the best
interests of the Purchaser. The proceeds of sale of the REO Property shall be
promptly deposited in the Custodial Account. As soon
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as practical thereafter the expenses of such sale shall be paid and the Seller
shall reimburse itself pursuant to Section 2.05(iii) hereof, as applicable, for
any related unreimbursed Servicing Advances, unpaid Servicing Fees and
unreimbursed advances made pursuant to this Section, and on the Remittance Date
immediately following the Due Period in which such sale proceeds are received
the net cash proceeds of such sale remaining in the Custodial Account shall be
distributed to the Purchaser; provided that such distribution shall, in any
event, be made within ninety (90) days from and after the closing of the sale of
such REO Property.
In addition to the Seller's obligations set forth in this Section 2.16,
the Seller shall deliver written notice to the Purchaser whenever title to any
Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure
together with a copy of the drive-by appraisal of the related Mortgaged Property
obtained by the Seller on or prior to the date of such acquisition.
Notwithstanding anything to the contrary contained herein, the Purchaser may, at
the Purchaser's sole option, terminate the Seller as servicer of any such REO
Property without payment of any Termination Fee with respect thereto, provided
that (i) the Purchaser gives the Seller notice of such termination within ten
(10) Business Days of receipt of said written notice from the Seller which
termination shall be effective no more than fifteen (15) Business Days from and
after the date of said notice from the Purchaser and (ii) the Seller shall on
the date said termination takes effect be reimbursed by Purchaser for any
unreimbursed Servicing Advances in each case relating to the Mortgage Loan
underlying such REO Property. In the event of any such termination, the
provisions of Section 8.06 hereof shall apply to said termination and the
transfer of servicing responsibilities with respect to such REO Property to the
Purchaser or its designee.
With respect to each REO Property, the Seller shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Seller shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
SECTION 2.17 PERMITTED WITHDRAWALS WITH RESPECT TO REO PROPERTY. For so
long as the Seller is acting as servicer of any Mortgage Loan relating to any
REO Property, the Seller shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost of
maintaining any hazard insurance pursuant to Section 2.10 and the fees of any
managing agent acting on behalf of the Seller. The Seller shall make monthly
distributions on each Remittance Date to the Purchaser of the net cash flow from
the REO Property (which shall equal the revenues from such REO Property net of
the expenses described in Section 2.16 and of any reserves reasonably required
from time to time to be maintained to satisfy anticipated liabilities for such
expenses).
SECTION 2.18 REAL ESTATE OWNED REPORTS. For so long as the Seller is
acting as servicer of any Mortgage Loan relating to any REO Property, the Seller
shall furnish to the Purchaser on or before the 15th day of each month a
statement with respect to any REO Property covering the operation of such REO
Property for the previous month and the Seller's efforts in connection with
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the sale of such REO Property and any rental of such REO Property incidental to
the sale thereof for the previous month. That statement shall be accompanied by
such other information as the Purchaser shall reasonably request.
SECTION 2.19 [RESERVED]
SECTION 2.20 REPORTS OF FORECLOSURES AND ABANDONMENTS. For so long as the
Seller is acting as servicer of any Mortgage Loan relating to any REO Property,
following the foreclosure sale or abandonment of any Mortgaged Property, the
Seller shall report such foreclosure or abandonment as required pursuant to
Section 6050J of the Code.
SECTION 2.21 NOTIFICATION OF ADJUSTMENTS. With respect to each Variable
Rate Mortgage Loan, the Seller shall adjust the Mortgage Interest Rate on the
related Interest Rate Adjustment Date and shall adjust the Monthly Payment
accordingly in compliance with the requirements of applicable law and the
related Mortgage and Mortgage Note. If, pursuant to the terms of the Mortgage
Note, another index is selected for determining the Mortgage Interest Rate, the
same index will be used with respect to each Mortgage Note which requires a new
index to be selected, provided that such selection does not conflict with the
terms of the related Mortgage Note. The Seller shall execute and deliver any and
all necessary notices required under applicable law and the terms of the related
Mortgage Note and Mortgage regarding the Mortgage Interest Rate and the Monthly
Payment adjustments. The Seller shall promptly upon written request therefor,
deliver to the Purchaser such notifications and any additional applicable data
regarding such adjustments and the methods used to calculate and implement such
adjustments. Upon the discovery by the Seller or the Purchaser that the Seller
has failed to adjust a Mortgage Interest Rate or a Monthly Payment pursuant to
the terms of the related Mortgage Note and Mortgage, the Seller shall
immediately deposit in the Custodial Account from its own funds the amount of
any interest loss actually caused the Purchaser thereby.
SECTION 2.22 NOTIFICATION OF MATURITY DATE. With respect to each Fixed
Rate Mortgage Loan, the Purchaser shall execute and deliver to the Mortgagor any
and all necessary notices required under applicable law and the terms of the
related Mortgage Note and Mortgage regarding the maturity date if required under
applicable law.
ARTICLE III
PAYMENTS TO PURCHASER
SECTION 3.01 REMITTANCES. On each Remittance Date the Seller shall remit
by wire transfer of immediately available funds to the Purchaser all amounts
deposited in the Custodial Account as of the close of business on the Cut-off
Date immediately preceding such Remittance Date, except that less than full
Principal Prepayments received on or after the first day of the month in which
the Remittance Date occurs shall be remitted to the Purchaser on the next
following Remittance Date; and minus any amounts attributable to Monthly
Payments collected but due on a Due Date or Dates subsequent to the first day of
the month of the Remittance Date, which amounts shall be remitted
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on the next Remittance Date, in each case, net of charges against or withdrawals
from the Custodial Account pursuant to Section 2.05.
With respect to any Principal Prepayment in full, the Seller shall remit
such Principal Prepayment to the Purchaser within five (5) Business Days of
receipt of such Principal Prepayment by the Seller.
With respect to any Seller's remittance received by the Purchaser after
the fifth Business Day following the Business Day on which such payment was due,
the Seller shall pay to the Purchaser interest on any such late payment at an
annual rate equal to the Prime Rate, adjusted as of the date of each change,
plus one (1) percentage point, but in no event greater than the maximum amount
permitted by applicable law. Such interest shall be deposited in the Custodial
Account by the Seller on the date such late payment is made and shall cover the
period commencing with and including the day following such fifth Business Day
and ending with the Business Day on which such payment is made, exclusive of
such Business Day; provided, however, that in the event that the Seller remits
such amounts after 11:00 A.M. (California time) on any day, such period shall
include such day. Such interest shall be remitted along with the distribution
payable on the next succeeding Remittance Date. The payment by the Seller of any
such interest shall not be deemed an extension of time for payment or a waiver
of any Event of Default by the Seller.
SECTION 3.02 STATEMENTS TO PURCHASER. Not later than the twentieth day of
the month following the end of each calendar quarter, the Seller shall furnish
by modem and/or diskette to the Purchaser or its designee a listing of the
outstanding Mortgage Loans, including with respect to each Mortgage Loan: the
Mortgage Loan number, the actual balance, the actual paid-through dates, the
Mortgage Interest Rate and principal and interest payment, and with respect to
Variable Rate Mortgage Loans, the next Interest Rate Adjustment Date, the
Mortgage Interest Rate and the principal and interest payment effective as of
the next Interest Rate Adjustment Date (if available), and shall furnish to the
Purchaser manually a Monthly Remittance Advice, with a trial balance report
attached thereto, in the form of Exhibit A annexed hereto as to the preceding
remittance and the period ending on the preceding Cut-off Date.
In addition, not more than sixty (60) days after the end of each calendar
year, the Seller shall furnish to each Person who was a Purchaser at any time
during such calendar year an annual statement in accordance with the
requirements of applicable federal income tax law as to the aggregate of
remittances for the applicable portion of such year.
Such obligation of the Seller shall be deemed to have been satisfied to
the extent that substantially comparable information shall be provided by the
Seller pursuant to any requirements of the Code as from time to time are in
force.
The Seller shall prepare and file, with respect to each Mortgage Loan, any
and all tax returns, information statements or other filings required to be
delivered to any governmental taxing authority or to the Purchaser pursuant to
any applicable law with respect to the Mortgage Loans and the
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transactions contemplated hereby. In addition, the Seller shall provide the
Purchaser with such information concerning the Mortgage Loans as is necessary
for the Purchaser to prepare its federal income tax return as the Purchaser may
reasonably request from time to time.
ARTICLE IV
GENERAL SERVICING PROCEDURES
SECTION 4.01 TRANSFERS OF MORTGAGED PROPERTY. The Seller shall be required
to enforce any "due-on-sale" provision contained in any Mortgage or Mortgage
Note and to deny assumption by the person to whom the Mortgaged Property has
been or is about to be sold whether by absolute conveyance or by contract of
sale, whether or not the Mortgagor remains liable on the Mortgage and the
Mortgage Note, unless assumptions are permitted by the Mortgage Loan Documents.
When the Mortgaged Property has been conveyed by the Mortgagor, the Seller
shall, to the extent it has knowledge of such conveyance, exercise its rights to
accelerate the maturity of such Mortgage Loan under the "due-on-sale" clause
applicable thereto, unless assumptions are permitted by the Mortgage Loan
Documents.
If the Seller reasonably believes it is unable under applicable law to
enforce such "due-on-sale" clause, or if the Mortgage Loan Documents permit an
assumption of the Mortgage Loan, the Seller, in the Purchaser's name, shall, to
the extent permitted by applicable law, enter into (i) an assumption and
modification agreement with the person to whom such property has been conveyed,
pursuant to which such person becomes liable under the Mortgage Note and the
original Mortgagor remains liable thereon, unless the Mortgage Loan Documents
provide otherwise or (ii) in the event the Seller is unable under applicable law
or the Mortgage Loan Documents to require that the original Mortgagor remain
liable under the Mortgage Note and the Seller has the prior consent of any
applicable insurer, a substitution of liability agreement with the purchaser of
the Mortgaged Property pursuant to which the original Mortgagor is released from
liability and the purchaser of the Mortgaged Property is substituted as
Mortgagor and becomes liable under the Mortgage Note. In connection with any
such assumption, neither the Mortgage Interest Rate borne by the related
Mortgage Note, the term of the Mortgage Loan nor the outstanding principal
amount of the Mortgage Loan shall be changed unless approved by the Purchaser.
To the extent that any Mortgage Loan is assumable, the Seller shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by the Seller with respect to underwriting mortgage
loans of the same type as the Mortgage Loans. If the credit of the proposed
transferee does not meet such underwriting criteria, the Seller diligently
shall, to the extent permitted by the Mortgage or the Mortgage Note and by
applicable law, accelerate the maturity of the Mortgage Loan.
SECTION 4.02 SATISFACTION OF MORTGAGES AND RELEASE OF MORTGAGE FILES. Upon
the payment in full of any Mortgage Loan, or the receipt by the Seller of a
notification that payment in
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full will be escrowed in a manner customary for such purposes, the Seller shall
notify the Purchaser in the Monthly Remittance Advice as provided in Section
3.02, and may request the release of any Mortgage Loan Documents from the
Purchaser in accordance with this Section 4.02 hereof. Upon full satisfaction of
the Mortgage Note, the Seller shall obtain discharge of the related Mortgage
Loan as of record within any related time limit required by applicable law.
If the Seller satisfies or releases a Mortgage without first having
obtained payment in full of the indebtedness secured by the Mortgage, upon
written demand of the Purchaser, the Seller shall repurchase the related
Mortgage Loan at the Repurchase Price by deposit thereof in the Custodial
Account within two (2) Business Days of receipt of such demand by the Purchaser.
Upon such repurchase, all funds maintained in the Escrow Account with respect to
such repurchased Mortgage Loan shall be transferred to the Seller. The Seller
shall maintain the Fidelity Bond and Errors and Omissions Insurance Policy as
provided for in Section 2.12 insuring the Seller against any loss it may sustain
with respect to any Mortgage Loan not satisfied in accordance with the
procedures set forth herein.
SECTION 4.03 SERVICING COMPENSATION. As consideration for servicing the
Mortgage Loans hereunder, the Seller shall withdraw the Servicing Fee with
respect to each Mortgage Loan from the Custodial Account pursuant to Section
2.05 hereof. Such Servicing Fee shall be payable monthly, computed on the basis
of the same principal amount and period in respect of which any related interest
payment on a Mortgage Loan is computed. The Servicing Fee shall be pro-rated
when servicing is for less than one month. The obligation of the Purchaser to
pay, and the Seller's right to withdraw, the Servicing Fee is limited to, and
the Servicing Fee is payable solely from, the interest portion (including
recoveries with respect to interest from Liquidation Proceeds, to the extent
permitted by Section 2.05), of such Monthly Payment collected by the Seller, or
as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income shall be
retained by the Seller and shall not be required to be deposited in the
Custodial Account. The Seller shall be required to pay all expenses incurred by
it in connection with its servicing activities hereunder and shall not be
entitled to reimbursement thereof except as specifically provided for herein.
SECTION 4.04 ANNUAL STATEMENT AS TO COMPLIANCE. The Seller shall deliver
to the Purchaser, on or before March 31 each year beginning with March 31, 1998,
an Officer's Certificate, stating that (i) a review of the activities of the
Seller during the preceding calendar year and of performance under this
Agreement has been made under such officer's supervision, and (ii) the Seller
has complied in all material respects with the provisions of Article II and
Article IV, and (iii) to the best of such officer's knowledge, based on such
review, the Seller has fulfilled all its obligations under this Agreement
throughout such year or part thereof, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof and the action being taken by the
Seller to cure such default.
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SECTION 4.05 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT. On
or before March 31 of each year, beginning March 31, 1998, the Seller at its
expense shall cause a firm of independent public accountants (who may also
render other services to the Seller, or any affiliate thereof) which is a member
of the American Institute of Certified Public Accountants to furnish a statement
to the Purchaser to the effect that such firm has, as part of their examination
of the financial statements of the Seller performed tests embracing the records
and documents relating to mortgage loans serviced by the Seller in accordance
with the requirements of the Uniform Single Audit Program for Mortgage Bankers
and that their examination disclosed no exceptions that, in their opinion were
material, relating to mortgage loans serviced by the Seller.
SECTION 4.06 RIGHT TO EXAMINE SELLER RECORDS. The Purchaser, upon
reasonable notice, shall have the right to examine and audit any and all of the
books, records, or other information of the Seller, whether held by the Seller
or by another on its behalf, with respect to or concerning this Agreement or the
Mortgage Loans, during business hours or at such other times as may be
reasonable under applicable circumstances, upon reasonable advance notice.
ARTICLE V
SELLER TO COOPERATE
SECTION 5.01 PROVISION OF INFORMATION. During the term of this Agreement,
the Seller shall furnish to the Purchaser such periodic, special, or other
reports or information, whether or not provided for herein, as shall be
necessary, reasonable, or appropriate with respect to the Purchaser or the
purposes of this Agreement. All such reports or information shall be provided by
and in accordance with all reasonable instructions and directions which the
Purchaser may give.
The Seller shall execute and deliver all such instruments and take all
such action as the Purchaser may reasonably request from time to time, in order
to effectuate the purposes and to carry out the terms of this Agreement.
SECTION 5.02 FINANCIAL STATEMENTS; SERVICING FACILITIES. In connection
with disposition of Mortgage Loans, the Purchaser may make available to a
prospective purchaser audited financial statements of the Seller for the most
recently completed two (2) fiscal years for which such statements are available,
as well as a Consolidated Statement of Condition at the end of the last two (2)
fiscal years covered by any Consolidated Statement of Operations. If it has not
already done so, the Seller shall furnish promptly to the Purchaser or a
prospective purchaser copies of the statements specified above; provided,
however, that prior to furnishing such statements or information to any
prospective purchaser, the Seller may require such prospective purchaser to
execute a confidentiality agreement in form reasonably satisfactory to it.
The Seller shall make available to the Purchaser or any prospective
Purchaser a knowledgeable financial or accounting officer for the purpose of
answering questions with respect to recent developments affecting the Seller or
the financial statements of the Seller, and to permit
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any prospective purchaser to inspect the Seller's servicing facilities for the
purpose of satisfying such prospective purchaser that the Seller has the ability
to service the Mortgage Loans as provided in this Agreement.
ARTICLE VI
TERMINATION
SECTION 6.01 DAMAGES. The Purchaser shall have the right at any time to
seek and recover from the Seller any damages or losses suffered by it solely as
a result of any failure by the Seller to observe or perform any duties,
obligations, covenants or agreements herein contained.
SECTION 6.02 TERMINATION. The respective obligations and responsibilities
of the Seller shall terminate upon: (i) the later of the final payment or other
liquidation (or any advance with respect thereto) of the last Mortgage Loan
serviced by the Seller or the disposition of all REO Property serviced by the
Seller and the remittance of all funds due hereunder; or (ii) by mutual consent
of the Seller and the Purchaser in writing, unless earlier terminated pursuant
to this Agreement.
SECTION 6.03 TERMINATION WITHOUT CAUSE. The Purchaser may, at its sole
option, upon not less than thirty (30) days' prior written notice to the Seller,
terminate any rights the Seller may have hereunder with respect to any or all of
the Mortgage Loans, without cause, upon written notice, provided that the Seller
shall have an additional period of not more than sixty (60) days from and after
the date of said notice from the Purchaser within which to effect the related
transfer of servicing. Any such notice of termination shall be in writing and
delivered to the Seller as provided in Section 12.01 of this Agreement. In the
event of such termination, the Seller shall be entitled to a Termination Fee,
equal to 1.50% of the then current aggregate unpaid principal balance of the
related Mortgage Loans; provided, however, that no Termination Fee shall be
payable if the successor servicer is an Affiliate of the Seller.
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ARTICLE VII
BOOKS AND RECORDS
SECTION 7.01 POSSESSION OF SERVICING FILES. The contents of each Servicing
File are and shall be held in trust by the Seller for the benefit of the
Purchaser as the owner thereof. The Seller shall maintain in the Servicing File
a copy of the contents of each Mortgage File and the originals of the documents
in each Mortgage File not delivered to the Purchaser. The possession of the
Servicing File by the Seller is at the will of the Purchaser for the sole
purpose of servicing the related Mortgage Loan, pursuant to this Agreement, and
such retention and possession by the Seller is in its capacity as Seller only
and at the election of the Purchaser. The Seller shall release its custody of
the contents of any Servicing File only in accordance with written instructions
from the Purchaser or other termination of the Seller with respect to the
related Mortgage Loans, unless such release is required as incidental to the
Seller's servicing of the Mortgage Loans pursuant to this Agreement, or is in
connection with a repurchase of any Mortgage Loan pursuant to Section 8.03 of
the Purchase Agreement or Section 4.02 of this Agreement.
The Seller shall be responsible for maintaining, and shall maintain, a
complete set of books and records for each Mortgage Loan which shall be marked
clearly to reflect the ownership of each Mortgage Loan by the Purchaser. In
particular, the Seller shall maintain in its possession, available for
inspection by the Purchaser or its designee during normal business hours, and
shall deliver to the Purchaser or its designee upon reasonable notice, evidence
of compliance with all federal, state and local laws, rules and regulations,
including but not limited to documentation as to the method used in determining
the applicability of the provisions of the Flood Disaster Protection Act of
1973, as amended, to the Mortgaged Property, documentation evidencing insurance
coverage and periodic inspection reports as required by Section 2.13. To the
extent that original documents are not required for purposes of realization of
Liquidation Proceeds or Insurance Proceeds, documents maintained by the Seller
may be in the form of microfilm or microfiche.
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
SECTION 8.01 INDEMNIFICATION. The Seller agrees to indemnify and hold the
Purchaser harmless from any liability, claim, loss or damage (including, without
limitation, any reasonable legal fees, judgments or expenses relating to such
liability, claim, loss or damage, but excluding consequential, special,
exemplary, punitive and indirect damages ("Special Damages"), except for such
Special Damages which Purchaser is required by law to pay to a third party), to
the Purchaser directly or indirectly resulting from the Seller's failure to
observe and perform any or all of Seller's duties, obligations, covenants,
agreements, warranties or representations contained in this Agreement or the
Seller's failure to comply with all applicable requirements with respect to the
transfer of servicing rights as set forth herein.
The Seller shall notify the Purchaser as soon as reasonably possible if a
claim is made by a third party with respect to this Agreement.
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SECTION 8.02 LIMITATION ON LIABILITY OF SELLER AND OTHERS. Neither the
Seller nor any of the directors, officers, employees or agents of the Seller
shall be under any liability to the Purchaser for any action taken or for
refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Seller or any such person against any breach of warranties
or representations made herein, or failure to perform its obligations in
material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Seller and any director, officer,
employee or agent of the Seller may rely in good faith on any document of any
kind prima facie properly executed and submitted by any Person with respect to
any matter arising hereunder. The Seller shall not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
duties to service the Mortgage Loans in accordance with this Agreement and which
in its opinion may involve it in any expense or liability, provided, however,
that the Seller may, with the prior written consent of the Purchaser, undertake
any such action which it may deem necessary or desirable in respect to this
Agreement and the rights and duties of the parties hereto. In such event, the
Seller shall be entitled to prompt reimbursement from the Purchaser of the
reasonable legal expenses and costs of such action.
SECTION 8.03 LIMITATION ON REGISTRATION AND ASSIGNMENT BY SELLER. The
Purchaser has entered into this Agreement with the Seller in reliance upon the
independent status of the Seller, and the representations as to the adequacy of
its servicing facilities, plant, personnel, records and procedures, its
integrity, reputation and financial standing, and the continuance thereof.
Therefore, the Seller shall not (i) assign this Agreement or the servicing
hereunder (other than to an affiliate of Seller) or (ii) delegate any
substantial part of its rights or duties hereunder without the prior written
consent of the Purchaser, which consent shall not be unreasonably withheld or
conditioned provided that (a) any delegation of such rights or duties shall not
release the Seller from its obligations hereunder and the Seller shall remain
responsible hereunder for all acts and omissions of any delegee as if such acts
or omissions were those of the Seller and (b) any such assignee or designee
shall satisfy the requirements for a successor or surviving Person set forth in
Section 8.05 and Section 8.06 hereof. The Seller shall notify the Purchaser in
writing at least 30 days prior to selling or otherwise disposing of all or
substantially all of its assets and receipt of such notice shall entitle the
Purchaser to terminate this Agreement except as set forth in Section 8.06
hereof.
The Seller shall not resign from the obligations and duties hereby imposed
on it except by mutual consent of the Seller and the Purchaser or upon the
determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Seller. Any such
determination permitting the resignation of the Seller shall be evidenced by an
Opinion of Counsel to such effect delivered to the Purchaser which Opinion of
Counsel shall be in form and substance acceptable to the Purchaser. No such
resignation shall become effective until a successor shall have assumed the
Seller's responsibilities and obligations hereunder in the manner provided in
Section 8.06.
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Without in any way limiting the generality of this Section 8.03, in the
event that the Seller either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without (i) satisfying the requirements set forth herein or (ii) the
prior written consent of the Purchaser, then the Purchaser shall have the right
to terminate this Agreement as set forth in Section 6.03, without any additional
payment of any penalty or damages and without any liability whatsoever to the
Seller (other than with respect to accrued but unpaid Servicing Fees and
Servicing Advances remaining unpaid) or any third party.
SECTION 8.04 ASSIGNMENT BY PURCHASER. The Purchaser shall have the right,
without the consent of the Seller, to assign, in whole or in part, its interest
under this Agreement with respect to some or all of the Mortgage Loans, and
designate any person to exercise any rights of the Purchaser hereunder, by
executing an Assignment and Assumption Agreement substantially in the form of
Exhibit G to the Purchase Agreement and the assignee or designee shall accede to
the rights and obligations hereunder of the Purchaser with respect to such
Mortgage Loans. All references to the Purchaser in this Agreement shall be
deemed to include its assignee or designee. Notwithstanding the foregoing, at
any one time there shall not be more than fifteen (15) separate Purchasers under
this Agreement.
SECTION 8.05 MERGER OR CONSOLIDATION OF THE SELLER. The Seller will keep
in full effect its existence, rights and franchises as a corporation under the
laws of the state of its incorporation except as permitted herein, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Agreement, or any of the
Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the Seller,
shall be the successor of the Seller hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided, however, that the
successor or surviving Person shall be an institution whose deposits are insured
by FDIC or a company whose business includes the origination and servicing of
mortgage loans and shall satisfy the requirements of Section 8.06 with respect
to the qualifications of a successor to the Seller.
SECTION 8.06 SUCCESSOR TO THE SELLER. Prior to termination of Seller's
responsibilities and duties under this Agreement pursuant to Sections 2.16,
6.03, 8.03 or 11.01, the Purchaser shall (i) succeed to and assume all of the
Seller's responsibilities, rights, duties and obligations under this Agreement,
or (ii) appoint a successor having a tangible net worth of not less than
$30,000,000 and which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of the Seller under this Agreement
prior to the termination of Seller's responsibilities, duties and liabilities
under this Agreement. In connection with such appointment and assumption, the
Purchaser may make such arrangements for the compensation of such successor out
of payments on Mortgage Loans as it and such successor shall agree. In the event
that the Seller's duties, responsibilities and
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liabilities under this Agreement should be terminated pursuant to the
aforementioned sections, the Seller shall discharge such duties and
responsibilities during the period from the date it acquires knowledge of such
termination until the effective date thereof with the same degree of diligence
and prudence which it is obligated to exercise under this Agreement, and shall
take no action whatsoever that might impair or prejudice the rights or financial
condition of its successor. The resignation or removal of Seller pursuant to the
aforementioned Sections shall not become effective until a successor shall be
appointed pursuant to this Section and shall in no event relieve the Seller of
the representations, warranties and covenants made pursuant to and the remedies
available to the Purchaser with respect thereto.
Any successor appointed as provided herein shall execute, acknowledge and
deliver to the Seller and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Seller, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.16, 6.03, 8.03 or 11.01
shall not affect any claims that the Purchaser may have against the Seller
arising prior to any such termination or resignation.
The Seller shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and the Seller shall account for
all funds. The Seller shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely vest
and confirm in the successor all such rights, powers, duties, responsibilities,
obligations and liabilities of the Seller. The successor shall make arrangements
as it may deem appropriate to reimburse the Seller for amounts the Seller
actually expended pursuant to this Agreement which the successor is entitled to
retain hereunder and which would otherwise have been recovered by the Seller
pursuant to this Agreement but for the appointment of the successor servicer.
Upon a successor's acceptance of appointment as such, the Seller shall
notify by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of each Closing Date, the Purchaser warrants and represents to, and
covenants and agrees with, the Seller as follows:
SECTION 9.01 DUE ORGANIZATION AND AUTHORITY. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Maryland. The Purchaser has the full corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith; the execution, delivery and performance of this Agreement by the
Purchaser and the consummation of the transactions contemplated hereby have been
duly and validly
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authorized; this Agreement evidences the valid, binding and enforceable
obligation of the Purchaser; and all requisite corporate action has been taken
by the Purchaser to make this Agreement valid and binding upon the Purchaser in
accordance with its terms;
SECTION 9.02 NO CONFLICTS. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Purchaser's charter or bylaws or any legal
restriction or any agreement or instrument to which the Purchaser is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Purchaser or its property is
subject;
SECTION 9.03 ABILITY TO PERFORM. The Purchaser does not believe, nor does
it have any reason or cause to believe, that it cannot perform each and every
covenant made by it in this Agreement.
SECTION 9.04 NO LITIGATION PENDING. There is no action, suit, proceeding
or investigation pending or threatened against the Purchaser, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Purchaser, or in
any material impairment of the right or ability of the Purchaser to carry on its
business substantially as now conducted, or in any material liability on the
part of the Purchaser, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Purchaser contemplated herein.
SECTION 9.05 NO CONSENT REQUIRED. No consent, approval, authorization or
order of any court or governmental agency or body is required for the execution,
delivery and performance by the Purchaser of, or compliance by the Purchaser
with, this Agreement as evidenced by the consummation of the transactions
contemplated by this Agreement, or if required, such approval has been obtained
prior to the Closing Date.
SECTION 9.06 ASSISTANCE. To the extent reasonably possible, the Purchaser
shall cooperate with and assist the Seller as requested by the Seller, in
carrying out Seller's covenants, agreements, duties and responsibilities under
this Agreement and in connection therewith shall execute and deliver all such
papers, documents and instruments as nay be necessary and appropriate in
furtherance thereof.
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ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
As of each Closing Date, the Seller warrants and represents to, and
covenants and agrees with, the Purchaser as follows:
SECTION 10.01 DUE ORGANIZATION AND AUTHORITY. The Seller is a federal
savings bank duly organized, validly existing and in good standing under the
laws of the United States and is licensed, qualified and in good standing in
each state where a Mortgaged Property is located if the laws of such state
require licensing or qualification in order to conduct business of the type
conducted by the Seller, and in any event the Seller is in compliance with the
laws of any such state to the extent necessary to ensure the enforceability of
the related Mortgage Loan in accordance with the terms of this Agreement; the
Seller has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Seller and the consummation of the
transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, legal, binding and enforceable obligation of the
Seller subject to bankruptcy laws and other similar laws of general application
affecting rights of creditors and subject to the application of the rules of
equity, including those respecting the availability of specific performance,
none of which will materially interfere with the realization of the benefits
provided thereunder, regardless of whether such enforcement is sought in a
proceeding in equity or at law; and all requisite corporate action has been
taken by the Seller to make this Agreement valid and binding upon the Seller in
accordance with its terms.
SECTION 10.02 ORDINARY COURSE OF BUSINESS. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Seller;
SECTION 10.03 NO CONFLICTS. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Seller's charter or bylaws or any legal
restriction or any agreement or instrument to which the Seller is now a party or
by which it is bound, or constitute a default or result in an acceleration under
any of the foregoing, or result in the violation of any law, rule, regulation,
order, judgment or decree to which the Seller or its property is subject, or
impair the ability of the Purchaser to realize on the Mortgage Loans, or impair
the value of the Mortgage Loans, or impair the ability of the Purchaser to
realize the full amount of any mortgage insurance benefits accruing pursuant to
this Agreement.
SECTION 10.04 ABILITY TO SERVICE. The Seller is duly qualified, licensed,
registered and otherwise authorized under all applicable federal, state and
local laws and regulations, meets the minimum capital requirements set forth by
OTS or the FDIC, and is in good standing to enforce, originate, sell mortgage
loans, and service mortgage loans in the jurisdiction wherein the Mortgaged
Properties are located.
SECTION 10.05 ABILITY TO PERFORM. The Seller does not believe, nor does it
have any reason to believe, that it cannot perform each and every covenant
contained in this Agreement.
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SECTION 10.06 NO LITIGATION PENDING. There is no action, suit, proceeding
or investigation pending or threatened against the Seller, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or in any material liability on the
part of the Seller, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Seller contemplated herein, or which
would be likely to impair materially the ability of the Seller to perform under
the terms of this Agreement.
SECTION 10.07 NO CONSENT REQUIRED. No consent, approval, authorization or
order of any court or governmental agency or body is required for the execution,
delivery and performance by the Seller of or compliance by the Seller with this
Agreement or the servicing of the Mortgage Loans as evidenced by the
consummation of the transactions contemplated by this Agreement, or if required,
such approval has been obtained.
SECTION 10.08 NO UNTRUE INFORMATION. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
SECTION 10.09 REASONABLE SERVICING FEE. The Seller acknowledges and agrees
that the Servicing Fee represents reasonable compensation for performing such
services and that the entire Servicing Fee shall be treated by the Seller, for
accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
SECTION 10.10 FINANCIAL STATEMENTS. The Servicer has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations and
changes in financial position for each of such periods and the financial
position at the end of each such period of the Servicer and its subsidiaries and
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as set forth in the
notes thereto. There has been no change in the business, operations, financial
condition, properties or assets of the Servicer since the date of the Servicer's
financial statements that would have a material adverse effect on its ability to
perform its obligations under this Agreement.
SECTION 10.11 CONFLICT OF INTEREST. The Seller agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests of
the Purchaser, and without regard to the interests of the Seller or its other
affiliates.
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ARTICLE XI
DEFAULT
SECTION 11.01 EVENTS OF DEFAULT. The following shall constitute an Event
of Default under this Agreement on the part of the Seller:
(a) any failure by the Seller to remit to the Purchaser any payment
required to be made under the terms of this Agreement which continues unremedied
for a period of five (5) Business Days after the date upon which written notice
of such failure, requiring the same to be remedied, shall have been given to the
Seller by the Purchaser; or
(b) the failure by the Seller duly to observe or perform in any material
respect any other of the covenants or agreements on the part of the Seller set
forth in this Agreement which continues unremedied for a period of thirty (30)
days (except that such number of days shall be fifteen (15) in the case of a
failure to pay any premium for any insurance policy required to be maintained
under this Agreement) after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Seller by the
Purchaser; or
(c) a decree or order of a court or agency or supervisory authority having
jurisdiction for the appointment of a conservator or receiver or liquidator in
any insolvency, bankruptcy, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Seller and such decree or order
shall have remained in force undischarged or unstayed for a period of sixty (60)
days; or
(d) the Seller shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, bankruptcy, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Seller or of or relating to all or substantially all of its property; or
(e) the Seller shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations; or
(f) the Seller, without the consent of the Purchaser, attempts to assign
this Agreement or the servicing responsibilities hereunder or to delegate any
substantial part of its duties hereunder or any portion thereof; or
(g) the Seller fails to maintain its license to do business or service
commercial mortgage loans in any jurisdiction where the Mortgaged Properties are
located and such failure results in a material adverse effect on the Mortgage
Loans, the servicing of the Mortgage Loans, or the Purchaser's rights with
respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not have
been remedied, in addition to whatsoever rights the Purchaser may have at law or
equity to damages, including
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injunctive relief and specific performance, the Purchaser, by notice in writing
to the Seller, may terminate without compensation or reimbursement (other than
Servicing Fees previously earned but remaining unpaid and Servicing Advances
remaining unreimbursed) all the rights and obligations of the Seller under this
Agreement and in and to the Mortgage Loans and the proceeds thereof.
Upon receipt by the Seller of such written notice, all authority and power
of the Seller under this Agreement, whether with respect to the Mortgage Loans
or otherwise, shall pass to and be vested in the successor appointed pursuant to
Section 8.06. Upon written request from the Purchaser, the Seller shall prepare,
execute and deliver any and all documents and other instruments reasonably
requested by the Purchaser, place in such successor's possession all Mortgage
Files (to the extent not properly delivered to the Purchaser by the Seller
previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Seller's sole expense. The Seller agrees
to reasonably cooperate with the Purchaser and such successor in effecting the
termination of the Seller's responsibilities and rights hereunder, including,
without limitation, the transfer to such successor for administration by it of
all cash amounts which shall at the time be credited by the Seller to the
Custodial Account or Escrow Account or thereafter received with respect to the
Mortgage Loans, subject to the Seller's right to be paid for unreimbursed
Servicing Advances and earned and unpaid Servicing Fees.
SECTION 11.02 WAIVER OF DEFAULTS. The Purchaser may waive any default by
the Seller in the performance of its obligations hereunder and its consequences.
Upon any such waiver of a past default, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been remedied for
every purpose of this Agreement. No such waiver shall extend to any subsequent
or other default or impair any right consequent thereon except to the extent
expressly so waived.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01 NOTICES. All notices, requests, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon the
delivery or mailing thereof, as the case may be, sent by registered or certified
mail, return receipt requested:
(a) If to Purchaser to:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
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(b) If to Seller to:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
SECTION 12.02 WAIVERS. Either the Seller or the Purchaser may upon consent
of all parties, by written notice to the others:
(a) Waive compliance with any of the terms, conditions or covenants
required to be complied with by the others hereunder; and
(b) Waive or modify performance of any of the obligations of the others
hereunder.
The waiver by any party hereto of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any other subsequent breach.
SECTION 12.03 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Purchase
Agreement constitute the entire agreement between the parties with respect to
servicing of the Mortgage Loans. This Agreement may be amended and any provision
hereof waived, but, only in writing signed by the party against whom such
enforcement is sought.
SECTION 12.04 EXECUTION; BINDING EFFECT. This Agreement may be executed in
one or more counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to the
benefit of and be binding upon the Seller and the Purchaser and their respective
successors and assigns.
SECTION 12.05 HEADINGS. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
SECTION 12.06 APPLICABLE LAW. This Agreement shall be construed in
accordance with the laws of the State of California and the obligations, rights
and remedies hereunder shall be determined in accordance with the substantive
laws of the State of California (without regard to conflicts of laws
principles), except to the extent preempted by Federal law.
SECTION 12.07 RELATIONSHIP OF PARTIES. Nothing herein contained shall be
deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Seller shall be rendered by it
as an independent contractor and not as an agent of the Purchaser. The Seller
shall have full control of all of its acts, doings, proceedings, relating to or
requisite in connection with the discharge of its duties and responsibilities
under this Agreement.
32
<PAGE>
SECTION 12.08 SEVERABILITY OF PROVISIONS. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
SECTION 12.09 EXHIBITS. The exhibits to this Agreement are hereby
incorporated and made a part hereof and are integral parts of this Agreement.
33
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL CORPORATION
(the Purchaser)
/s/ J. Michael Holmes
By:----------------------------
J. Michael Holmes
Name:--------------------------
Title: Executive Vice President/
--------------------------
Chief Financial Officer
--------------------------
PEOPLE'S BANK OF CALIFORNIA
(the Seller)
/s/ J. Michael Holmes
By:----------------------------
J. Michael Holmes
Name:--------------------------
Title: Executive Vice President/
-------------------------
Chief Financial Officer
-------------------------
/s/ William W. Flader
By:----------------------------
William W. Flader
Name:--------------------------
Title: Executive Vice President
-------------------------
34
<PAGE>
EXHIBIT A
MONTHLY REMITTANCE ADVICE
<PAGE>
EXHIBIT B
CUSTODIAL ACCOUNT CERTIFICATION
____________, 1997
_________________ hereby certifies that it has established the account
described below as a Custodial Account pursuant to Section 2.04 of the
Commercial Servicing Agreement, dated as of ______, 1997.
Title of Account: "People's Bank of California, in trust for People's Preferred
Capital Corporation."
Account Number: ___________________________________
Address of office or branch of the Seller at which Account is maintained:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
PEOPLE'S BANK OF CALIFORNIA
By:________________________________
Name:______________________________
Title:_____________________________
<PAGE>
EXHIBIT C
CUSTODIAL ACCOUNT LETTER AGREEMENT
______________, 1997
To:
--------------------
--------------------
--------------------
(the "Depository")
As Seller under the Commercial Servicing Agreement, dated as of ______,
1997, (the "Agreement"), we hereby authorize and request you to establish an
account, as a Custodial Account pursuant to Section 2.04 of the Agreement, to be
designated as "People's Bank of California, in trust for People's Preferred
Capital Corporation." All deposits in the account shall be subject to withdrawal
therefrom by order signed by the Seller. You may refuse any deposit which would
result in violation of the requirement that the account be fully insured as
described below. This letter is submitted to you in duplicate. Please execute
and return one original to us.
PEOPLE'S BANK OF CALIFORNIA
By:______________________________
Name:____________________________
Title:___________________________
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number ___________, at the office of
the Depository indicated above, and agrees to honor withdrawals on such account
as provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
---------------------------------
Depository
By:______________________________
Name:____________________________
Title:___________________________
Date:____________________________
<PAGE>
EXHIBIT D
ESCROW ACCOUNT CERTIFICATION
____________, 1997
______________________________hereby certifies that it has established
the account described below as an Escrow Account pursuant to Section 2.06 of
the Commercial Servicing Agreement, dated as of ________, 1997.
Title of Account: "People's Bank of California in trust for People's Preferred
Capital Corporation."
Account Number: _____________________________
Address of office or branch
of the Seller at which
Account is maintained:
------------------------------
------------------------------
------------------------------
------------------------------
PEOPLE'S BANK OF CALIFORNIA
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
EXHIBIT E
ESCROW ACCOUNT LETTER AGREEMENT
______________, 1997
To:
--------------------------
--------------------------
--------------------------
(the "Depository")
As Seller under the Commercial Servicing Agreement, dated as of
____________, 1997 (the "Agreement"), we hereby authorize and request you to
establish an account, as an Escrow Account pursuant to Section 2.06 of the
Agreement, to be designated as "People's Bank of California in trust for the
People's Preferred Capital Corporation." All deposits in the account shall be
subject to withdrawal therefrom by order signed by the Seller. You may refuse
any deposit which would result in violation of the requirement that the
account be fully insured as described below. This letter is submitted to you
in duplicate. Please execute and return one original to us.
PEOPLE'S BANK OF CALIFORNIA
By: _____________________________
Name: ___________________________
Title: __________________________
Date:____________________________
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number _______, at the office of the
Depository indicated above, and agrees to honor withdrawals on such account as
provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
---------------------------------
Depository
By: _____________________________
Name: ___________________________
Title: __________________________
Date:____________________________
<PAGE>
ADVISORY AGREEMENT
THIS AGREEMENT is made this 3rd day of October, 1997 between PEOPLE'S
PREFERRED CAPITAL CORPORATION, a Maryland corporation (the "Company"), and
PEOPLE'S BANK OF CALIFORNIA, a federally chartered savings bank (the "Advisor").
Capitalized terms used herein shall have the meanings set forth in Section 1 of
this Agreement.
WHEREAS, the Company intends to qualify as a "real estate investment
trust" ("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"); and
WHEREAS, the Company desires to avail itself of the experience and
assistance of the Advisor and to have the Advisor undertake, on the Company's
behalf, the duties and responsibilities hereinafter set forth, subject to the
control and supervision of the Board of Directors of the Company (the "Board of
Directors") as provided for herein; and
WHEREAS, the Advisor desires to render such services for the Company
subject to the control and supervision of the Board of Directors, on the terms
and conditions hereinafter set forth.
NOW THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
respective meanings set forth below:
"Advisor" has the meaning set forth in the forepart of this Agreement.
"Advisor Termination Date" means the date on which this Agreement
terminates.
"Agreement" means this Advisory Agreement, as amended, modified and
supplemented from time to time.
"Board of Directors" has the meaning set forth in the forepart of this
Agreement.
"Code" has the meaning set forth in the forepart of this Agreement.
"Company" has the meaning set forth in the forepart of this Agreement.
"Gross Mortgage Assets" means for any month the weighted average book
value of the real estate mortgage assets held by the Company, before reserves
for depreciation or bad debts or other similar noncash reserves, computed at the
end of such month.
<PAGE>
"Independent Directors" means the members of the Board of Directors of the
Company who are either not current officers or employees of the Company or
current directors, officers or employees of the Advisor or any affiliate of the
Advisor.
"Operating Expenses" for any period means all of the operating expenses of
the Company (with the exception of those expenses to be borne by the Advisor in
accordance with Section 4 hereof), including without limitation the following:
(a) interest, taxes and other expenses incurred in connection with the
mortgage assets of the Company;
(b) expenses related to the officers, directors and employees of the
Company, including without limitation any fees or expenses of the
directors;
(c) fees and expenses payable to accountants, appraisers, auditors,
consultants, attorneys, collection and paying agents and all other
Persons who contract with or are retained by the Company or by the
Advisor on behalf of the Company;
(d) legal and other expenses incurred in connection with advice
concerning, obtaining or maintaining the Company's status as a REIT,
the determination of the Company's taxable income, any formal or
informal administrative action or legal proceedings which involve a
challenge to the REIT status of the Company or any claim that the
activities of the Company, any member of the Board of Directors or
any officer were improper;
(e) expenses relating to communications and reports to stockholders of
the Company, including without limitation the costs of preparing,
printing, duplicating and mailing the certificates for the stock of
the Company, proxy solicitation materials and reports to
stockholders, and the costs of arranging meetings of stockholders;
(f) the costs of insurance described in Section 2 hereof, including
directors and officers liability insurance covering the directors
and officers of the Company;
(g) expenses relating to the acquisition, disposition and ownership of
mortgage assets, including without limitation and to the extent not
paid by others, legal fees and other expenses for professional
services and fees;
(h) expenses connected with the payments of dividends or interest or
distributions in cash or any other form made or caused to be made by
the Board of Directors to the stockholders of the Company;
2
<PAGE>
(i) expenses connected with any office or office facilities maintained
by the Company separate from the office of the Advisor, including
without limitation rent, telephone, utilities, office furniture and
equipment and machinery; and
(j) other miscellaneous expenses of the Company which are not expenses
of the Advisor under Section 4.
"Person" means and includes individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
limited liability companies, joint ventures, associations, consortia, companies,
trusts, banks, savings institutions, trust companies, land trusts, common law
trusts, business trusts or other entities, governments and agencies and
political subdivisions thereof.
"REIT" has the meaning set forth in the forepart of this Agreement.
SECTION 2. Duties of Advisor. The Advisor shall consult with the Board of
Directors and the officers of the Company and shall, at the request of the Board
of Directors or the officers of the Company, furnish advice and recommendations
with respect to all aspects of the business and affairs of the Company. Subject
to the control and discretion and at the request of the Board of Directors, the
Advisor shall:
(a) administer the day-to-day operations and affairs of the Company,
including without limitation the performance or supervision of the
functions described in this Section 2;
(b) monitor the credit quality of the mortgage loans and other real
estate and other assets held by the Company;
(c) advise the Company with respect to the acquisition, management,
financing and disposition of the Company's mortgage loans and other
real estate and other assets;
(d) represent the Company in its day-to-day dealings with Persons with
whom the Company interacts, including without limitation
stockholders of the Company, the transfer agent, consultants,
accountants, attorneys, servicers of the Company's mortgage loans,
custodians, insurers and banks;
(e) establish and provide necessary services for the Company, including
executive, administrative, accounting, stockholder relations,
secretarial, recordkeeping, copying, telephone, mailing and
distribution facilities;
(f) [reserved]
(g) arrange, schedule and coordinate the regular and special meetings of
the Board of Directors required for the conduct of the affairs of
the Company or for timely action on any
3
<PAGE>
matters the Company is required to act upon and implement all
decisions of the Board of Directors, unless otherwise instructed,
with regard to the Company and its assets;
(h) maintain communications and relations with the stockholders of the
Company, including, but not limited to, responding to inquiries,
proxy solicitations, providing reports to stockholders and arranging
and coordinating all meetings of stockholders;
(i) arrange for the investment and management of any short-term
investments of the Company;
(j) arrange for the services of third parties to collect and distribute
funds of the Company and to perform such functions as the Board of
Directors shall from time to time require;
(k) monitor and supervise the performance of all parties who have
contracts to perform services for the Company, provided that the
Advisor shall have no duty to assume the obligations or guarantee
the performance of such parties under such contracts;
(l) establish and maintain such bank accounts in the name of the Company
as may be required by the Company and approved by the Board of
Directors and ensure that all funds collected by the Advisor in the
name or on behalf of the Company shall be held in trust and shall
not be commingled with the Advisor's own funds or accounts;
(m) make payment on behalf of the Company of all Operating Expenses;
(n) arrange for the execution and delivery of such documents and
instruments by the officers of the Company as may be required in
order to perform the functions herein described and to take any
other required action;
(o) arrange for insurance for the Company including liability insurance,
errors and omissions policies and officers and directors policies,
which shall cover and insure the Company, members of the Board of
Directors and the officers of the Company in amounts and with
deductibles and insurers approved by the Board of Directors;
(p) maintain proper books and records of the Company's affairs and
furnish or cause to be furnished to the Board of Directors such
periodic reports and accounting information as may be required from
time to time by the Board of Directors, including, but not limited
to quarterly reports of all income and expenses of and distributions
of the Company;
(q) consult and work with legal counsel for the Company in implementing
Company decisions and undertaking measures consistent with all
pertinent Federal, state and local laws and rules or regulations of
governmental or quasi-governmental agencies, including, but not
4
<PAGE>
limited to, Federal and state securities laws, the Code, as it
relates to the Company's qualification as a REIT, and the
regulations promulgated under each of the foregoing;
(r) consult and work with accountants for the Company in connection with
the preparation of financial statements, annual reports and tax
returns;
(s) arrange for an annual audit of the books and records of the Company
by the accounting firm designated for such purposes by the Board of
Directors;
(t) prepare and distribute in consultation with the accountants for the
Company, annual reports to stockholders which will contain audited
financial statements;
(u) furnish reports to the Board of Directors and provide research,
economical and statistical data in connection with the Company's
investments; and
(v) as reasonably requested by the Company, make reports to the Company
of its performance of the foregoing services and furnish advice and
recommendations with respect to other aspects of the business of the
Company.
SECTION 3. Compensation. The Company shall pay to the Advisor, for
services rendered by the Advisor hereunder, an annual management fee equal to
Two Hundred Thousand Dollars ($200,000), payable in equal quarterly
installments.
SECTION 4. Expenses of the Advisor.
(a) Without regard to the compensation received pursuant to Section 3,
the Advisor will bear the following expenses:
(i) employment expenses of the personnel employed by the Advisor,
including without limitation salaries, wages, payroll taxes
and the cost of employee benefit plans; and
(ii) rent, telephone equipment, utilities, office furniture and
equipment and machinery and other office expenses of the
Advisor incurred in connection with the maintenance of any
office facility of the Advisor.
(b) The Company shall reimburse the Advisor within 30 days of a written
request by the Advisor, for any Operating Expenses paid or incurred
by the Advisor on behalf of the Company.
5
<PAGE>
SECTION 5. Records. The Advisor shall maintain appropriate books of
account and records relating to services performed hereunder, and such books of
account an records shall be accessible for inspection by the Board of Directors
or representatives of the Company at all times.
SECTION 6. REIT Qualification and Compliance. The Advisor shall consult
and work with the Company's legal and tax counsel in maintaining the Company's
qualification as a REIT. Notwithstanding any other provisions of this Agreement
to the contrary, the Advisor shall refrain from any action which, in its
reasonable judgment or in the judgment of the Board of Directors (of which the
Advisor has received written notice), would adversely affect the qualification
of the Company as a REIT or which would violate any law, rule or regulation of
any governmental body or agency having jurisdiction over the Company or its
securities, or which would otherwise not be permitted by the Articles of
Incorporation or Bylaws of the Company. Furthermore, the Advisor shall take any
action which, in its judgment or the judgment of the Board of Directors (of
which the Advisor has received written notice), may be necessary to maintain the
qualification of the Company as a REIT or prevent the violation of any law or
regulation of any governmental body or agency having jurisdiction over the
Company or its securities.
SECTION 7. Term; Termination. This Agreement shall be in full force and
effect for a term beginning on the date hereof with an initial term of five
years, and will be renewed automatically for additional five year periods unless
the Company delivers a notice of nonrenewal to the Advisor not less than 90 days
prior to the expiration of the initial term of this Agreement or 90 days prior
to the expiration of any renewal term. Notwithstanding the foregoing, at any
time after the initial term, the Company may terminate this Agreement at any
time upon 90 days' prior notice.
SECTION 8. Other Activities of the Advisor.
(a) Nothing herein contained shall prevent the Advisor, an affiliate of
the Advisor or an officer, a director, employee or stockholder of
the Advisor from engaging in any activity, including without
limitation originating, purchasing and managing mortgage loans and
other real estate assets, rendering of services and investment
advice with respect to real estate investment opportunities to any
other Person (including other REITs) and managing other investments
(including the investments of the Advisor and its affiliates).
(b) Directors, officers, stockholders, employees and agents of the
Advisor or of the affiliates of the Advisor may serve as directors,
officers, employees or agents of the Company but shall receive no
compensation (other than reimbursement for expenses) from the
Company for such service.
SECTION 9. Binding Effect; Assignment. This Agreement shall inure to the
benefit of and shall be binding upon the parties hereto and their respective
successors and assigns. Neither party may assign this Agreement or any of its
respective rights hereunder (other than an assignment to a successor
6
<PAGE>
organization which acquires substantially all of the property of such party or,
in the case of the Advisor, to an affiliate of the Advisor) without the prior
written consent of the other party to this Agreement.
SECTION 10. Subcontracting. The Advisor may at any time subcontract all or
a portion of its obligations under this Agreement to any affiliate of the
Advisor without the consent of the Company or if no affiliate of the Advisor is
engaged in the business of managing mortgage assets to an unaffiliated third
party with the approval of a majority of the Board of Directors as well as a
majority of the Independent Directors. Notwithstanding the foregoing, the
Advisor will not, in connection with subcontracting any of its obligations under
this Agreement, be relieved or discharged in any respect from its obligations
under this Agreement.
SECTION 11. Liability and Indemnity of the Advisor. The Advisor assumes no
responsibilities under this Agreement other than to perform the services called
for hereunder in good faith. Neither the Advisor nor any of its affiliates,
stockholders, directors, officers or employees will have any liability to the
Company, or stockholders of the Company, or others except by reason of acts or
omissions constituting gross negligence or willful breach of any of its material
obligations under this Agreement. The Company shall indemnify and reimburse (if
necessary) the Advisor, its stockholders, directors, officers, employees and
agents for any and all expenses (including without limitation attorneys' fees
and expenses), losses, damages, liabilities, demands and charges of any nature
whatsoever in respect of or arising from any acts or omissions by the Advisor
pursuant to this Agreement, provided that the conduct against which the claim is
made was determined by such person, in good faith, to be in the best interest of
the Company and was not the result of gross negligence by such person or willful
breach of any of such person's material obligations by such person. The Advisor
agrees that any such indemnification is recoverable only from the assets of the
Company and not from the stockholders.
SECTION 12. Action Upon Notice of Non-Renewal or Termination. Forthwith
upon giving of notice of non-renewal of this Agreement by the Company or of
termination of this Agreement by the Company, the Advisor shall not be entitled
to compensation after the Advisor Termination Date for further services under
this Agreement, but shall be paid all compensation accruing to the Advisor
Termination Date and shall be reimbursed for all expenses of the Company paid or
incurred by the Advisor as of the Advisor Termination Date which are
reimbursable by the Company under this Agreement. The Advisor shall promptly
after the Advisor Termination Date:
(i) deliver to the Company all assets and documents of the Company then
in the custody of the Advisor; and
(ii) cooperate with the Company and take all reasonable steps requested
to assist the Board of Directors in making an orderly transfer of
the administrative functions of the Company.
SECTION 13. No Joint Venture or Partnership. Nothing in this Agreement
shall be deemed to create a partnership or joint venture between the parties,
whether for purposes of taxation or otherwise.
7
<PAGE>
SECTION 14. Notices. Unless expressly provided otherwise herein, all
notices, request, demands and other communications required or permitted under
this Agreement shall be in writing and shall be made by hand delivery, certified
mail, overnight courier service, telex or telecopier. Any notice shall be duly
addressed to the parties as follows:
If to the Company:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Corporate Secretary
If to the Advisor:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Corporate Secretary
Either party may alter the address to which communications or copies are
to be sent by giving notice of such change of address in conformity with the
provisions of this Section 14 for the giving of notice.
SECTION 15. Severability. If any term or provision of this Agreement or
the application thereof with respect to any Person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement, or the
application of that term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Agreement shall be valid and be
enforced to the fullest extent permitted by law.
SECTION 16. Governing Law. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the State
of California.
SECTION 17. Amendments. This Agreement shall not be amended changed,
modified, terminated or discharged in whole or in part except by an instrument
in writing signed by both parties hereto or their respective successors or
assigns, or otherwise as provided herein.
SECTION 18. Headings. The section headings herein have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction or effect of this Agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the day and year
first above written.
PEOPLE'S PREFERRED CAPITAL CORPORATION
By: /s/ J. Michael Holmes
------------------------------------
Name: J. Michael Holmes
Title: Executive Vice President /
Chief Financial Officer
PEOPLE'S BANK OF CALIFORNIA
By: /s/ J. Michael Holmes
------------------------------------
Name: J. Michael Holmes
Title: Executive Vice President /
Chief Financial Officer
By: /s/ William W. Flader
------------------------------------
Name: William W. Flader
Title: Executive Vice President
9
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0001042024
<NAME> PEOPLES PREFERRED CAPITAL
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 959
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 70,699
<ALLOWANCE> 253
<TOTAL-ASSETS> 72,393
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 42
<LONG-TERM> 0
14
0
<COMMON> 0
<OTHER-SE> 72,337
<TOTAL-LIABILITIES-AND-EQUITY> 72,393
<INTEREST-LOAN> 5,491
<INTEREST-INVEST> 0
<INTEREST-OTHER> 130
<INTEREST-TOTAL> 5,621
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 5,621
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 483
<INCOME-PRETAX> 5,138
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,138
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.69
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 253
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 253
<ALLOWANCE-DOMESTIC> 253
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
