<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
FILE NO.: 333-39941
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
UNITED PANAM FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 6162 95-3211687
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1300 SOUTH EL CAMINO REAL
SAN MATEO, CALIFORNIA 94402
(650) 345-1800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
LAWRENCE J. GRILL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1300 SOUTH EL CAMINO REAL
SAN MATEO, CALIFORNIA 94402
(650) 345-1800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
PAUL H. IRVING, ESQ. TODD H. BAKER, ESQ.
MANATT, PHELPS & PHILLIPS, LLP GREGORY J. CONKLIN, ESQ.
11355 WEST OLYMPIC BOULEVARD GIBSON, DUNN & CRUTCHER LLP
LOS ANGELES, CALIFORNIA 90064 ONE MONTGOMERY STREET, SUITE 3100
(310) 312-4196 SAN FRANCISCO, CALIFORNIA 94104
(415) 393-8200
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement has become effective.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 31, 1998
5,500,000 SHARES
UNITED PANAM FINANCIAL CORP.
[LOGO OF UPFC]
COMMON STOCK
All of the 5,500,000 shares of Common Stock offered hereby (the "Offering")
are being sold by United PanAm Financial Corp., a California corporation (the
"Company"). Prior to the Offering, there has been no public market for the
Common Stock. It currently is anticipated that the initial public offering
price will be between $9.50 and $11.50 per share. See "Underwriting" for a
discussion of factors to be considered in determining the initial public
offering price.
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "UPFC."
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY POTENTIAL PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BYTHE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATIONTO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
- --------------------------------------------------------------------------------
Total(3)...................................... $ $ $
================================================================================
</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated to be $950,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
825,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the offices
of NationsBanc Montgomery Securities LLC on or about , 1998.
-----------
NationsBanc Montgomery Securities LLC Piper Jaffray Inc.
, 1998
<PAGE>
[MAP OF THE UNITED STATES SHOWING THE LOCATION OF THE COMPANY'S OFFICES.]
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent certified public
accountants and quarterly reports containing unaudited financial information
for each of the first three quarters of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus (i) reflects a 1,875-
for-1 stock split effected in November 1997, (ii) assumes no exercise of the
Underwriters' over-allotment option and (iii) excludes 2,287,500 shares of
Common Stock reserved for issuance under the Company's 1997 Employee Stock
Incentive Plan (the "Stock Incentive Plan"). See "Management--Stock Incentive
Plan" and "Underwriting." Unless the context indicates otherwise, all
references herein to the "Company" refer to United PanAm Financial Corp. and
its subsidiaries on a consolidated basis.
This Prospectus contains forward-looking statements, including statements
regarding the Company's strategies, plans, objectives, expectations and
intentions, which are subject to a variety of risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this Prospectus. The
cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus.
THE COMPANY
The Company is a diversified specialty finance company engaged primarily in
originating and acquiring for investment or sale residential mortgage loans,
personal automobile insurance premium finance contracts and retail automobile
installment sales contracts. The Company targets customers who generally cannot
obtain financing from traditional lenders. These customers usually pay higher
loan origination fees and interest rates than those charged by traditional
lenders to gain access to consumer financing. The Company believes that
management's experience in originating, assessing, pricing and managing credit
risk enables the Company to earn attractive risk-adjusted returns. The Company
has funded its operations to date principally through retail deposits, Federal
Home Loan Bank ("FHLB") advances and whole loan sales at its federal savings
bank subsidiary, Pan American Bank, FSB (the "Bank"). The Company completed its
first securitization of mortgage loans in December 1997. In March 1998, the
Company sold its residual interests in this securitization for cash in an
amount in excess of net book value. The Company's strategy is to undertake
controlled geographic expansion of its existing businesses, with particular
emphasis in the near term on the national expansion of its mortgage finance
operations, and to evaluate possible entry into other specialty finance
businesses which provide the opportunity for attractive risk-adjusted returns.
The Company believes that the Bank currently is the largest Hispanic-
controlled savings association in California. The Company commenced operations
in 1994, as a Hispanic-controlled financial institution, by purchasing from the
Resolution Trust Corporation (the "RTC") certain assets and assuming certain
liabilities of the Bank's predecessor, Pan American Federal Savings Bank. The
Company has used the Bank as a base for expansion into its current specialty
finance businesses. In 1995, the Company commenced its insurance premium
finance business through a joint venture with BPN Corporation ("BPN"), which
the Company believes to be the second largest provider of financing for
consumer automobile insurance premiums in California. In 1996, the Company
commenced its current mortgage and automobile finance businesses.
Mortgage Finance. The Company originates and sells subprime mortgage loans
secured primarily by first mortgages on single family residences through its
subsidiary, United PanAm Mortgage Corporation, and the Bank (such business,
together with the Bank's mortgage finance activities, "UPAM"). UPAM's targeted
mortgage customers are considered "subprime" because of factors such as
impaired credit history or high debt-to-income ratios compared to customers
targeted by traditional mortgage lenders. UPAM's customers use the proceeds of
the mortgage loans primarily to finance home purchases and improvements, debt
consolidation, education and other
3
<PAGE>
consumer needs, and may benefit from consolidating existing consumer debt
through mortgage loans with lower monthly payments. The Company believes that
the subprime residential mortgage market is highly fragmented and that success
in this market depends primarily on the ability to provide superior customer
service and competitive pricing. UPAM seeks to (i) locate experienced loan
officers in geographic proximity to large population centers, (ii) issue
conditional loan approvals promptly, generally within 24 hours after receipt of
an application, (iii) avoid imposing unnecessarily restrictive conditions on
loan approvals, (iv) fund loans on a timely basis, generally within 15 to 20
days following conditional approval, and in accordance with approved terms, and
(v) competitively price loans according to market conditions.
UPAM's operating strategy is to maintain a balance between retail and
wholesale origination of mortgage loans. Approximately 38% of the mortgage
loans originated by UPAM during the twelve months ended December 31, 1997 were
originated through the direct solicitation of borrowers by mail and
telemarketing ("retail" loan originations), with the balance originated through
independent loan brokers ("wholesale" loan originations). At March 31, 1998,
UPAM had 23 retail loan branches and five wholesale loan centers originating
mortgage loans in 29 states, and intends to balance its future growth between
retail offices and wholesale loan centers.
UPAM's mortgage loan originations have grown from $71.5 million for the
twelve months ended December 31, 1996 to $578.6 million for the twelve months
ended December 31, 1997. The average loan-to-value ratio ("LTV") on mortgage
loans originated by UPAM during the twelve months ended December 31, 1997 was
approximately 75%. Until December 1997, UPAM sold all of its loan originations
to mortgage companies and investors through whole loan packages offered for bid
several times each month. During the twelve months ended December 31, 1997,
UPAM sold $360.2 million of mortgage loans at a weighted average sales price
equal to 105.7% of the unpaid principal balance of the loans sold. The Company
completed its first securitization of $114.9 million in mortgage loans in
December 1997 at a net gain on sale of 5.2% of the principal amount of loans
securitized, and expects to sell or securitize mortgage loans on a periodic
basis in the future. In March 1998, the Company sold its residual interests in
this securitization for cash in an amount in excess of net book value. See
"Risk Factors--General--Securitizations."
Insurance Premium Finance. In May 1995, the Company entered into a joint
venture with BPN under the name "ClassicPlan" (such business, "IPF"). BPN was
founded in 1982. Under this joint venture, which commenced operations in
September 1995, (i) the Bank underwrites and finances automobile insurance
premiums in California and (ii) BPN markets this financing primarily to
independent insurance agents that sell personal automobile insurance in
California and, thereafter, services such loans for the Bank. The Bank lends to
individuals for the purchase of single premium automobile insurance policies.
The Bank's collateral is the unearned insurance premium, which is held by the
insurance company and is refundable to IPF in the event the underlying
insurance policy is canceled. The Company does not sell or have the risk of
underwriting the underlying insurance policy. The Company's portfolio of
insurance premium finance contracts has grown from 54,927 contracts in the
aggregate gross amount of $32.1 million at December 31, 1996 to 132,623
contracts in the aggregate gross amount of $40.0 million at December 31, 1997,
primarily as a result of changes in California's automobile insurance laws.
During the twelve months ended December 31, 1997, IPF originated 125,315
insurance premium finance contracts in the aggregate gross amount of $145.2
million, as compared to 83,839 such contracts in the aggregate gross amount of
$99.0 million during the twelve months ended December 31, 1996. The Company
believes that success in the insurance premium finance business depends on
developing relationships with independent insurance agents and efficient and
accurate servicing and collection systems. The Company has an option to
purchase BPN, which becomes exercisable on April 29, 1999 at an agreed price.
See "Business--Insurance Premium Finance--Relationship with BPN." In January
1998, the Company and BPN purchased from Providian National Bank and others the
right to solicit new and renewal insurance premium finance business from
brokers who have previously provided contracts to Commonwealth Premium Finance
("CPF"). Primarily as a result of this acquisition, the Company's insurance
premium finance contracts increased from $40.0 million at December 31, 1997 to
$50.3 million at March 30, 1998.
4
<PAGE>
Automobile Finance. The Company acquires, holds for investment and services
subprime retail automobile installment sales contracts ("auto contracts")
generated by franchised and independent dealers of used automobiles through the
Bank and its subsidiary, United Auto Credit Corporation (such business,
"UACC"). UACC's customers are considered "subprime" because they typically have
limited credit histories or credit histories that preclude them from obtaining
loans through traditional sources. The Company believes that success in the
subprime automobile finance business depends upon controlled growth,
disciplined underwriting, strong internal audit procedures and focused
servicing and collection efforts at each of its local branches adjacent to
dealers, customers and collateral. The Company's portfolio of auto contracts
has grown from 1,134 contracts in the aggregate gross amount (including
unearned financing charges) of $10.8 million at December 31, 1996 to 4,750
contracts in the aggregate gross amount of $40.9 million at December 31, 1997.
During the twelve months ended December 31, 1997, the Company acquired 4,195
auto contracts in the aggregate gross amount of $44.3 million, as compared to
1,175 auto contracts in the aggregate gross amount of $12.2 million during the
twelve months ended December 31, 1996. At March 31, 1998, the Company marketed
its automobile finance program from seven branch offices in California and one
each in Arizona, Colorado, Oregon and Utah.
The Bank. The Bank has been the principal funding source to date for the
Company's residential mortgage, insurance premium and automobile finance
businesses, primarily through the Bank's deposits, FHLB advances and whole loan
sales. In addition, the Bank holds a portfolio of primarily traditional
residential mortgage loans acquired from the RTC in 1994 and 1995 at a discount
from the unpaid principal balance of such loans, which loans aggregated $82.0
million (before unearned discounts and premiums) at December 31, 1997. The Bank
maintains four branches in Northern California and one in Southern California,
and has focused its branch marketing efforts on building a middle income
customer base, including efforts targeted at local Hispanic communities. As of
December 31, 1997, deposits totaled $233.2 million with a weighted average
interest rate of 5.25%. In the future, the Company intends to operate its
mortgage finance business principally through United PanAm Mortgage
Corporation. The Company intends to continue funding its insurance premium and
automobile finance businesses entirely through the Bank for the foreseeable
future.
BUSINESS STRATEGY
Growth Strategy. The Company intends to capitalize on its competitive
strengths by expanding its core businesses and entering other specialty finance
businesses which provide the opportunity for attractive risk- adjusted returns.
The Company's growth strategy includes the following key elements.
. Geographic Expansion of Existing Businesses. The Company intends to
expand its residential mortgage and automobile finance businesses into
new geographic areas, principally by opening offices staffed by
experienced local marketing and management personnel. The Company
believes that an emphasis on management with local experience, coupled
with comprehensive underwriting standards and financial controls, will
permit growth in loan originations without compromising loan
performance. The Company also may expand its insurance premium finance
business as opportunities arise outside of California. See "Risk
Factors--General--Management of Growth."
. Entry into New Specialty Finance Businesses. The Company continually
evaluates expansion into other specialty finance businesses which
provide the opportunity for attractive risk-adjusted returns in markets
(i) which it believes are underserved by traditional lenders or are
undergoing change, (ii) which are highly fragmented with no participant
having significant market share, or (iii) in which it can attract the
required management experience to assess, price and manage the credit
risk and, thereby, generate attractive risk-adjusted returns. The
Company may enter such new businesses on a de novo basis or through
acquisitions. See "Risk Factors--General--Management of Growth and "Use
of Proceeds."
5
<PAGE>
Operating Strategy. The Company's operating strategy includes the following
key elements.
. Centralized Risk Management Controls. For each of its businesses, the
Company has implemented comprehensive risk management policies and
portfolio parameters which are designed to identify the types and amount
of risk that can prudently be taken in each business. The Company
continually monitors the performance of each of its businesses against
these policies and parameters.
. Decentralized Management. The management of each of the Company's
businesses is responsible for its day-to-day operations, subject to
centralized risk management controls and individualized, goal oriented
incentive compensation programs that support the achievement of credit
quality, growth and profitability objectives. The Company believes that
the delegation of responsibility to the management of each business has
enabled the Company to attract, promote and retain experienced managers,
to provide high levels of customer service and to respond promptly to
changes in market conditions.
. Diversified Funding Sources. The Company has funded its lending
businesses to date primarily through the Bank's deposits, as well as
FHLB advances and whole loan sales. The Company believes that bank
deposits are a stable and cost-effective funding source which provide it
with a competitive advantage. To further diversify its funding sources,
in October 1997 the Company obtained a $100 million master repurchase
facility to finance the anticipated growth in its mortgage lending
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--
Warehouse Line of Credit." The Company completed its first
securitization of mortgage loans in December 1997 and expects to sell or
securitize mortgage loans on a periodic basis in the future. In
connection with any mortgage loan securitizations, the Company will seek
to maximize cash gains or arrange for the prompt sale of residual
interests retained in the securitizations at or above their net book
value. The Company will, in the future, consider the sale or
securitization of other financial assets. See "Risk Factors--General--
Securitizations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General--Mortgage Finance."
RECENT DEVELOPMENTS
Securitization. In December 1997, the Company completed its first
securitization of mortgage loans in the principal amount of $114.9 million. As
part of this securitization, the Company recorded a net gain on sale of $5.9
million or 5.2% of the principal amount of loans securitized and recorded
residual interests in securitizations of $8.2 million. In March 1998, the
Company sold its residual interests in this securitization for cash in an
amount in excess of net book value.
Acquisition of Commonwealth Portfolio. In January 1998, the Company and BPN
purchased from Providian National Bank and others for $450,000 the right to
solicit new and renewal personal and commercial insurance premium finance
business from brokers who previously have provided contracts to CPF. The
purchase price for the agreement was provided 60% by the Company and 40% by
BPN. The relationship between the Company and BPN continues to be governed by
the joint venture arrangement already in effect. See "Business--Insurance
Premium Finance--Relationship with BPN." The Company also acquired the
Commonwealth name and certain equipment and software. The agreement also
provides that Providian National Bank and the servicers of its insurance
premium finance business may not solicit or engage in the insurance premium
finance business in California for a period of three years. Primarily as a
result of this acquisition, the Company's insurance premium finance contracts
increased from $40.0 million at December 31, 1997 to $50.3 million at March 30,
1998.
First Quarter Developments. As part of the growth strategy for its mortgage
finance business, the Company opened 11 retail production branches during the
fourth quarter of 1997 and the first quarter of 1998 and established retail
telemarketing and wholesale correspondent lending groups in the first quarter
of 1998.
6
<PAGE>
Included in the quarter's results will be expenses associated with this
expansion of the Company's loan origination and marketing network. Management
expects such operating costs to continue to increase as the Company continues
to expand its loan origination capacity.
The Company's quarterly revenues are dependent in part on the timing and
extent of mortgage loan sales and securitizations. During the fourth quarter of
1997, the Company sold or securitized $202.0 million in mortgage loans, or 84%
of its loan originations. The Company expects to sell in the first quarter of
1998 approximately 75% of the loans originated in that quarter. The Company
elected to defer some loan sales in the quarter to gain more flexibility in the
timing and execution of transactions. Accordingly, the Company expects its
revenues in the first quarter from gain on sale to be lower than in the
previous quarter.
As a result of the deferral of loan sales and the increase in its loan
origination capacity, the Company expects its inventory of unsold loans to
increase significantly from December 31, 1997 to March 31, 1998 and its net
income in the first quarter of 1998 to decline substantially from its net
income in the fourth quarter of 1997, although it is expected to exceed net
income for the first quarter of 1997.
The Company was incorporated in Delaware on August 31, 1989. Immediately
prior to the effective date of the Offering, the Company will reincorporate in
California through the merger of the Company into a newly formed subsidiary
incorporated in California under the name "United PanAm Financial Corp." The
Company's principal executive offices are located at 1300 South El Camino Real,
San Mateo, California 94402, and its telephone number is (650) 345-1800.
THE OFFERING
Common Stock offered by the Company...
5,500,000 shares
Common Stock to be outstanding after
the Offering.......................... 16,450,000 shares(1)
Use of proceeds.......................
For general corporate purposes,
including financing the growth of the
Company's existing businesses, with
particular emphasis on the expansion of
UPAM and the development or acquisition
of other specialty finance businesses,
and to repay certain indebtedness to
existing shareholders. See "Use of
Proceeds."
Proposed Nasdaq National Market UPFC
symbol................................
- --------
(1) Excludes 2,287,500 shares reserved for issuance under the Stock Incentive
Plan, of which (i) 1,580,000 shares were subject to options outstanding as
of March 31, 1998, at a weighted average exercise price of $4.55 per share,
and (ii) 140,000 shares are subject to options to be granted to certain
directors and officers concurrently with the completion of the Offering, at
an exercise price equal to either the initial public offering price or 110%
of the initial public offering price. See "Management--Stock Incentive
Plan."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 29, 1994
(INCEPTION) AT OR FOR THE
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------
1994 1995 1996 1997
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Interest income................... $ 6,882 $ 13,533 $ 16,561 $ 26,511
Interest expense.................. 3,573 7,727 7,853 12,411
-------- -------- -------- --------
Net interest income............. 3,309 5,806 8,708 14,100
Provision for loan losses......... 50 120 194 507
-------- -------- -------- --------
Net interest income after
provision for loan losses...... 3,259 5,686 8,514 13,593
-------- -------- -------- --------
Non-interest income
Gain on sale of loans........... 3 90 2,333 26,526
Other non-interest income....... 95 228 443 702
-------- -------- -------- --------
Total non-interest income..... 98 318 2,776 27,228
-------- -------- -------- --------
Non-interest expense
Compensation and benefits....... 1,564 2,750 5,248 19,043
Savings Association Insurance
Fund special assessment........ -- -- 820 --
Other expense................... 1,579 2,412 3,581 11,039
-------- -------- -------- --------
Total non-interest expense.... 3,143 5,162 9,649 30,082
-------- -------- -------- --------
Income before income taxes........ 214 842 1,641 10,739
Income taxes...................... 98 384 691 4,491
-------- -------- -------- --------
Net income........................ $ 116 $ 458 $ 950 $ 6,248
======== ======== ======== ========
Net income per share--basic(1).... $ 0.01 $ 0.04 $ 0.09 $ 0.58
======== ======== ======== ========
Net income per share--diluted(1)
................................. $ 0.01 $ 0.04 $ 0.09 $ 0.53
======== ======== ======== ========
Weighted average shares
outstanding--basic(1)............ 10,669 10,669 10,669 10,739
======== ======== ======== ========
Weighted average shares
outstanding--diluted(1).......... 10,669 10,669 10,669 11,875
======== ======== ======== ========
BALANCE SHEET DATA
Total assets...................... $180,024 $159,581 $188,743 $310,842
Loans............................. 53,176 131,794 134,821 148,535
Loans held for sale............... -- -- 20,766 120,002
Allowance for loan losses......... (378) (5,250) (5,356) (6,487)
Deposits.......................... 163,114 141,924 159,061 233,194
Notes payable..................... 10,930 10,930 10,930 12,930
FHLB advances..................... -- -- 4,000 28,000
Warehouse line of credit.......... -- -- -- 6,237
Stockholders' equity.............. 5,270 5,811 6,761 13,009
OPERATING DATA
Return on average assets(2)....... 0.11% 0.27% 0.56% 2.48%
Return on average stockholders'
equity(2)........................ 3.44% 8.51% 16.10% 71.84%
Net interest margin............... 3.24% 3.61% 5.44% 6.07%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
APRIL 29, 1994
(INCEPTION) AT OR FOR THE
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1994 1995 1996 1997
-------------- ------- ------- --------
<S> <C> <C> <C> <C>
Stockholders' equity to assets..... 2.93% 3.64% 3.58% 4.19%
Tangible capital ratio of Bank..... 8.50% 9.89% 8.85% 7.27%
Core capital ratio of Bank......... 8.50% 9.89% 8.85% 7.27%
Risk-based capital ratio of Bank... 27.53% 17.19% 16.36% 12.34%
ASSET QUALITY DATA
Nonaccrual loans, net(3)........... $1,439 $ 5,240 $ 5,835 $ 6,633
Real estate owned.................. -- 298 988 562
Total non-performing assets........ 1,439 5,538 6,823 7,195
Non-performing assets to total
assets............................ 0.80% 3.47% 3.61% 2.31%
Allowance for credit losses to
loans held for investment......... 0.71% 3.98% 3.97% 4.37%
SUBPRIME MORTGAGE FINANCE DATA
Loan origination activities(4)
Wholesale originations........... -- -- $58,456 $359,236
Retail originations.............. -- -- 13,055 219,386
------ ------- ------- --------
Total loan originations........ -- -- $71,511 $578,622
Percent of loans secured by first
mortgages....................... -- -- 95% 96%
Weighted average initial loan-to-
value ratio..................... -- -- 72% 75%
Originations by product type
Adjustable-rate mortgages...... -- -- 85% 82%
Fixed-rate mortgages........... -- -- 15% 18%
Weighted average interest rate
Adjustable-rate mortgages...... -- -- 9.55% 9.48%
Fixed-rate mortgages........... -- -- 10.76% 10.67%
Average balance per loan......... -- -- $ 100 $ 104
Loans sold through whole loan
transactions(5)................... -- -- $50,142 $360,210
Loan securitizations............... -- -- -- $114,904
Number of retail branches and
wholesale loan centers............ -- -- 5 22
INSURANCE PREMIUM FINANCE DATA
Loans originated................... -- $21,676 $99,012 $145,167
Number of loans originated......... -- 21,137 83,839 125,315
Average net yield on loans
originated........................ -- 15.77% 13.62% 14.01%
Average loan size at origination... -- $ 1.03 $ 1.18 $ 1.16
Net charge-offs to average
loans(2)(6)....................... -- -- 0.38% 0.35%
AUTOMOBILE FINANCE DATA
Gross contracts purchased.......... -- -- $12,216 $ 44,255
Number of contracts purchased...... -- -- 1,175 4,195
Average discount on contracts
purchased......................... -- -- 10.00% 9.86%
Gross amount financed per
contract.......................... -- -- $ 10.42 $ 10.55
Net charge-offs to average
contracts(7)...................... -- -- 1.50% 4.94%
Number of branches................. -- -- 4 10
</TABLE>
(Footnotes on next page)
9
<PAGE>
- --------
(1) Net income per share-diluted is based on the weighted average shares of
Common Stock and Common Stock equivalents outstanding during the period
adjusted for a 1,875-for-1 stock split effected in November 1997. Net
income per share-basic is based on the weighted average shares of Common
Stock outstanding during the period adjusted for the 1,875-for-1 stock
split.
(2) Information for the period from April 29, 1994 (Inception) through December
31, 1994 is annualized for comparability with full year information.
(3) Nonaccrual loans are net of specific loss allowances.
(4) Does not include conforming loans purchased from the RTC in the aggregate
principal amount of $75.9 million and $57.2 million in the year ended
December 31, 1995 and from April 29, 1994 (Inception) through December 31,
1994, respectively, and conforming loan originations of $4.5 million in the
year ended December 31, 1995.
(5) Does not include $3.5 million in conforming loan sales in the year ended
December 31, 1995.
(6) See "Business--Insurance Premium Finance--Servicing and Collection."
(7) See "Business--Automobile Finance--Servicing and Collection."
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<PAGE>
ORGANIZATIONAL STRUCTURE
The following chart illustrates the relationship between the Company and its
principal operating subsidiaries and divisions prior to the Offering and
certain sources of financing.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------- ---------------------------
$2.0 million ---- United PanAm
Capital Loan(1) Financial Corp.
- ------------------- ---------------------------
100% Owned 100% Owned
----------------- ------------------ -------------------
United PanAm PanAmerican ------- $10.9 million
Mortgage Corp. Financial, Inc. RTC Interim
----------------- ------------------ Capital Assistance
Notes Payable(2)
-------------------
100% Owned -------------------
$100 million
Master Repurchase
------------------ Agreement(3)
-------------------
Pan American Bank, FSB -------------------
Deposits and
------------------ FHLB Advances
100% Owned(4) -------------------
------------------ -------------------
United Auto Credit Insurance Premium
Corporation Finance Division
------------------ -------------------
</TABLE>
- --------
(1) See "Use of Proceeds" and Note 10 of Notes to Consolidated Financial
Statements.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--RTC Notes Payable"
and "Use of Proceeds."
(3) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Warehouse Line of
Credit."
(4) United Auto Credit Corporation has granted to certain key employees the
right to purchase up to a 13.5% ownership interest in that corporation,
subject to certain performance standards, and may, in the future, grant
options to purchase an additional 1.5% interest. See "Management--Executive
Compensation--Employment Agreements" and "--Certain Transactions."
11
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements, including statements
regarding the Company's strategies, plans, objectives, expectations and
intentions, which are subject to a variety of risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward- looking statements as a result of certain factors, including
those set forth in these "Risk Factors" and elsewhere in this Prospectus. The
cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus.
Prospective investors should consider carefully the following factors,
together with the other information contained in this Prospectus, in
evaluating an investment in the Common Stock offered hereby.
GENERAL
LIMITED OPERATING HISTORY
The Company purchased certain assets and assumed certain liabilities of Pan
American Federal Savings Bank from the RTC in 1994. In 1995, the Company
commenced its insurance premium finance business through a joint venture with
BPN, and in 1996 the Company commenced its subprime mortgage and automobile
finance businesses. Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be
based. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CREDIT-IMPAIRED BORROWERS
Loans made to borrowers who cannot obtain financing from traditional lenders
generally entail a higher risk of delinquency and default and higher losses
than loans made to borrowers with better credit. Such loans also have a more
limited secondary market than traditional loans. The actual rate of
delinquencies, defaults and losses on such loans could be more dramatically
affected by an economic slowdown or recession than those experienced in the
financial services industry generally. Substantially all of the Company's
mortgage and auto loans are made to individuals with impaired or limited
credit histories, limited documentation of income or higher debt-to-income
ratios than are permitted by traditional lenders. Although delinquencies,
defaults and losses to date have not had a material adverse effect on the
Company's financial condition, results of operations or business prospects, no
assurance can be given that the Company's underwriting criteria and collection
methods will continue to afford adequate protection against the higher risks
associated with loans to such borrowers. If the Company experiences higher
losses than anticipated, the Company's financial condition, results of
operations and business prospects would be materially and adversely affected.
NEED FOR ADDITIONAL FINANCING
The Company's ability to maintain or expand its current level of lending
activity will depend on the availability and terms of its sources of
financing. The Company has funded its operations to date principally through
deposits, FHLB advances and whole loan sales at the Bank. The Company
completed its first securitization of mortgage loans in December 1997. In
March 1998, the Company sold its residual interests in this securitization for
cash in an amount in excess of net book value. The Bank competes for deposits
primarily on the basis of interest rates and, accordingly, the Bank could
experience difficulty in attracting deposits if it does not continue to offer
rates that are competitive with other financial institutions. Certificate of
deposit accounts ("CDs") constituted $197.1 million or 84.5% of the Bank's
total deposits at December 31, 1997, of which amount $181.9 million matures in
one year or less. Increases in short-term CDs, which tend to be more sensitive
to interest rate movements than core deposits, may cause the Bank's deposit
base to be less stable than if it had a large amount of core deposits. Federal
regulations restrict the Bank's ability to lend to affiliated companies and
limit the amount of non-mortgage consumer loans that may be held by the Bank.
Accordingly, the growth of the Company's mortgage, insurance premium and
automobile finance businesses will depend to a significant extent on the
availability of additional sources of financing. There can be no assurance
that the
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<PAGE>
Company will be able to develop additional financing sources on acceptable
terms or at all. To the extent the Bank is unable to maintain its deposits and
the Company is unable to develop additional sources of financing, the Company
will have to restrict its lending activities which would materially and
adversely affect the Company's financial condition, results of operations and
business prospects. In addition, the Company's ability to raise additional
equity financing may be limited by the requirement that the Company repay the
$10.9 million RTC interim capital assistance loan (the "RTC Notes Payable") if
the Bank ceases to be a "minority-owned" business, as defined by the OTS, or
Pan American Financial, Inc. ("PAFI") obtains a material portion of its
permanent financing. Pursuant to the Company's loan agreement with the RTC,
the Bank would cease to be a "minority-owned business" if 50% or more of its
capital stock were owned or controlled by one or more non-minorities. Upon
completion of the Offering (whether or not the underwriters' over-allotment
option is exercised), 50% or more of the outstanding Common Stock is expected
to be owned by minorities, assuming that no shares in the Offering are
purchased by minorities. Therefore, the Company believes that, upon completion
of the Offering, it will be a minority-owned business. Because all of the
shares offered hereby will be sold by the Company, and no portion of the net
proceeds is anticipated to be used to finance PAFI or the Bank, the Company
believes that the Offering will not constitute permanent financing of PAFI. In
addition, the Company has pledged the shares of the Bank as collateral for the
RTC interim capital assistance loan. However, there can be no assurances that
the RTC will not view the Offering as changing the "minority-owned" status of
the Bank or constituting permanent financing of PAFI and require repayment of
the RTC Notes Payable. In the event the Offering is deemed to change the
"minority-owned" status of the Bank or constitute the permanent financing of
PAFI, the Company will use $10.9 million of the net proceeds to repay the RTC
Notes Payable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--RTC
Notes Payable."
CONCENTRATION OF BUSINESS IN CALIFORNIA
The Company's lending activities are concentrated primarily in California
and are likely to remain so for the foreseeable future. At December 31, 1997,
82.0% of the dollar amount of the Company's loans was related to collateral or
borrowers located in California. The performance of these loans may be
affected by changes in California's economic and business conditions,
including its residential real estate market. In the recent past, the
California economy has experienced a significant recession with a resulting
decline in employment and the value of residential property. A decline in the
value of residential real estate may adversely affect the value of the
Company's collateral. In addition, California real estate is subject to
certain natural disasters, such as earthquakes and erosion-caused mudslides,
which are typically not covered by the standard hazard insurance policies
maintained by borrowers. Uninsured disasters may render borrowers unable to
repay loans made by the Company. The occurrence of adverse economic conditions
or natural disasters in California could have a material adverse effect on the
Company's financial condition, results of operations and business prospects.
RELIANCE ON SYSTEMS AND CONTROLS
The Company depends heavily upon its systems and controls, some of which
have been designed specifically for a particular business, to support the
evaluation, acquisition, monitoring, collection and administration of that
business. There can be no assurance that these systems and controls, including
those specially designed and built for the Company, are adequate or will
continue to be adequate to support the Company's growth. A failure of the
Company's automated systems, including a failure of data integrity or
accuracy, could have a material adverse effect upon the Company's financial
condition, results of operations and business prospects.
RELIANCE ON KEY EMPLOYEES AND OTHERS
The Company is dependent upon the continued services of its key employees,
including Guillermo Bron, the Chairman of the Board, Lawrence J. Grill,
President and Chief Executive Officer, John T. French, President and Chief
Executive Officer of United PanAm Mortgage Corporation, and Ray C. Thousand,
President and Chief Executive Officer of United Auto Credit Corporation, as
well as the key employees of BPN. The loss of the services of any such
employee, or the failure of the Company to attract and retain other qualified
personnel, could
13
<PAGE>
have a material adverse effect on the Company's financial condition, results
of operations and business prospects. Although the Company has entered into
employment agreements with certain key employees, including Messrs. Bron,
Grill, French and Thousand, there can be no assurance that these agreements
will be effective in retaining their services. See "Management."
Mr. Bron, the Chairman of the Board of the Company, is an officer, director
and principal stockholder of a general partner of Bastion Capital Fund, L.P.,
a private equity investment fund, and in such capacity, may have the power to
direct the investments of such fund. Mr. Bron may have conflicts of interest
in determining whether a potential acquisition or other business opportunity
should be presented to the Company or to Bastion Capital Fund, L.P. or another
affiliate of Mr. Bron. No assurance can be given that any such conflict will
be resolved in favor of the Company.
COMPETITION
Each of the Company's businesses is highly competitive. Competition in the
Company's markets can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms
of the loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company's competitors
in subprime mortgage finance include other consumer finance companies,
mortgage banking companies, commercial banks, credit unions, savings
associations and insurance companies. The Company competes in the insurance
premium finance business with other specialty finance companies, independent
insurance agents who offer premium finance services, captive premium finance
affiliates of insurance companies and direct bill plans established by
insurance companies. The Company competes in the subprime automobile finance
industry with commercial banks, the captive finance affiliates of automobile
manufacturers, savings associations and companies specializing in subprime
automobile finance, many of which have established relationships with
automobile dealerships and may offer dealerships or their customers other
forms of financing, including dealer floor plan financing and lending, which
are not offered by the Company. In attracting deposits, the Bank competes
primarily with other savings institutions, commercial banks, brokerage firms,
mutual funds, credit unions and other types of investment companies.
The profitability of the Company's lending activities and the low barriers
to entry could attract additional competitors. Certain large, national finance
companies and mortgage originators have announced their intention to adapt
their mortgage loan origination programs and allocate resources to the
origination of subprime loans. The Company and its competitors may also face
increasing competition from government-sponsored entities, such as the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). FHLMC currently purchases what it terms "Alternative-A"
mortgage loans and has announced its intention to establish a program to
purchase what it terms "A-" mortgage loans in the near future. In addition,
FHLMC has expressed its intention to purchase so-called "B" and "C" mortgage
loans in the future. FHLMC also has purchased securities backed by subprime
mortgage loans and has re-securitized them for resale. Additional competition
may lower the rates the Company can charge borrowers, reduce the volume of the
Company's loan originations and increase demand for the Company's key
employees and the potential that such employees will leave the Company for its
competitors.
Fluctuations in interest rates and general and localized economic conditions
also may affect the competition the Company faces. Competitors with lower
costs of capital have a competitive advantage over the Company. During periods
of declining interest rates, competitors may solicit the Company's customers
to refinance their loans. In addition, during periods of economic slowdown or
recession, the Company's borrowers may face financial difficulties and be more
receptive to offers of the Company's competitors to refinance their loans.
As the Company expands into new geographic markets, it will face additional
competition from lenders already established in these markets. There can be no
assurance that the Company will be able to compete successfully with these
lenders.
14
<PAGE>
CHANGES IN INTEREST RATES
The Company's results of operations depend to a large extent upon its net
interest income, which is the difference between interest income on interest-
earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits and other borrowings. When
interest-bearing liabilities mature or reprice more quickly than interest-
earning assets in a given period, a significant increase in market rates of
interest could have a material adverse effect on the Company's net interest
income. Further, a significant increase in market rates of interest could
adversely affect demand for the Company's financial products and services.
Interest rates are highly sensitive to many factors, including governmental
monetary policies and domestic and international economic and political
conditions, which are beyond the Company's control. The Company's liabilities
generally have shorter terms and are more interest rate sensitive than its
assets. Accordingly, changes in interest rates could have a material adverse
effect on the profitability of the Company's lending activities.
Adjustable-rate mortgage loans ("ARMs") totaled $474.5 million of the $578.6
million of mortgage loans originated by the Company during the twelve months
ended December 31, 1997. The market values of ARMs are less sensitive to
changes in market interest rates than are the market values of fixed-rate
loans. The Company's ARMs generally are offered at an initial interest rate
below the fully indexed interest rate at origination. There can be no
assurance that the interest rate on these loans will reach the fully indexed
rate if the loans are pre-paid or in the case of foreclosure. Further,
although these loans are underwritten at the fully indexed rate at
origination, borrowers may encounter financial difficulties as a result of
increases in the interest rate over the life of the loan. Certain ARMs also
may be subject to periodic or lifetime payment caps that result in a portion
of the accrued interest being deferred and added to the outstanding principal.
This could result in receipt by the Company of less cash income on its ARMs
than it is required to pay on its related borrowings which do not have such
payment caps. Because the Company does not believe that hedging against
interest rate risks is cost-effective and because the Company sells a
substantial portion of its loans on a regular basis, the Company currently
does not use hedging strategies to mitigate interest rate risk. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management of Interest Rate Risk."
MANAGEMENT OF GROWTH
The Company has experienced rapid growth in each of its businesses and
intends to pursue growth for the foreseeable future, particularly in its
mortgage and automobile finance businesses. In addition, the Company intends
to broaden its product offerings to include additional types of consumer or,
in the case of IPF, commercial loans. Further, the Company may enter other
specialty finance businesses. This growth strategy will require additional
capital, systems development and human resources. There can be no assurance
that the Company will continue to (i) manage effectively its funding sources,
information and operating systems and human resources, (ii) expand
successfully and operate such businesses profitably, (iii) identify and hire
qualified employees to support its expansion plans, or (iv) accomplish such
expansion in a timely and cost-effective manner or, if achieved, that such
expansion will result in profitable operations. The failure of the Company to
implement its planned growth strategy would have a material adverse effect on
the Company's financial condition, results of operations and business
prospects.
SECURITIZATIONS
The Company completed its first securitization of mortgage loans in December
1997 and expects to sell or securitize mortgage loans on a periodic basis in
the future. The Company will, in the future, consider the securitization of
other financial assets. In March 1998, the Company sold the residual interests
in this securitization for cash in an amount in excess of net book value. The
Company believes that the gain on sale from such securitizations could
represent a significant portion of the Company's future revenues and net
income. The Company's ability to complete securitizations will depend on a
number of factors, including conditions in the securities markets generally,
conditions in the asset-backed securities market specifically, the performance
of the Company's portfolio of securitized loans and the Company's ability to
obtain credit enhancement for its securitized loans. If the Company were
unable to securitize profitably a sufficient number of its loans in a
particular quarter, then the Company's revenues for the quarter could decline,
which could result in lower
15
<PAGE>
earnings or a loss reported for the quarter. In addition, delays in closing a
securitization could require the Company to seek additional and alternative
funding under current and future credit facilities in order to finance
additional loan originations and purchases and could increase the Company's
interest rate risk by increasing the period during which newly originated
loans are held prior to sale and could increase the Company's interest
expense.
In a securitization, the Company sells loans that it has originated or
purchased to a trust for a cash purchase price and an interest in the loans
securitized, called "residual interests," which thereafter can be retained or
sold. The cash portion of the purchase price in many cases will be less than
the carrying value of the related loan. The Company will estimate the present
value of the residual interests on its balance sheet, and will project the
expected cash flows over the life of the residual interests, using prepayment
and default assumptions that the Company believes that market participants
would use for similar financial instruments that are subject to prepayment,
credit and interest rate risks. The Company then will determine the present
value of these cash flows using an interest rate believed by it to be
commensurate with the risks involved. If the Company's actual experience
differs materially from the assumptions used in the determination of the
present value of the residual interests, future cash flows and earnings could
be adversely affected. Furthermore, because the Company does not have
meaningful loan performance data, the Company's assumptions will not be based
on the actual performance of its loans but on available historical loss data
for comparable portfolios of loans and the specific characteristics of the
loans included in the Company's securitizations. No assurance can be given
that the residual interests could be sold at their stated value, if at all.
The Company may rely on credit enhancements to guarantee or otherwise
support senior certificates issued in securitizations. If the Company is
unable to obtain credit enhancement in connection with the senior
certificates, the Company might be unable to securitize its loans, which could
have a material adverse effect on the Company's results of operations,
financial condition and business prospects. Although alternative structures to
securitizations may be available, there can be no assurance that the Company
will be able to use these structures or that these structures will be
economically viable for the Company. The Company's ability to obtain credit
enhancement for its securitizations also may be adversely affected by poor
performance of the Company's securitizations or the securitizations of others.
The inability of the Company to complete securitizations for any reason could
have a material adverse effect on the Company's results of operations,
financial condition and business prospects.
CHANGES IN GENERAL ECONOMIC CONDITIONS
Each of the Company's businesses is affected directly by changes in general
economic conditions, including changes in employment rates, prevailing
interest rates and real wages. During periods of economic slowdown or
recession, the Company may experience a decrease in demand for its financial
products and services, an increase in its servicing costs, a decline in
collateral values and an increase in delinquencies and defaults. A decline in
collateral values and an increase in delinquencies and defaults increase the
possibility and severity of losses. Because substantially all of the Company's
loans are made to borrowers who generally cannot obtain financing from
traditional lenders, its actual rates of delinquency, default and loss could
be more dramatically affected by an economic slowdown or recession than those
experienced in the financial services industry generally. Although the Company
believes that its underwriting criteria and collection methods enable it to
manage the higher risks inherent in loans made to such borrowers, no assurance
can be given that such criteria or methods will afford adequate protection
against such risks. Any sustained period of increased delinquencies, defaults
or losses would materially and adversely affect the Company's financial
condition, results of operations and business prospects.
YEAR 2000 COMPLIANCE
Like most financial institutions, the Company's computer systems identify
dates using only the last two digits of the year. These systems may recognize
a date using "00" as the year 1900, rather than 2000.
The Company is using both internal and external resources to identify,
correct and test systems that may be affected by year 2000 dates. System
identification is scheduled for completion by the end of the second quarter of
1998, with testing and implementation scheduled for completion during the last
half of 1998 and in 1999. The
16
<PAGE>
Company believes that year 2000 compliance will not pose significant
operational issues for the Company. However, the failure to implement timely
year 2000 compliant systems could have a material adverse effect on the
operations of the Company.
Dependence on third party vendors could adversely affect the Company's
efforts to successfully complete year 2000 compliance for all systems in a
timely manner. The Company is requiring third party vendors to represent that
their products are year 2000 compliant and will implement a program to test
for compliance. Contingency plans are being developed in the event that a
vendor is not able to provide timely year 2000 compliance.
The Company has initiated formal communications with its significant
customers and vendors to determine the extent to which the Company may be
affected by the failure of these parties to correct their own year 2000
issues. No assurance can be given that the systems of third parties on which
the Company relies will be corrected in a timely manner, or that a failure to
correct the year 2000 issue by another party, or a correction that is
incompatible with the Company's systems, will not have a material adverse
effect on the Company.
The Company is assessing the expense of year 2000 compliance and the
potential effect on the Company's earnings. The Company does not believe that
the costs of year 2000 compliance will be material.
RISKS ASSOCIATED WITH MORTGAGE FINANCE
DEPENDENCE ON WHOLE LOAN SALES FOR FUTURE EARNINGS
The gain on sale generated by whole loan sales has represented and will
continue to represent a significant source of the Company's earnings. During
the twelve months ended December 31, 1997, UPAM sold approximately 62% of its
loan originations in the whole loan secondary market to a limited number of
institutional purchasers. The Company plans to sell a significant number of
loans it originates through whole loan sales in the future. There can be no
assurance that such purchasers will continue to purchase UPAM's loans, and
UPAM's failure to replace successfully such loan purchasers, would have a
material adverse effect on the Company's financial condition, results of
operations and business prospects. Further, adverse conditions in the asset-
backed securitization market could adversely affect the Company's ability to
complete whole loan sales, as many of UPAM's whole loan purchasers securitize
loans purchased from UPAM, as well as UPAM's ability to complete the
securitization of its mortgage loans. During the twelve months ended December
31, 1997, UPAM sold loans to 16 institutional purchasers, four of which
purchased approximately 78% of the total loans sold by UPAM in that period.
CONTINGENT RISKS
During the period that mortgage loans are held for sale, UPAM is subject to
various risks associated with its lending business, including borrower
default, foreclosure and the risk that a rapid increase in interest rates
would result in a decline in the value of loans held for sale, thus reducing
or eliminating any gain on sale on such loans.
RISK OF DECLINING VALUE OF COLLATERAL
The Company's mortgage finance business may be materially and adversely
affected by declining real estate values. Any material decline in real estate
values reduces the ability of borrowers to use home equity to support
borrowings and increases the LTV of loans previously made by the Company,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of a default. Further, delinquencies, foreclosures and losses
generally increase during an economic slowdown or recession. Because UPAM
targets borrowers who generally are unable to obtain mortgage financing from
traditional lenders, the actual rates of delinquency, foreclosure and loss on
such loans could be higher under adverse economic conditions than those
experienced in the mortgage finance industry in general. Any sustained period
of increased delinquencies, foreclosures or losses could materially and
adversely affect the Company's financial condition, results of operations and
business prospects.
17
<PAGE>
DEPENDENCE ON INDEPENDENT MORTGAGE BROKERS
UPAM depends primarily on independent mortgage brokers for the origination
and purchase of its wholesale mortgage loans, which constitute the largest
portion of its total loan production. These independent mortgage brokers deal
with multiple lenders for each prospective borrower. UPAM competes with these
lenders for the independent brokers' business on price, service, loan fees,
costs and other factors. UPAM's competitors also seek to establish
relationships with such brokers who are not obligated by contract or otherwise
to do business with it. The Company's financial condition, results of
operations and business prospects could be adversely affected by changes in
the volume and profitability of UPAM's wholesale loans resulting from, among
other things, competition with other lenders and purchasers of such loans.
ELIMINATION OF LENDER PAYMENTS TO BROKERS
Class-action lawsuits have been filed against a number of mortgage lenders
alleging that such lenders have violated the federal Real Estate Settlement
Procedures Act of 1974 ("RESPA") and engaged in unfair practices by making
certain payments to independent mortgage brokers. These lawsuits generally
have been filed on behalf of a purported nationwide class of borrowers and
allege that payments made by a lender to a broker in addition to payments made
by the borrower to a broker are prohibited by RESPA and, therefore, illegal.
If these cases are resolved against the lenders, it may cause an industry-wide
change in the way independent mortgage brokers are compensated. UPAM's broker
compensation arrangements permit such payments. Future regulatory
interpretations or judicial decisions may require UPAM to change its broker
compensation programs or subject it to material monetary judgments or other
penalties. Any such changes or penalties may have a material adverse effect on
the Company's financial condition, results of operations and business
prospects. Although UPAM has not been named in any such class-action lawsuit,
there can be no assurance that UPAM will not subsequently be named in these or
similar lawsuits.
ENVIRONMENTAL LIABILITIES
The Company may acquire real property securing mortgage loans that are in
default, and there is a risk that hazardous substances or waste, contaminants
or pollutants could be discovered on such properties after the Company
acquires them. The Company may be required to remove such substances from the
affected properties at its expense, and the cost of such removal may
substantially exceed the value of the affected properties or the loans secured
by such properties. Furthermore, the Company may not have adequate remedies
against the prior owners or other responsible parties to recover its costs.
Finally, the Company may find it difficult or impossible to sell the affected
properties either prior to or following any such removal.
GOVERNMENT REGULATION
The subprime mortgage industry is highly regulated. UPAM is subject to
extensive and complex rules and regulations of, and examinations by, various
federal, state and local government authorities. These rules and regulations
impose obligations and restrictions on UPAM's loan originations, credit
activities and secured transactions. In addition, these rules may limit the
interest rates, finance charges and other fees UPAM may assess, mandate
extensive disclosure to its customers, prohibit discrimination and impose
multiple qualification and licensing obligations on UPAM. Certain of UPAM's
loan origination activities may be subject to the laws and regulations of the
states in which those activities are conducted. UPAM's lending activities are
also subject to various federal laws, including the Truth in Lending Act
("TILA"), the Homeownership and Equity Protection Act of 1994 ("High Cost
Mortgage Act"), the Equal Credit Opportunity Act ("ECOA"), the Fair Credit
Reporting Act ("FCRA"), RESPA and the Home Mortgage Disclosure Act ("HMDA").
Failure to comply with any of these laws may result in, among other things,
demands for indemnification or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits, administrative
enforcement actions and civil and criminal liability.
The laws, rules and regulations applicable to the Company's mortgage finance
business are subject to change. In addition, various laws, rules and
regulations currently are proposed, which, if adopted, could affect
18
<PAGE>
UPAM. There can be no assurance that these proposed laws, rules and
regulations, or other such laws, rules or regulations, will not be adopted in
the future. Such adoption could make compliance more difficult or expensive,
restrict UPAM's ability to originate, broker, purchase or sell loans, further
limit or restrict the amount of commissions, interest and other charges earned
on loans originated, brokered, purchased or sold by UPAM, or otherwise
materially and adversely affect the Company's financial condition, results of
operations and business prospects. See "Business--Supervision and Regulation--
Regulation of Mortgage Finance Operation."
UPAM's loans currently are originated and funded by the Bank. Current
federal regulations generally provide that the Bank is not subject to state
law limits on its lending operations, other than certain California limits on
charges that are deemed to be "interest" under federal regulations. It is
contemplated that the Company's mortgage lending operations in the future will
be conducted by United PanAm Mortgage Corporation. At such time, the Company's
mortgage lending operations will become subject to state law limits in each
state in which it originates mortgage loans.
EFFECT OF ELIMINATION OF MORTGAGE INTEREST DEDUCTION
Government officials, including members of Congress, have from time to time
suggested the elimination of the mortgage interest deduction for federal
income tax purposes or other action, such as a flat tax or a national sales
tax in substitution for the existing income tax system. Because many of UPAM's
loans are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, the competitive advantages of tax deductible
interest, when compared with alternative sources of consumer financing, could
be eliminated or seriously impaired by such government action. Accordingly,
the reduction or elimination of these tax benefits could have a material
adverse effect on the demand for loans of the kind offered by UPAM.
RISKS ASSOCIATED WITH INSURANCE PREMIUM FINANCE
DEPENDENCE ON INDEPENDENT INSURANCE AGENTS
IPF depends primarily on independent insurance agents for the origination of
insurance premium finance contracts. These independent insurance agents deal
with multiple lenders for each prospective borrower. IPF competes with these
lenders for the independent agents' business on price, service, loan fees,
costs and other factors. IPF's competitors also seek to establish
relationships with such agents, who are not obligated by contract or otherwise
to do business with IPF. For the twelve months ended December 31, 1997, two
insurance agents located in Southern California accounted for approximately
12.3% and 19.2%, respectively, of the aggregate number of insurance premium
finance contracts entered into by IPF. The loss of a substantial portion of
the business of either of these agents would have a material adverse effect on
the Company's financial condition, results of operations and business
prospects. In addition, the Company's financial condition, results of
operations and business prospects could be adversely affected by changes in
the volume and profitability of IPF resulting from, among other things,
competition from other lenders for business from independent insurance agents.
RISK OF CONTRACT LOSSES
Each insurance premium finance contract is designed to ensure that at any
point during the term of the underlying insurance policy, the unearned premium
under the policy exceeds the unpaid principal under the contract. However, in
the event of a default, the unearned premium may not provide IPF full
reimbursement of interest, fees and other charges. In addition, the insurance
company may default and fail to remit the unearned premium, and a delay in
processing a claim for the return of the unearned premium may cause IPF to
incur a loss. Moreover, any delay in IPF's cancellation of a policy would
result in declining collateral protection and an increase in IPF's risk of
loss. Although contract losses to date have not had a material adverse effect
on the Company's financial condition, results of operations or business
prospects, no assurance can be given that IPF will not suffer material losses
in the future as a result of defaults under insurance premium finance
contracts. See "Business--Insurance Premium Finance--Operating Summary."
19
<PAGE>
GOVERNMENT REGULATION
IPF is subject to California regulation. This regulatory structure requires
certain disclosures, notices and collection procedures with respect to loans
made to finance insurance premiums. Such state regulations also require that
certain disclosures be delivered by the insurance agent or broker or other
person arranging for such credit. IPF's activities also are subject to certain
federal statutes, including TILA. Any failure of the Company or BPN to comply
with any of the laws and regulations to which they are subject, or any change
in the regulatory structure or the applicable statutes, regulations or
interpretations of such laws and regulations, could have a material adverse
effect on the Company's and BPN's respective financial condition, results of
operations and business prospects. See "Business--Supervision and Regulation--
Regulation of Insurance Premium Finance Companies."
RELIANCE ON BPN
IPF is dependent upon the continued services of BPN and its key employees.
The loss by IPF of the services of BPN or of the services of any such
employee, or the failure of BPN to attract and retain other qualified
personnel, could have a material adverse effect on the Company's financial
condition, results of operations and business prospects. See "Business--
Insurance Premium Finance--Relationship with BPN."
RISKS ASSOCIATED WITH AUTOMOBILE FINANCE
RISK OF DECLINING VALUE OF COLLATERAL
The value of the collateral securing UACC's auto contracts is subject to
various risks, including uninsured damage, change in location or decline in
value caused by use or age. Any material decline in the value of the
collateral could result in a loss to UACC in the event of a default on the
auto contract.
DEPENDENCE ON DEALER RELATIONSHIPS
The ability of UACC to expand into new geographic markets and to maintain or
increase its volume of auto contracts is dependent upon maintaining and
expanding the network of automobile dealers from which it purchases contracts.
UACC's loss of any of its branch managers could materially and adversely
affect its relationships with dealers doing business with that branch and,
thereby, result in fewer opportunities to purchase contracts. Increased
competition, including competition from captive finance affiliates of
automobile manufacturers, could have a material adverse effect on UACC's
ability to maintain or expand its dealer network. See "Business--Automobile
Finance--Subprime Automobile Finance Industry," "--Sales and Marketing" and
"Business--Competition."
GOVERNMENT REGULATION AND LITIGATION
UACC is subject to numerous federal and state consumer protection laws and
regulations which are subject to change. An adverse change in or
interpretation of existing laws or regulations, the promulgation of any new
laws or regulations, or the failure to comply with any of such laws and
regulations could have a material adverse effect on the Company's financial
condition, results of operations and business prospects. See "Business--
Supervision and Regulation--Regulation of Subprime Automobile Lending."
Given the consumer-oriented nature of the subprime automobile finance
industry, industry participants from time to time are named as defendants in
litigation involving alleged violations of federal and state consumer
protection or other similar laws and regulations. A judgment against the
Company in connection with any such litigation could have a material adverse
effect on the Company's financial condition, results of operations and
business prospects. In addition, the determination that an automobile dealer
failed to comply with applicable laws or that any auto contracts purchased by
UACC involved violations of applicable law could have a material adverse
effect on the Company's financial condition, results of operations and
business prospects. See "Business--Supervision and Regulation--Regulation of
Subprime Automobile Lending."
20
<PAGE>
RISKS ASSOCIATED WITH THE BANK
FINANCIAL INSTITUTION REGULATION
Both the Company, as a savings and loan holding company, and the Bank, as a
federal savings bank, are subject to significant regulation by the federal
government. Statutes and regulations now affecting the Company or the Bank may
be changed at any time, and the interpretation of these statutes and
regulations by federal regulatory authorities also is subject to change.
Changes in federal statutes and regulations affecting federal savings banks
and their holding companies could, among other matters, materially alter the
powers of and opportunities available to the Bank, the Company and its
subsidiaries. There can be no assurance that future changes in such statutes
and regulations or in their interpretation will not adversely affect the
Company's financial condition, results of operations and business prospects.
As a savings and loan holding company, the Company is subject to supervision
and examination from time to time by the Office of Thrift Supervision ("OTS").
As a federal savings bank, the Bank is subject to supervision and examination
from time to time by the OTS, its primary regulator, and by the Federal
Deposit Insurance Corporation ("FDIC"), as administrator of the Savings
Association Insurance Fund ("SAIF"), of which the Bank is a member. Any
failure by the Company or the Bank to comply with any of the laws and
regulations to which it is subject, or any change in the regulatory structure
or the applicable statutes, regulations or interpretations of such laws and
regulations, by the OTS, the FDIC or the Congress, could have a material
adverse effect on the Company or the Bank, and on the Company's financial
condition, results of operations and business prospects. See "Business--
Supervision and Regulation--Holding Company Regulation" and "--Federal Savings
Bank Regulation."
RISKS ASSOCIATED WITH THE COMPANY AND THE OFFERING
CONTROL BY EXISTING SHAREHOLDERS
Upon completion of the Offering, Pan American Financial, L.P. ("PAFLP") will
own an aggregate of approximately 52.8% of the outstanding shares of Common
Stock (approximately 50.3% assuming the exercise of the Underwriters' over-
allotment option in full). Accordingly, PAFLP will have the ability to approve
any matter submitted to a vote of the Company's shareholders (including
mergers, consolidations and sales of assets) and to elect all members of the
Board of Directors. See "Principal Shareholders" and "Management."
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation (the "Articles") and Bylaws (the
"Bylaws") include provisions that could delay, defer or prevent a takeover
attempt that may be in the best interests of shareholders. These provisions
include the ability of the Board of Directors to issue up to 2,000,000 shares
of Preferred Stock without any further shareholder approval and requirements
that (i) any action required to be taken or that may be taken at any meeting
of the Company's shareholders may only be taken at a meeting of shareholders
or by the written consent of the holders of two-thirds of the outstanding
voting shares, (ii) shareholders give advance notice with respect to
nomination of candidates for election as directors and certain proposals they
may wish to present for a shareholder vote and (iii) special meetings of
shareholders may only be called by the Company's Board of Directors, Chairman
of the Board, Chief Executive Officer, or at the written request of holders of
not less than 10% of the Company's voting shares. In addition, certain
provisions of the Articles and the Bylaws, including provisions governing the
required vote for shareholder action without a meeting, the classification of
the Board of Directors, the elimination of cumulative voting and
indemnification of directors, officers and others, can only be amended by the
affirmative vote of the holders of at least two-thirds of the outstanding
voting shares. The issuance of Preferred Stock in certain circumstances may
have the effect of delaying, deferring or preventing a change in control of
the Company, may discourage bids for the Common Stock at a premium over the
current market price of the Common Stock and may adversely affect the market
price, and the voting and other rights of the holders, of Common Stock. See
"Description of Capital Stock."
21
<PAGE>
ABSENCE OF PUBLIC MARKET
There currently is no trading market for the Common Stock. Although the
Company has applied for quotation of the Common Stock on the Nasdaq National
Market ("Nasdaq"), there can be no assurance that an active public trading
market for the Common Stock will develop after the Offering or that, if
developed, will be sustained. The initial public offering price of the Common
Stock offered hereby will be determined by negotiations among the Company and
representatives of the Underwriters and may not be indicative of the price at
which the Common Stock will trade after the Offering. See "Underwriting."
Accordingly, there can be no assurance that the market price for the Common
Stock will not fall below the initial public offering price.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the
price of the Common Stock may be affected by general market price movements as
well as developments specifically related to the consumer finance industry and
the financial services sector, including interest rate movements, quarterly
variations or changes in financial estimates by securities analysts and a
significant reduction in the price of the stock of another participant in the
consumer finance industry. In addition, the Company's quarterly operating
income depends significantly upon the successful completion of sales by UPAM
of its loans, and the Company's inability to complete these transactions in a
particular quarter may have a material adverse effect on the Company's results
of operations for that quarter and, accordingly, could materially and
adversely affect the price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
16,450,000 shares of Common Stock. The 5,500,000 shares of Common Stock
offered hereby (6,325,000 shares if the Underwriters' over-allotment option is
exercised in full) will be immediately eligible for sale in the public market
without restriction beginning on the date of this Prospectus. Future sales of
substantial amounts of Common Stock after the Offering, or the perception that
such sales could occur, could have a material adverse effect on the market
price of the Common Stock. No prediction can be made as to the effect, if any,
that future sales of shares, or the availability of shares for further sale,
will have on the market price of the Common Stock. Additionally, 2,287,500
shares of Common Stock are reserved for issuance under the Stock Incentive
Plan of which 1,580,000 were subject to options outstanding as of March 31,
1998 and 140,000 shares are subject to options to be granted concurrently with
the completion of the Offering. The Company intends to file a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
to register such shares of Common Stock reserved for issuance under the Stock
Incentive Plan, thus permitting the resales of such shares by non-affiliates
in the public market without restriction under the Securities Act.
The remaining 10,950,000 shares of Common Stock held by existing
shareholders are "restricted securities," as that term is defined in Rule 144
promulgated under the Securities Act, and are eligible for sale subject to the
holding period, volume and other limitations imposed thereby. See "Description
of Capital Stock--Shares Eligible for Future Sale."
The Company, certain existing shareholders of the Company and the executive
officers and directors of the Company have agreed with the Underwriters that,
subject to certain exceptions, for a period of 180 days following the
commencement of the Offering, they will not sell, contract to sell or
otherwise dispose of any shares of Common Stock or rights to acquire such
shares (other than pursuant to employee plans) without the prior written
consent of NationsBanc Montgomery Securities LLC on behalf of the
Underwriters. See "Underwriting."
SUBSTANTIAL AND IMMEDIATE DILUTION
The initial public offering price will be substantially higher than the net
tangible book value per share of the Common Stock. Investors purchasing shares
of Common Stock in the Offering will be subject to immediate
22
<PAGE>
dilution of $6.53 per share in net tangible book value assuming an initial
public offering price of $10.50 per share (the mid-point of the filing range
set forth on the cover of this Prospectus). See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never paid a cash dividend on the Common Stock. The Company
currently intends to retain any future earnings to provide funds for the
operation and expansion of its businesses and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Company's Board of Directors and
will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual
restrictions on the payment of dividends and general business conditions. See
"Dividend Policy." Federal regulations restrict the Bank's ability to declare
or pay any dividends to the Company. See "Business--Supervision and
Regulation--Federal Savings Bank Regulation--Limitation on Capital
Distributions." In addition, certain interim capital assistance loan
agreements among the Bank, PAFI and the RTC prohibit the Bank from declaring
or paying any dividends, except under limited circumstances, until all of the
obligations of the Bank and PAFI to the RTC have been discharged. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--RTC Notes Payable."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
5,500,000 shares of Common Stock offered hereby (after deducting the estimated
underwriting discount and Offering expenses) are estimated to be $52.8 million
($60.8 million if the Underwriters' over-allotment option is exercised in
full), assuming an initial public offering price of $10.50 per share (the mid-
point of the filing range set forth on the cover of this Prospectus).
The net proceeds of the Offering will be used primarily for general
corporate purposes, including financing the growth of the Company's existing
businesses, with particular emphasis on the expansion of UPAM and the
development or acquisition of other specialty finance businesses. See
"Business--Business Strategy." In addition, the Company intends to use $2.0
million of the net proceeds of the Offering to repay the Company's
indebtedness to certain of its existing shareholders, which indebtedness was
incurred subsequent to July 1, 1997 to finance the establishment and
operations of United PanAm Mortgage Corporation. Such indebtedness bears
interest at 8% per year (which interest is payable on July 15, 1998 and June
30, 1999) and the entire unpaid principal is payable on June 30, 1999. See
"Management--Certain Transactions." In the event the Offering is deemed by the
RTC to change the "minority-owned" status of the Bank or constitute the
permanent financing of PAFI for purposes of the RTC loan agreements, the
Company will use $10.9 million of the net proceeds to repay the RTC Notes
Payable. All of the shares offered hereby will be sold by the Company, and no
portion of the net proceeds is anticipated to be used to finance PAFI or the
Bank. Therefore, the Company believes that the Offering will not constitute
permanent financing of PAFI. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--RTC Notes Payable."
23
<PAGE>
DIVIDEND POLICY
The Company has never paid a cash dividend on the Common Stock. The Company
currently intends to retain any future earnings to provide funds for the
operation and expansion of its businesses and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Company's Board of Directors and
will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual
restrictions on the payment of dividends and general business conditions.
Federal regulations restrict the Bank's ability to declare or pay any
dividends to the Company. See "Business--Supervision and Regulation--Federal
Savings Bank Regulation--Limitation on Capital Distributions." In addition,
certain interim capital assistance loan agreements among the Bank, PAFI and
the RTC prohibit the Bank from declaring or paying any dividends, except under
limited circumstances, until all of the obligations of the Bank and PAFI to
the RTC have been discharged. See "Risk Factors--Risks Associated With the
Company and the Offering--Absence of Dividends" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--RTC Notes Payable."
DILUTION
At December 31, 1997, the net tangible book value of the Company was
approximately $12.6 million, or $1.15 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities divided by the number of shares of Common Stock
outstanding. Net tangible book value dilution represents the difference
between the amount per share paid by purchasers in the Offering and the net
tangible book value per share after the Offering. Without taking into account
any changes in net tangible book value after December 31, 1997, other than to
give effect to the sale by the Company of the 5,500,000 shares of Common Stock
offered hereby, assuming an initial public offering price of $10.50 per share
(the mid-point of the filing range set forth on the cover of this Prospectus)
and after deducting the estimated underwriting discount and Offering expenses,
the net tangible book value of the Company at December 31, 1997 would have
been approximately $65.3 million, or $3.97 per share. This represents an
immediate increase in net tangible book value of $2.82 per share to the
existing shareholders and an immediate net tangible book value dilution of
$6.53 per share to purchasers in the Offering, as illustrated by the following
table.
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................. $10.50
Net tangible book value per share at December 31, 1997........... $1.15
Increase in net tangible book value per share attributable to new
investors....................................................... 2.82
-----
Net tangible book value per share after the Offering.............. 3.97
------
Dilution to new investors......................................... $ 6.53
======
</TABLE>
The following table summarizes as of December 31, 1997 the differences
between the number of shares of Common Stock purchased from the Company, the
total cash consideration paid and the average price per share paid by the
existing shareholders and to be paid by the investors purchasing shares of
Common Stock in the Offering assuming the sale of 5,500,000 shares by the
Company at an assumed initial public offering price of $10.50 per share (the
mid-point of the filing range set forth on the cover of this Prospectus) and
before deducting the estimated underwriting discount and Offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Existing shareholders..... 10,950,000 66.6% $ 5,237,000 8.3% $ 0.48
New investors............. 5,500,000 33.4% 57,750,000 91.7% $10.50
---------- ----- ----------- -----
Total................. 16,450,000 100.0% $62,987,000 100.0%
========== ===== =========== =====
</TABLE>
24
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization and certain
ratios of the Company and the Bank's regulatory capital ratios at December 31,
1997, and as adjusted to give effect to the sale of Common Stock offered
hereby.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
AS
ACTUAL ADJUSTED
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term borrowings
Shareholder notes payable due 1999................. $ 2,000 $ --
RTC notes payable due 1999......................... 10,930 10,930
----------- -----------
Total long-term borrowings........................... 12,930 10,930
----------- -----------
Shareholders' equity
Preferred Stock: 2,000,000 shares authorized: no
shares outstanding................................ -- --
Common Stock : 20,000,000 shares authorized;
10,950,000 shares outstanding; 16,450,000 shares
as adjusted....................................... 110 165
Additional paid-in capital......................... 5,127 57,830
Retained earnings.................................. 7,772 7,772
----------- -----------
Total shareholders' equity........................... 13,009 65,767
----------- -----------
Total capitalization................................. $ 25,939 $ 76,697
=========== ===========
Ratio of equity to assets............................ 4.19% 18.19%
Regulatory capital ratios of the Bank(1)
Leverage........................................... 7.27% 7.27%
Tier 1 risk-based.................................. 11.07% 11.07%
Total risk-based................................... 12.34% 12.34%
</TABLE>
- --------
(1) For regulatory capital purposes, the Bank includes the $10.9 million of
RTC Notes Payable as equity capital. As adjusted numbers assume no capital
contribution of net Offering proceeds to the Bank.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial and other data
of the Company at the dates and for the periods indicated. The selected
consolidated financial and other data should be read in conjunction with, and
is qualified in its entirety by reference to, the information in the
consolidated financial statements and related notes set forth elsewhere herein.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 29, 1994
(INCEPTION) AT OR FOR THE
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------
1994 1995 1996 1997
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Interest income................... $ 6,882 $ 13,533 $ 16,561 $ 26,511
Interest expense.................. 3,573 7,727 7,853 12,411
-------- -------- -------- --------
Net interest income............. 3,309 5,806 8,708 14,100
Provision for loan losses......... 50 120 194 507
-------- -------- -------- --------
Net interest income after
provision for loan losses...... 3,259 5,686 8,514 13,593
-------- -------- -------- --------
Non-interest income
Gain on sale of loans........... 3 90 2,333 26,526
Other non-interest income....... 95 228 443 702
-------- -------- -------- --------
Total non-interest income..... 98 318 2,776 27,228
-------- -------- -------- --------
Non-interest expense
Compensation and benefits....... 1,564 2,750 5,248 19,043
SAIF special assessment......... -- -- 820 --
Other expense................... 1,579 2,412 3,581 11,039
-------- -------- -------- --------
Total non-interest expense.... 3,143 5,162 9,649 30,082
-------- -------- -------- --------
Income before income taxes........ 214 842 1,641 10,739
Income taxes...................... 98 384 691 4,491
-------- -------- -------- --------
Net income........................ $ 116 $ 458 $ 950 $ 6,248
======== ======== ======== ========
Net income per share--basic (1)... $ 0.01 $ 0.04 $ 0.09 $ 0.58
======== ======== ======== ========
Net income per share--diluted
(1).............................. $ 0.01 $ 0.04 $ 0.09 $ 0.53
======== ======== ======== ========
Weighted average shares
outstanding--basic (1)........... 10,669 10,669 10,669 10,739
======== ======== ======== ========
Weighted average shares
outstanding--diluted (1)......... 10,669 10,669 10,669 11,875
======== ======== ======== ========
BALANCE SHEET DATA
Total assets...................... $180,024 $159,581 $188,743 $310,842
Loans............................. 53,176 131,794 134,821 148,535
Loans held for sale............... -- -- 20,766 120,002
Allowance for loan losses......... (378) (5,250) (5,356) (6,487)
Deposits.......................... 163,114 141,924 159,061 233,194
Notes payable..................... 10,930 10,930 10,930 12,930
FHLB advances..................... -- -- 4,000 28,000
Warehouse line of credit.......... -- -- -- 6,237
Stockholders' equity.............. 5,270 5,811 6,761 13,009
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
APRIL 29, 1994
(INCEPTION) AT OR FOR THE YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, --------------------------
1994 1995 1996 1997
-------------- ------- ------- --------
<S> <C> <C> <C> <C>
OPERATING DATA
Return on average assets(2)........ 0.11% 0.27% 0.56% 2.48%
Return on average stockholders'
equity(2)......................... 3.44% 8.51% 16.10% 71.84%
Net interest margin................ 3.24% 3.61% 5.44% 6.07%
Stockholders' equity to assets..... 2.93% 3.64% 3.58% 4.19%
Tangible capital ratio of Bank..... 8.50% 9.89% 8.85% 7.27%
Core capital ratio of Bank......... 8.50% 9.89% 8.85% 7.27%
Risk-based capital ratio of Bank... 27.53% 17.19% 16.36% 12.34%
ASSET QUALITY DATA
Nonaccrual loans, net(3)........... $1,439 $ 5,240 $ 5,835 $ 6,633
Real estate owned.................. -- 298 988 562
Total non-performing assets........ 1,439 5,538 6,823 7,195
Non-performing assets to total
assets............................ 0.80% 3.47% 3.61% 2.31%
Allowance for credit losses to
loans held for investment......... 0.71% 3.98% 3.97% 4.37%
SUBPRIME MORTGAGE FINANCE DATA
Loan origination activities(4)
Wholesale originations........... -- -- $58,456 $359,236
Retail originations.............. -- -- 13,055 219,386
------ ------- ------- --------
Total loan originations........ -- -- $71,511 $578,622
Percent of loans secured by first
mortgages....................... -- -- 95% 96%
Weighted average initial loan-to-
value ratio..................... -- -- 72% 75%
Originations by product type
Adjustable-rate mortgages...... -- -- 85% 82%
Fixed-rate mortgages........... -- -- 15% 18%
Weighted average interest rate
Adjustable-rate mortgages...... -- -- 9.55% 9.48%
Fixed-rate mortgages........... -- -- 10.76% 10.67%
Average balance per loan......... -- -- $ 100 $ 104
Loans sold through whole loan
transactions(5)................... -- -- $50,142 $360,210
Loan securitizations............... -- -- -- $114,904
Number of retail branches and
wholesale loan centers............ -- -- 5 22
INSURANCE PREMIUM FINANCE DATA
Loans originated................... -- $21,676 $99,012 $145,167
Number of loans originated......... -- 21,137 83,839 125,315
Average net yield on loans
originated........................ -- 15.77% 13.62% 14.01%
Average loan size at origination... -- $ 1.03 $ 1.18 $ 1.16
Net charge-offs to average
loans(2)(6)....................... -- -- 0.38% 0.35%
AUTOMOBILE FINANCE DATA
Gross contracts purchased.......... -- -- $12,216 $ 44,255
Number of contracts purchased...... -- -- 1,175 4,195
Average discount on contracts
purchased......................... -- -- 10.00% 9.86%
Gross amount financed per
contract.......................... -- -- $ 10.42 $ 10.55
Net charge-offs to average
contracts(7) ..................... -- -- 1.50% 4.94%
Number of branches................. -- -- 4 10
</TABLE>
(Footnotes on next page)
27
<PAGE>
- --------
(1) Net income per share - basic is based on the weighted average shares of
Common Stock outstanding during the period adjusted for the 1,875-for-1
stock split. Net income per share - diluted is based on the weighted
average shares of Common Stock and Common Stock equivalents outstanding
during the period adjusted for a 1,875-for-1 stock split effective in
November 1997.
(2) Information for the period from April 29, 1994 (Inception) to December 31,
1994 is annualized for comparability with full year information.
(3) Nonaccrual loans are net of specific loss allowances.
(4) Does not include conforming loans purchased from the RTC in the aggregate
principal amount of $75.9 million and $57.2 million in the year ended
December 31, 1995 and from April 29, 1994 (Inception) through December 31,
1994, respectively, and conforming loan originations of $4.5 million in
the year ended December 31, 1995.
(5) Does not include $3.5 million in conforming loan sales in the year ended
December 31, 1995.
(6) See "Business--Insurance Premium Finance--Servicing and Collection."
(7) See "Business--Automobile Finance--Servicing and Collection."
The following table presents summary consolidated financial and other data
of the Company for the quarters indicated.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
----------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
------------ --------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net interest income.... $ 2,344 $ 2,766 $ 3,511 $ 3,844 $ 3,979
Provision for loan
losses................ 96 94 285 66 62
------- ------- -------- -------- --------
Net interest income
after provision for
loan losses........... 2,248 2,672 3,226 3,778 3,917
------- ------- -------- -------- --------
Non-interest income
Gain on sale of
loans................ 1,479 2,380 4,697 8,183 11,266
Other non-interest
income............... 129 143 179 201 179
------- ------- -------- -------- --------
Total non-interest
income.............. 1,608 2,523 4,876 8,384 11,445
------- ------- -------- -------- --------
Non-interest expense... 3,843 4,800 6,496 7,989 10,797
------- ------- -------- -------- --------
Income before income
taxes................. 13 395 1,606 4,173 4,565
Income taxes........... (7) 162 666 1,752 1,911
------- ------- -------- -------- --------
Net income............. $ 20 $ 233 $ 940 $ 2,421 $ 2,654
======= ======= ======== ======== ========
Net income per share -
basic (1)............. $ -- $ 0.02 $ 0.09 $ 0.23 $ 0.24
======= ======= ======== ======== ========
Net income per share -
diluted (1)........... $ -- $ 0.02 $ 0.08 $ 0.21 $ 0.22
======= ======= ======== ======== ========
Weighted average shares
outstanding -
basic (1)............. 10,669 10,669 10,669 10,669 10,950
======= ======= ======== ======== ========
Weighted average shares
outstanding - diluted
(1)................... 10,669 11,099 11,126 11,126 12,103
======= ======= ======== ======== ========
OTHER DATA
Mortgage loan
originations.......... $34,796 $67,337 $108,481 $161,061 $241,743
Mortgage loans sold or
securitized........... $28,585 $40,254 $ 92,463 $140,363 $202,034
Insurance premium
finance loan
originations.......... $25,563 $43,304 $ 41,951 $ 31,864 $ 28,048
Automobile installment
contracts purchased... $ 5,351 $ 7,686 $ 9,520 $ 12,236 $ 14,813
</TABLE>
- --------
(1) Net income per share - basic is based on the weighted average shares of
Common Stock outstanding during the period adjusted for the 1,875-for-1
stock split. Net income per common share is based on the weighted average
shares of Common Stock and Common Stock equivalents outstanding during the
period adjusted for a 1,875-for-1 stock split effective in November 1997.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements, including statements
regarding the Company's strategies, plans, objectives, expectations and
intentions, which are subject to a variety of risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this Prospectus. The
cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus.
GENERAL
The Company is a diversified specialty finance company engaged primarily in
originating and acquiring for investment or sale residential mortgage loans,
personal automobile insurance premium finance contracts and retail automobile
installment sales contracts. The Company targets customers who generally
cannot obtain financing from traditional lenders. These customers usually pay
higher loan origination fees and interest rates than those charged by
traditional lenders to gain access to consumer financing. The Company believes
that management's experience in originating, assessing, pricing and managing
credit risk enables the Company to earn attractive risk-adjusted returns.
Finance companies generate income from a combination of (i) "spread" or "net
interest" income (i.e., the difference between the yield on loans, net of loan
losses, and the cost of funding) and (ii) "non-interest" income (i.e., the
fees paid for various services and gain on the sale of loans). Income is used
to cover operating expenses incurred (i.e., compensation and benefits,
occupancy and other expenses) in generating that income. Each of the Company's
businesses, as described below, reflects a combination of spread and non-
interest income.
MORTGAGE FINANCE
From its inception in January 1996 to July 1997, the Company's residential
mortgage finance business was conducted solely through the Bank. As a
federally chartered savings bank, the Bank's residential mortgage finance
business is generally exempt from state licensing requirements. In January
1997, the Company organized United PanAm Mortgage Corporation. Pending receipt
of its requisite state licenses, this subsidiary, as agent of the Bank,
markets loans made by the Bank under the Company's mortgage finance program
pursuant to an operating agreement between the subsidiary and the Bank.
However, the Company does not anticipate that the failure to obtain such
licensing would have a material effect on the conduct of its mortgage finance
business because in such event the Bank will continue to conduct the Company's
mortgage lending operations. After obtaining all required licensing, the
mortgage operations will be operated entirely by United PanAm Mortgage
Corporation. The Company has funded its mortgage finance business to date
primarily through the Bank's deposits, FHLB advances, the sale of its mortgage
loan originations to mortgage companies and investors through whole loan
packages offered for bid several times per month and to a lesser extent, from
a loan securitization. In October 1997, the Bank obtained a $100 million
master repurchase agreement to supplement the Bank's existing financing
sources and fund the anticipated growth of its mortgage lending business. The
Company completed its first securitization of mortgage loans in December 1997
and expects to sell or securitize mortgage loans on a periodic basis in the
future. In March 1998, the Company sold its residual interests in this
securitization for cash in an amount in excess of net book value. The Company
will continue to evaluate both whole loan sales and securitizations as a means
to finance its loan originations.
The Company has sold or securitized a substantial majority of its mortgage
loan originations to date. Therefore, its mortgage lending income has been
generated almost entirely from gain on sale of loans, with only a small spread
component resulting from loans held prior to sale. Income generated from this
mortgage finance business covers operating costs including compensation,
occupancy, loan origination and administrative expenses.
In October 1997, the Bank entered into a $100 million master repurchase
agreement under which it may sell and repurchase at a set price mortgage loans
pending the sale or securitization of such loans.
29
<PAGE>
INSURANCE PREMIUM FINANCE
In May 1995, the Bank entered into a joint venture with BPN. Under this
joint venture, which commenced operations in September 1995, the Bank
underwrites and finances automobile insurance premiums in California and BPN
markets the financing program and services the loans for the Bank. The Company
has an option to purchase BPN exercisable commencing on April 29, 1999 at an
agreed price. For a description of the fees paid by the Bank to BPN and the
allocation of interest, fees, losses and recoveries experienced on the loan
portfolio and the purchase option, see "Business--Insurance Premium Finance--
Relationship with BPN."
As a result of BPN performing substantially all marketing and servicing
activities, the Company's role is primarily that of an underwriter and funder
of loans. Therefore, IPF's income is generated primarily on a spread basis,
supplemented by non-interest income generated from late payment and returned
check fees. The Bank uses this income to cover the costs of underwriting and
loan administration, including compensation, occupancy and data processing
expenses.
AUTOMOBILE FINANCE
In 1996, the Bank commenced its automobile finance business through its
subsidiary, United Auto Credit Corporation. Unlike UPAM and IPF, UACC provides
all marketing, origination, underwriting and servicing activities for its
loans. Therefore, income is generated from a combination of spread and non-
interest income and is used to cover all operating costs, including
compensation, occupancy and systems expense.
THE BANK
The Company has funded its operations to date primarily through the Bank's
deposits, FHLB advances and loan sales. As of December 31, 1997, the Bank was
a five-branch federal savings bank with $233.2 million in deposits. The loans
generated by the Company's mortgage, insurance premium and automobile finance
businesses currently are funded and held by the Bank. In addition, the Bank
holds a portfolio of primarily traditional residential mortgage loans acquired
from the RTC in 1994 and 1995 at a discount from the unpaid principal balance
of such loans, which loans aggregated $82.0 million in principal amount
(before unearned discounts and premiums) at December 31, 1997.
The Bank generates spread income not only from loans originated or purchased
by each of the Company's principal businesses, but also from (i) loans
purchased from the RTC, (ii) its securities portfolio and (iii) consumer loans
originated by its branches. This income is supplemented by non-interest income
from its branch banking activities (e.g., deposit service charges, safe
deposit box fees), and is used to cover operating costs and other expenses.
YEAR 2000 COMPLIANCE
Like most financial institutions, the Company's computer systems identify
dates using only the last two digits of the year. These systems may recognize
a date using "00" as the year 1900, rather than 2000.
The Company is using both internal and external resources to identify,
correct and test systems that may be affected by year 2000 dates. System
identification is scheduled for completion by the end of the second quarter of
1998, with testing and implementation scheduled for completion during the last
half of 1998 and in 1999. The Company believes that year 2000 compliance will
not pose significant operational issues for the Company. However, the failure
to implement timely year 2000 compliant systems could have a material adverse
effect on the operations of the Company.
Dependence on third party vendors could adversely affect the Company's
efforts to successfully complete year 2000 compliance for all systems in a
timely manner. The Company is requiring third party vendors to represent that
their products are year 2000 compliant and will implement a program to test
for compliance. Contingency plans are being developed in the event that a
vendor is not able to provide timely year 2000 compliance.
30
<PAGE>
The Company has initiated formal communications with its significant
customers and vendors to determine the extent to which the Company may be
affected by the failure of these parties to correct their own year 2000
issues. No assurance can be given that the systems of third parties on which
the Company relies will be corrected in a timely manner, or that a failure to
correct the year 2000 issue by another party, or a correction that is
incompatible with the Company's systems, will not have a material adverse
effect on the Company.
The Company is assessing the expense of year 2000 compliance and the
potential effect on the Company's earnings. The Company does not believe that
the costs of year 2000 compliance will be material.
AVERAGE BALANCE SHEETS
The following tables set forth information relating to the Company for the
years ended December 31, 1995, 1996 and 1997. The yields and costs are derived
by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. The yields and costs include fees which
are considered adjustments to yields.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1996 1997
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST COST BALANCE(1) INTEREST COSTS BALANCE(1) INTEREST COST
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Investment Securities.. $ 52,363 $3,205 6.12% $ 11,050 $ 706 6.39% $ 9,763 $ 639 6.55%
Mortgage loans,
net(2)................ 105,833 10,028 9.48% 117,877 11,150 9.46% 161,667 15,240 9.43%
IPF loans, net(3)...... 2,591 300 11.58% 28,795 4,026 13.98% 43,923 6,179 14.07%
Automobile installment
contracts, net(4)..... -- -- -- 2,488 679 27.29% 16,980 4,453 26.22%
-------- ------ -------- ------ -------- -------
Total interest earning
assets................ 160,787 13,533 8.42% 160,210 16,561 10.34% 232,333 26,511 11.41%
------ ------ ------- -----
Non-interest earning
assets(4).............. 6,106 8,124 19,778
-------- -------- --------
Total assets........... $166,893 $168,334 $252,111
======== ======== ========
LIABILITIES AND EQUITY
Interest bearing
liabilities
Customer deposits...... 148,582 7,240 4.87% 146,160 7,225 4.94% 198,405 10,095 5.09%
Notes payable.......... 10,930 487 4.46% 10,930 556 5.09% 11,541 669 5.80%
FHLB advances.......... -- -- -- 1,170 72 6.15% 18,526 1,103 5.95%
Warehouse line of
credit................ -- -- -- -- -- -- 8,914 544 6.10%
-------- ------ ----- -------- ------ ----- -------- -------
Total interest bearing
liabilities........... 159,512 7,727 4.85% 158,260 7,853 4.96% 237,386 12,411 5.23%
------ ----- ------ ----- ------- -----
Non-interest bearing
liabilities............ 1,998 4,173 6,028
-------- -------- --------
Total liabilities...... 161,510 162,433 243,414
Equity.................. 5,383 5,901 8,697
-------- -------- --------
Total liabilities and
equity................ $166,893 $168,334 $252,111
======== ======== ========
Net interest income
before provision for
loan losses............ $5,806 $8,708 $14,100
====== ====== =======
Net interest rate
spread(5).............. 3.57% 5.38% 6.18%
Net interest margin(6).. 3.61% 5.44% 6.07%
Ratio of interest
earning assets to
interest bearing
liabilities............ 100.8% 101.2% 97.9%
</TABLE>
- --------
(1) Average balances are measured on a month-end basis.
(2) Net of deferred loan origination fees, unamortized discounts, premiums and
allowance for estimated loan losses; includes loans held for sale and non-
performing loans.
(3) Net of allowance for estimated losses; includes non-performing loans.
(4) Net of unearned finance charges, allowance for estimated losses; includes
non-performing loans.
(5) Net interest rate spread represents the difference between the yield on
interest earning assets and the cost of interest bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest earning assets.
31
<PAGE>
RATE AND VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
---------------------- ----------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------- ----------------------
VOLUME RATE NET VOLUME RATE NET
------- ---- ------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Investment securities......... $(2,639) $140 $(2,499) $4,128 $ (38) $4,090
Mortgage loans, net(1)........ 1,138 (16) 1,122 2,128 25 2,153
IPF loans, net................ 3,652 74 3,726 3,799 (26) 3,773
Automobile installment
contracts, net............... 679 -- 679 (85) 19 (66)
------- ---- ------- ------ ------ ------
Total interest earning
assets..................... 2,830 198 3,028 9,970 (20) 9,950
Interest bearing liabilities
Customer deposits............. (133) 118 (15) 2,653 217 2,870
Notes payable................. -- 69 69 32 81 113
FHLB advances................. 72 -- 72 1,033 (2) 1,031
Warehouse line of credit...... -- -- -- 272 272 544
------- ---- ------- ------ ------ ------
Total interest bearing
liabilities................ (61) 187 126 3,990 568 4,558
------- ---- ------- ------ ------ ------
Change in net interest income.. $ 2,891 $ 11 $ 2,902 $5,980 $(588) $5,392
======= ==== ======= ====== ====== ======
</TABLE>
- --------
(1) Includes interest on loans held for sale.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1997
GENERAL
Net income increased from $950,000 for the twelve months ended December 31,
1996 to $6.2 million for the twelve months ended December 31, 1997. This
increase was due primarily to the expansion of the Company's mortgage,
insurance premium and auto finance businesses, all of which showed improved
operating results in 1997. Also contributing to the favorable operating
results was an increase of $24.2 million in gain on sales of loans from the
Company's mortgage finance operations offset by an increase in non-interest
expense of $20.4 million which also resulted primarily from the expansion of
mortgage finance and other lending operations.
As a result of the expansion of the Company's lending operations, mortgage
loan originations increased from $71.5 million for the twelve months ended
December 31, 1996 to $578.6 million for the twelve months ended December 31,
1997, while insurance premium financing originations increased from $99.0
million to $145.2 million, respectively, and auto contracts purchased
increased from $12.2 million to $44.3 million, respectively. Sales of mortgage
loans were $50.1 million for the twelve months ended December 31, 1996 and
$475.1 million for the comparable period in 1997.
32
<PAGE>
INTEREST INCOME
Interest income increased from $16.6 million for the twelve months ended
December 31, 1996 to $26.5 million for the twelve months ended December 31,
1997 due primarily to a $72.1 million increase in average earning assets and a
1.07% increase in the average yield on earning assets. The largest components
of growth in average earning assets were mortgage loans, insurance premium
finance loans and auto contracts, which increased $43.8 million, $15.1 million
and $14.5 million, respectively. The increase in the average yield on earning
assets was attributable to an increase in the origination or purchase of
higher yielding loans during 1997 principally related to the expansion and
growth of the mortgage, insurance premium and automobile finance businesses.
The increase in mortgage loan receivables was a result of an increase in loans
held for sale, which increased from $20.8 million at December 31, 1996 to
$120.0 million at December 31, 1997. Generally, these loans are originated for
sale in the secondary mortgage market. The growth in IPF loans was primarily a
result of new loan originations associated with changes in California's
automobile insurance laws effective January 1, 1997, while the increase in
auto contracts principally resulted from the opening of new branch offices and
the purchasing of additional dealer contracts in these new markets.
INTEREST EXPENSE
Interest expense increased from $7.9 million for the twelve months ended
December 31, 1996 to $12.4 million for the twelve months ended December 31,
1997, due to a $79.1 million increase in average interest bearing liabilities
and a 0.27% increase in the weighted average interest rate on interest bearing
liabilities. The largest component of growth in interest bearing liabilities
was deposits with the Bank, which increased from an average balance of $146.2
million for the twelve months ended December 31, 1996 to $198.4 million for
the twelve months ended December 31, 1997. The average cost of deposits
increased from 4.94% for the twelve months ended December 31, 1996 to 5.09%
for the twelve months ended December 31, 1997.
The increase in deposits resulted from the use of retail and wholesale CDs
to finance the Company's lending operations, and the increase in the average
yield on the Bank's deposits reflects the repricing of accounts to higher
rates.
The second largest component of growth in interest bearing liabilities was
FHLB advances to the Bank, which increased from an average balance of $1.2
million for the twelve months ended December 31, 1996 to $18.5 million for the
comparable period in 1997. This increase reflects the use of short-term
borrowings to support the growth of the Company's lending businesses.
PROVISION FOR LOAN LOSSES
Provision for loan losses increased from $194,000 for the twelve months
ended December 31, 1996 to $507,000 for the twelve months ended December 31,
1997. The increase in the provision reflects management's decision to increase
general valuation allowances as a result of the increase in loans made by the
Company. The total allowance for loan losses was $5.4 million at December 31,
1996 compared to $6.5 million at December 31, 1997. The increase is
attributable to the additional provision for losses recorded during the twelve
months ended December 31, 1997 and $2.0 million in acquisition discounts
related to the Company's purchase of auto contracts. The Company allocates the
estimated amount of discounts attributable to credit risk to the allowance for
loan losses. Net loan charge-offs were $444,000 in the twelve months ended
December 31, 1996 compared to $1.3 million in the twelve months ended December
31, 1997.
A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loan portfolio and the adequacy of its allowance for
loan losses. While management believes it has adequately provided for losses
and does not expect any material loss on its loans in excess of allowances
already recorded, no assurance can be given that economic or real estate
market conditions or other circumstances will not result in increased losses
in the loan portfolio.
33
<PAGE>
NON-INTEREST INCOME
Non-interest income increased $24.4 million, from $2.8 million for the
twelve months ended December 31, 1996 to $27.2 million for the twelve months
ended December 31, 1997. This increase resulted from gain on sale of mortgage
loans and is due primarily to a substantial increase in the volume of loans
sold by UPAM. During the twelve months ended December 31, 1996, the Company
sold $50.1 million in mortgage loans compared to $475.1 million in mortgage
loans sold or securitized during the comparable period in 1997. Net gains on
sales of loans, as a percentage of loans sold, were 4.65% for the twelve
months ended December 31, 1996 compared to 5.58% for the twelve months ended
December 31, 1997. During the twelve months ended December 31, 1997, the
Company sold $360.2 million as whole loan sales and completed its first
securitization of $114.9 million in mortgage loans in December 1997. In March
1998, the Company sold its residual interests in this securitization for cash
in an amount in excess of net book value. The Company expects to sell or
securitize mortgage loans on a periodic basis in the future.
As part of its securitization, the Company recorded a net gain on sale of
$5.9 million and recorded residual interests in securitizations of $8.2
million consisting of beneficial interests in the form of an interest-only
strip representing the subordinated right to receive cash flows from the pool
of securitized loans after payment of required amounts to the holders of the
securities and certain costs associated with the securitization.
The Company classifies its residual interests in securitizations as trading
securities and records them at fair market value with any unrealized gains or
losses recorded in the results of operations.
Valuations of the residual interests in securitizations at each reporting
period are based on discounted cash flow analyses. Cash flows are estimated as
the amount of the excess of the weighted-average coupon on the loans sold over
the sum of the pass-through on the senior certificates, a servicing fee, an
estimate of annual future credit losses and prepayment assumptions and other
expenses associated with the securitization, discounted at an interest rate
which the Company believes is commensurate with the risks involved. The
Company uses prepayment and default assumptions that market participants would
use for similar instruments subject to prepayment, credit and interest rate
risks. The assumptions used by the Company for valuing the residual interests
in securitizations arising from its December securitization included a
prepayment assumption of 5% for the first year increasing to 25% thereafter,
an annual credit loss assumption of 0.75% and a discount rate of 15%. In March
1998, the Company sold its residual interests in this securitization for cash
in an amount in excess of net book value.
In connection with its securitization transaction, an overcollateralization
amount is required to be maintained which serves as credit enhancement to the
senior certificate holders. The overcollateralization amount initially
consists of the excess of the principal balance of the mortgage loans sold,
less the principal balance of the certificates sold to investors. The
overcollateralization is required to be maintained at a specified target level
of the principal balance of the certificates and can be increased as specified
in the related securitization documents. Cash flows received in excess of the
obligations to the senior certificate holders and certain costs of the
securitization are deposited into a trust account until the
overcollateralization target is reached. Once this target is reached,
distributions of excess cash from the trust account are remitted to the
Company.
Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income. The total of all of these items
increased $259,000, from $443,000 for the twelve months ended December 31,
1996 to $702,000 for the twelve months ended December 31, 1997.
NON-INTEREST EXPENSE
Non-interest expense increased $20.5 million, from $9.6 million for the
twelve months ended December 31, 1996 to $30.1 million for the twelve months
ended December 31, 1997. This increase primarily reflects an increase in
salaries, loan commissions, employee benefits and other personnel costs of
$13.8 million associated with the expansion of the Company's mortgage and
automobile finance operations. In addition, occupancy expense increased
$2.1 million, reflecting an increase in the number of mortgage and automobile
lending offices. Marketing expense was $1.7 million for the twelve months
ended December 31, 1997, compared to $171,000
34
<PAGE>
for the twelve months ended December 31, 1996. This increase is attributable
to the Company's retail mortgage lending operations which use extensive direct
mail and telemarketing campaigns to target prospective borrowers. Also, as a
result of growth in the Company's mortgage finance and automobile lending
operations, other operating expense, including stationery and supplies, data
processing, insurance, telephone and postage, increased $3.8 million during
the twelve months ended December 31, 1997 compared to the same period in 1996.
The Company significantly expanded its mortgage and automobile finance
operations, resulting in an increase from 54 employees in five offices and 25
employees in four offices, respectively, as of December 31, 1996 to 359
employees in 22 offices and 60 employees in ten offices, respectively, as of
December 31, 1997.
INCOME TAXES
Income taxes increased $3.8 million, from $691,000 for the twelve months
ended December 31, 1996 to $4.5 million for the twelve months ended
December 31, 1997. This increase occurred as a result of a $9.1 million
increase in income before income taxes between the two periods offset by a
decrease in the effective tax rate from 42.1% for 1996 to 41.8% for 1997.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1997
Total assets increased $122.1 million, from $188.7 million at December 31,
1996 to $310.8 million at December 31, 1997. This increase occurred primarily
as a result of a $112.9 million increase in loans receivable, from
$155.6 million at December 31, 1996 to $268.5 million as of December 31, 1997.
The increase in loans was comprised of a $99.2 million increase in mortgage
loans held for sale, a $22.7 million increase (net of unearned finance
charges) in auto contracts and a $7.9 million increase in insurance premium
finance loans, offset by a $20.7 million decrease in loans purchased from the
RTC as a result of scheduled principal amortizations and prepayments.
Cash and cash equivalents decreased $7.1 million, from $26.1 million at
December 31, 1996 to $19.0 million at December 31, 1997, primarily as a result
of funding for the Company's origination of loans.
Residual interests in securitizations were $8.2 million at December 31, 1997
which were entirely attributable to the Company's first securitization in
December 1997. There were no residual interests in securitizations at December
31, 1996.
Premises and equipment increased from $822,000 at December 31, 1996 to $3.1
million at December 31, 1997 as a result of purchases of furniture and
equipment for the Company's new branch offices and the overall growth in
lending operations.
Deposit accounts at the Bank increased $74.1 million, from $159.1 million at
December 31, 1996 to $233.2 million at December 31, 1997, due primarily to an
increase in CDs of $65.7 million, from $131.4 million at December 31, 1996 to
$197.1 million at December 31, 1997. Included in deposits at December 31, 1997
are $17.5 million in brokered CDs. There were no brokered CDs outstanding at
December 31, 1996.
Other interest bearing liabilities include the RTC notes payable which
remained unchanged at $10.9 million between period ends, FHLB advances which
increased from $4.0 million as of December 31, 1996 at a weighted average
interest rate of 5.70% to $28.0 million at December 31, 1997 at a weighted
average interest rate of 7.07%, notes payable from shareholders which
increased $2.0 million between period ends and a warehouse line of credit of
$6.2 million at December 31, 1997.
Net deferred tax assets were $3.2 million at December 31, 1997 due
principally to temporary differences in the recognition of gain on sale of
loans for federal and state income tax reporting and financial statement
reporting purposes. For income tax purposes, loans held for sale are marked-
to-market.
Shareholders' equity increased from $6.8 million at December 31, 1996 to
$13.0 million at December 31, 1997, solely as a result of the Company's net
income.
35
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1996
GENERAL
Net income increased from $458,000 for the year ended December 31, 1995 to
$950,000 for the year ended December 31, 1996. This increase was due primarily
to the expansion of the Company's insurance premium and mortgage finance
businesses which commenced in the later part of 1995 and early 1996,
respectively. Partially offsetting this increase in net income was an increase
in operating costs incurred by UPAM as well as those incurred as a result of
the commencement in early 1996 of UACC's operations.
INTEREST INCOME
Interest income increased from $13.5 million for the year ended December 31,
1995 to $16.6 million for the year ended December 31, 1996 due primarily to a
1.9% increase in the average yield on earning assets. While average earning
assets decreased $577,000, the components of this balance changed
significantly with the average balance of insurance premium finance loans
increasing from $2.6 million for the year ended December 31, 1995 to $28.8
million for the comparable period in 1996, and mortgage loans increasing from
$105.8 million to $117.9 million, respectively. These increases in average
earning assets were offset by a decline in average investments from $52.4
million for the year ended December 31, 1995 to $11.1 million for the year
ended December 31, 1996. The changes in average earning assets resulted from
the Company's strategy of reinvesting in higher yielding loans, such as
subprime mortgage and insurance premium finance loans, rather than investment
securities and traditional mortgage loans which dominated the Company's
balance sheet in the early years of its operations.
INTEREST EXPENSE
Interest expense increased from $7.7 million for the year ended December 31,
1995 to $7.9 million for the year ended December 31, 1996 due primarily to a
$1.3 million decrease in average interest bearing liabilities, offset by a
0.11% increase in the weighted average interest rate on interest bearing
liabilities. The largest component of change in interest bearing liabilities
was deposits, which decreased from an average balance of $148.6 million for
the year ended December 31, 1995 to $146.2 million for the year ended December
31, 1996. The average cost of deposits increased from 4.87% for the year ended
December 31, 1995 to 4.94% for the year ended December 31, 1996.
Other interest bearing liabilities include the RTC Notes Payable, which
remained unchanged at $10.9 million at both December 31, 1995 and 1996, and
FHLB advances which increased to $4.0 million at December 31, 1996 with a
weighted average interest rate of 5.70%. The Bank had no FHLB advances at
December 31, 1995.
PROVISION FOR LOAN LOSSES
Provision for loan losses increased from $120,000 for the year ended
December 31, 1995 to $194,000 for the year ended December 31, 1996. This
increase was due primarily to the growth in 1996 of the Company's insurance
premium finance business. The total allowance for loan losses was $5.3 million
at December 31, 1995 compared to $5.4 million at December 31, 1996. The
increase is attributable to the additional provision for losses recorded
during the year ended December 31, 1996 and $356,000 in acquisition discounts
related to the Company's purchase of auto contracts. The Company allocated the
estimated amount of discounts attributable to credit risk to the allowance for
loan losses. Net loan charge-offs were $108,000 in the year ended December 31,
1995 compared to $444,000 in the year ended December 31, 1996.
A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loan portfolio and the adequacy of its allowance for
loan losses. While management believes it has adequately provided for losses
and does not expect any material loss on its loans in excess of allowances
already recorded, no assurance can be given that economic or real estate
market conditions or other circumstances will not result in increased losses
in the loan portfolio.
36
<PAGE>
NON-INTEREST INCOME
Non-interest income increased $2.5 million, from $318,000 for the year ended
December 31, 1995 to $2.8 million for the year ended December 31, 1996. This
increase resulted from gain on sale of loans and is due primarily to a
substantial increase in the volume of mortgage loans sold by the Company.
During the year ended December 31, 1995, the Company sold $3.5 million in
mortgage loans compared to $50.1 million during the comparable period in 1996.
Net gains on sales of loans, as a percentage of loans sold, were 2.57% for the
year ended December 31, 1995 compared to 4.65% for the year ended December 31,
1996. All loans sold during the year ended December 31, 1995 and 1996 were
sold as whole loans with servicing released to the investor.
Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income. The total of all of these items
increased $215,000 from $228,000 for the year ended December 31, 1995 to
$443,000 for the year ended December 31, 1996.
NON-INTEREST EXPENSE
Non-interest expense increased $4.4 million, from $5.2 million for the year
ended December 31, 1995 to $9.6 million for the year ended December 31, 1996.
This increase primarily reflects an increase in salaries, loan commissions,
employee benefits and other personnel costs of $2.5 million associated with
the Company's mortgage and automobile finance operations which commenced in
early 1996. In addition, occupancy expense increased $402,000 also reflecting
an increase in the number of mortgage and automobile finance offices. As a
result of growth in mortgage and automobile finance operations, other
operating expenses, including stationery and supplies, data processing,
insurance, telephone and postage increased $800,000 during the year ended
December 31, 1996 compared to the same period in 1995.
As stated above, the Company commenced its subprime mortgage finance and
automobile finance businesses in early 1996, and by December 31, 1996 these
operations grew to 64 employees in five offices and 25 employees in four
offices, respectively.
Also included in 1996 non-interest expense is a one-time special assessment
in the amount of $820,000 to recapitalize the SAIF. This assessment of 0.657%
of the Bank's assessment base as of March 31, 1995 was enacted through federal
legislation and paid by SAIF insured institutions. As a result of this
recapitalization, the Bank's future deposit insurance assessments will
decrease significantly.
INCOME TAXES
Income taxes increased $307,000 from $384,000 for the year ended December
31, 1995 to $691,000 for the year ended December 31, 1996. This increase
occurred as a result of a $799,000 increase in income before income taxes
between the two years offset by a decrease in the effective tax rate from
45.6% in 1995 to 42.1% in 1996.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND DECEMBER 31, 1996
Total assets increased $29.1 million, from $159.6 million as of December 31,
1995 to $188.7 million as of December 31, 1996. This increase occurred
primarily as a result of a $23.8 million increase in loans, from
$131.8 million for the year ended December 31, 1995 to $155.6 million for the
year ended December 31, 1996. The increase in loans was comprised of a $20.8
million increase in mortgage loans held for sale, a $7.6 million increase (net
of unearned finance charges) in auto contracts and a $15.1 million increase in
insurance premium finance loans, offset by a $21.8 million decrease in loans
purchased from the RTC, resulting from scheduled principal amortization and
prepayments.
Cash and cash equivalents increased $2.5 million, from $23.6 million as of
December 31, 1995 to $26.1 million as of December 31, 1996, as a result of
increased liquidity from the Company's sale of mortgage loans.
37
<PAGE>
Deposit accounts increased $17.2 million, from $141.9 million as of December
31, 1995 to $159.1 million as of December 31, 1996 due primarily to an
increase in CDs of $15.6 million, from $115.8 million as of December 31, 1995
to $131.4 million as of December 31, 1996. The Company uses CDs, in part, to
finance the growth of its lending operations.
Other interest-bearing liabilities include the RTC Notes Payable which
remained unchanged at $10.9 million at December 31, 1995 and 1996, and FHLB
advances which increased to $4.0 million at December 31, 1996 with a weighted
average interest rate of 5.70%. There were no FHLB advances at December 31,
1995.
Stockholders' equity increased $950,000, from $5.8 million as of December
31, 1995 to $6.8 million as of December 31, 1996, solely as a result of the
Company's net income for the year.
COMPARISON OF OPERATING RESULTS FOR THE PERIOD FROM APRIL 29, 1994 (INCEPTION)
THROUGH DECEMBER 31, 1994 AND THE YEAR ENDED DECEMBER 31, 1995
GENERAL
Net income increased from $116,000 for the period from April 29, 1994
(Inception) to December 31, 1994 to $458,000 for the year ended December 31,
1995. This increase was due primarily to (i) completion of the Bank's
purchases of loans from the RTC thereby converting assets from lower yielding
investment securities into higher yielding loans, and (ii) the inclusion of
twelve months of operations in 1995 as opposed to eight months in 1994. The
Bank acquired certain assets and assumed certain liabilities from the RTC on
April 29, 1994.
INTEREST INCOME
Interest income increased from $6.9 million for the period from April 29,
1994 (Inception) to December 31, 1994 to $13.5 million for the year ended
December 31, 1995 due primarily to (i) the inclusion of twelve months of
operations in 1995 as opposed to eight months in 1994, and (ii) a $7.6 million
increase in average earning assets and a 1.68% increase in the average yield
on earning assets. The largest component of growth in average earning assets
was mortgage loans, which increased $50.2 million. Loans totaling $133.1
million were purchased from the RTC from April 1994 through December 1995, and
these higher yielding loans resulted in a significant increase in interest
income.
INTEREST EXPENSE
Interest expense increased from $3.6 million for the period from April 29,
1994 (Inception) to December 31, 1994 to $7.7 million for the year ended
December 31, 1995 due primarily to (i) the inclusion of twelve months of
operations in 1995 as opposed to eight months in 1994, (ii) a $10.3 million
increase in average interest bearing liabilities and (iii) a 1.30% increase in
the weighted average interest rate on interest bearing liabilities. The
largest component of growth in interest bearing liabilities was deposits,
which increased from an average balance of $140.3 million for the period from
April 29, 1994 (Inception) to December 31, 1994 to $148.6 million for the year
ended December 31, 1995. This growth resulted from the Bank's purchase of
deposits from the RTC offset by the sale of deposits by the Bank in the same
period and deposit outflows. The average cost of deposits increased from 3.58%
for the period from April 29, 1994 (Inception) to December 31, 1994 to 4.87%
for the year ended December 31, 1995 primarily as a result of deposits
repricing to higher interest rate accounts.
Other interest-bearing liabilities include the RTC Notes Payable, the
average balance of which increased $1.9 million between years as a result of
an additional loan provided to the Bank as part of its purchase of deposits
from the RTC.
38
<PAGE>
PROVISION FOR LOAN LOSSES
Provision for loan losses increased from $50,000 for the period from April
29, 1994 (Inception) to $120,000 for the year ended December 31, 1995. The
total allowance for loan losses was $378,000 at December 31, 1994 compared to
$5.3 million at December 31, 1995. This increase was attributable to the
additional provision for losses recorded during the year ended December 31,
1995 and $4.9 million in acquisition discounts related to the Company's
purchase of loans from the RTC. The Company allocated the estimated amount of
discounts attributable to credit risk to the allowance for loan losses. Loan
charge-offs were $108,000 in the year ended December 31, 1995. There were no
charge-offs in the period from April 29, 1994 (Inception) to December 31,
1994.
NON-INTEREST INCOME
Non-interest income increased $220,000, from $98,000 for the period from
April 29, 1994 (Inception) through December 31, 1994 to $318,000 for the year
ended December 31, 1995. This increase was due primarily to (i) the inclusion
of twelve months of operations in 1995 as opposed to eight months in 1994, and
(ii) an increase in gain on sale of loans from $3,000 for the period from
April 29, 1994 (Inception) through December 31, 1994 to $90,000 for the year
ended December 31, 1995.
Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income. The total of all of these items
increased $133,000 from $95,000 for the period from April 29, 1994 (Inception)
through December 31, 1994 to $228,000 for the year ended December 31, 1995.
NON-INTEREST EXPENSE
Non-interest expense increased $2.1 million, from $3.1 million for the
period from April 29, 1994 (Inception) through December 31, 1994 to $5.2
million for the year ended December 31, 1995. This increase was due primarily
to (i) the inclusion of twelve months of operations in 1995 as opposed to
eight months in 1994, and (ii) increases in compensation and benefits
occurring from increased staffing in the Bank.
INCOME TAXES
Income taxes increased $286,000 from $98,000 for the period from April 29,
1994 (Inception) through December 31, 1994 to $384,000 for the year ended
December 31, 1995. This increase occurred as a result of a $628,000 increase
in income before income taxes between the two years, offset by a decrease in
the average tax rate from 45.8% in 1994 to 45.6% in 1995.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1994 AND DECEMBER 31, 1995
Total assets decreased $20.5 million, from $180.0 million at December 31,
1994 to $159.6 million at December 31, 1995. This decrease occurred primarily
as a result of a $95.8 million decrease in short-term investments offset by a
$79.0 million increase in loans. The increase in loans was comprised primarily
of a $75.9 million increase in mortgage loans purchased from the RTC under the
Minority Preference Resolution Program in 1994 and 1995.
Cash and cash equivalents decreased $96.0 million, from $119.6 million at
December 31, 1994 to $23.6 million at December 31, 1995, resulting from the
purchase of loans from the RTC in 1995.
Deposits at the Bank decreased $21.2 million, from $163.1 million at
December 31, 1994 to $141.9 million at December 31, 1995 due primarily to
outflows in the Bank's deposits resulting from the acquisition by the Bank of
certain assets and liabilities from the RTC and the resultant lowering of
deposit rates to reflect market conditions and reduce excess liquidity held by
the Bank.
Other interest-bearing liabilities include the RTC Notes Payable, which
remained unchanged at $10.9 million between December 31, 1994 and 1995.
39
<PAGE>
Stockholders' equity increased $500,000, from $5.3 million at December 31,
1994 to $5.8 million at December 31, 1995, solely as a result of the Company's
net income for the year.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Company's interest rate risk management
activities is to evaluate the interest rate risk inherent in the Company's
business activities, determine the level of appropriate risk given the
Company's operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with guidelines approved
by the Board of Directors. Through such management, the Company seeks to
reduce the exposure of its operations to changes in interest rates. The Board
of Directors reviews on a quarterly basis the asset/liability position of the
Company, including simulation of the effect on capital of various interest
rate scenarios.
The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received on the loans it originates and
the interest rates paid on deposits and other financing facilities which can
be adversely affected by movements in interest rates. In addition, between the
time the Company originates loans and investors' sales commitments are
received, the Company may be exposed to interest rate risk to the extent that
interest rates move upward or downward during the time the loans are held for
sale. The Company mitigates these risks somewhat by purchasing or originating
ARMs that reprice frequently in an increasing or declining interest rate
environment. Also, the Company sells substantially all of its loans held for
sale on a regular basis, thereby reducing significantly the amount of time
these loans are held by the Company.
The Bank's interest rate sensitivity is monitored by the Board of Directors
and management through the use of a model which estimates the change in the
Bank's net portfolio value ("NPV") over a range of interest rate scenarios.
NPV is the present value of expected cash flows from assets, liabilities and
off-balance sheet instruments, and NPV Ratio is defined as the NPV in that
scenario divided by the market value of assets in the same scenario. The
Company reviews a market value model prepared quarterly by the OTS (the "OTS
NPV model"), based on the Bank's quarterly Thrift Financial Reports filed with
the OTS. The OTS NPV model measures the Bank's interest rate risk by
approximating the Bank's NPV under various scenarios which range from a 400
basis point increase to a 400 basis point decrease in market interest rates.
The interest rate risk policy of the Company provides that the maximum
permissible change at a 400 basis point increase or decrease in market
interest rates is a 30% change in NPV. The OTS has incorporated an interest
rate risk component into its regulatory capital rule for thrifts. Under the
rule, an institution whose sensitivity measure, as defined by the OTS, in the
event of a 200 basis point increase or decrease in interest rates exceeds 20%
would be required to deduct an interest rate risk component in calculating its
total capital for purpose of the risk-based capital requirement.
At September 30, 1997, the most recent date for which the relevant OTS NPV
model is available, the Bank's sensitivity measure resulting from (i) a 200
basis point decrease in interest rates was 40 basis points and would result in
a $1.4 million increase in the NPV of the Bank and (ii) a 200 basis point
increase in interest rates was 50 basis points and would result in a $1.8
million decrease in the NPV of the Bank. At September 30, 1997, the Bank's
sensitivity measure was below the threshold at which the Bank could be
required to hold additional risk-based capital under OTS regulations.
Although the NPV measurement provides an indication of the Bank's interest
rate risk exposure at a particular point in time, such measurement is not
intended to and does not provide a precise forecast of the effect of changes
in market interest rates on the Bank's net interest income and will differ
from actual results. Management monitors the results of this modeling, which
are presented to the Board of Directors on a quarterly basis.
40
<PAGE>
The following table shows the NPV and projected change in the NPV of the
Bank at September 30, 1997 assuming an instantaneous and sustained change in
market interest rates of 100, 200, 300 and 400 basis points ("bp"). This table
is based on data prepared by the OTS. The Company makes no representation as
to the accuracy of this data.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
NET PORTFOLIO VALUE VALUE OF ASSETS
--------------------------- ------------------------
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE
--------------- -------- -------- -------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400 bp.................... $33,034 $(8,495) -20% 11.46% -258 bp
+300 bp.................... $36,982 $(4,547) -11% 12.69% -135 bp
+200 bp.................... $39,766 $(1,763) -4% 13.54% -50 bp
+100 bp.................... $41,198 $ (331) -1% 13.96% -8 bp
0 bp....................... $41,529 -- -- 14.04% --
- -100 bp.................... $41,794 $ 265 +1% 14.11% +7 bp
- -200 bp.................... $42,967 $ 1,438 +3% 14.44% +40 bp
- -300 bp.................... $44,724 $ 3,195 +8% 14.95% +91 bp
- -400 bp.................... $47,183 $ 5,654 +14% 15.66% +162 bp
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's primary sources of funds are deposits with the Bank, FHLB
advances, principal and interest payments on loans, cash proceeds from the
sale of loans and, to a lesser extent, interest payments on securities and
proceeds from the maturation of securities. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. However, the Company has continued to maintain the
required minimum levels of liquid assets as defined by OTS regulations. This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 4%, and the Company
has always met or exceeded this requirement. Management, through its Asset and
Liability Committee, which meets monthly or more frequently if necessary,
monitors rates and terms of competing sources of funds to use the most cost-
effective source of funds wherever possible.
Sales and securitizations of loans have been a primary source of funds for
the Company. During the twelve months ended December 31, 1996 and 1997, cash
flows from sales and securitizations of loans were $52.2 million and
$493.5 million, respectively.
Another source of funds consists of deposits obtained through the Bank's
five retail branches in California. The Bank offers checking accounts, various
money market accounts, regular passbook accounts, fixed interest rate
certificates with varying maturities and retirement accounts. Deposit account
terms vary by interest rate, minimum balance requirement and the duration of
the account. Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank periodically based on liquidity and
financing requirements, rates paid by competitors, growth goals and federal
regulations. At December 31, 1997, such retail deposits were $182.2 million or
78.1% of total deposits.
The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at December 31, 1997, wholesale deposits were $33.5
million or 14.4% of total deposits while broker-originated deposits were
$17.5 million or 7.5% of total deposits. The Bank solicits wholesale deposits
by posting its interest rates on a national on-line service which advertises
the Bank's wholesale products to investors. Generally, most of the wholesale
deposit account holders are institutional investors, commercial businesses or
public sector entities. The weighted average maturity of wholesale and broker-
originated deposits at December 31, 1997 was five months.
41
<PAGE>
The Company believes that wholesale and broker-originated deposits provide a
supplemental short-term source of funding which can be more flexible than
retail sources of funds for matching asset maturities, especially the
Company's loans held for sale. While the Company believes its primary source
of deposits will continue to be originated from the Bank's retail branches,
wholesale and broker-originated deposits will be used to provide additional
sources of funds to finance lending growth.
Although the Bank has a significant amount of deposits maturing in less than
one year, the Company believes that the Bank's current pricing strategy will
enable it to retain a significant portion of these accounts at maturity and
that it will continue to have access to sufficient amounts of CDs which,
together with other funding sources, will provide the necessary level of
liquidity to finance its lending businesses. However, as a result of these
shorter-term deposits, the rates on these accounts may be more sensitive to
movements in market interest rates which may result in a higher cost of funds.
The following table sets forth the average balances and rates paid on each
category of deposits for the years ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts............ $ 16,612 2.12% $ 14,665 2.39% $ 21,452 3.44%
Checking accounts............ 12,091 1.48% 10,060 1.33% 9,910 1.32%
Certificates of deposit
Under $100,000.............. 112,342 5.67% 117,063 5.55% 135,059 5.53%
$100,000 and over........... 7,537 6.36% 4,372 5.88% 31,984 5.90%
-------- -------- --------
Total...................... $148,582 4.87% $146,160 4.94% $198,405 5.09%
======== ======== ========
</TABLE>
The following table sets forth the time remaining until maturity for all CDs
at December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Maturity within one year................. $ 76,879 $103,369 $181,858
Maturity within two years................ 36,316 26,819 14,984
Maturity within three years.............. 1,681 1,177 298
Maturity within four years............... 957 -- --
-------- -------- --------
Total certificates of deposit............ $115,833 $131,365 $197,140
======== ======== ========
</TABLE>
At December 31, 1997, the Bank exceeded all of its regulatory capital
requirements (and was deemed to be "well capitalized") with (i) tangible
capital of $22.4 million, or 7.27% of total adjusted assets, which is above
the required level of $4.6 million, or 1.50%; (ii) core capital of $22.4
million, or 7.27% of total adjusted assets, which is above the required level
of $9.2 million, or 3.00%; and (iii) risk-based capital of $24.9 million, or
12.34% of risk-weighted assets, which is above the required level of $16.0
million, or 8.00%.
The Company has other sources of liquidity, including FHLB advances,
warehouse lines of credit and securities maturing within one year. Through the
Bank, the Company obtains advances from the FHLB, collateralized by its
portfolio of mortgage loans purchased from the RTC and the Bank's FHLB stock.
The FHLB functions as a central reserve bank providing credit for thrifts and
certain other member financial institutions. Advances are made pursuant to
several programs, each of which has its own interest rate and range of
maturities. Limitations on the amount of advances are based generally on a
fixed percentage of net worth or on the FHLB's assessment of an institution's
credit-worthiness. The Bank's available borrowing capacity under this credit
facility was $40.9 million at December 31, 1997.
42
<PAGE>
Other borrowings of the Company consist of the RTC Notes Payable which
mature in 1999, notes payable from shareholders which mature in 1999 and a
warehouse line of credit. See "--Liquidity and Capital Resources--Warehouse
Line of Credit" and "--RTC Notes Payable" for a discussion of the Company's
warehouse line of credit and RTC Notes Payable, respectively, and
"Management--Certain Transactions" for discussion of the notes payable from
shareholders.
The following table sets forth certain information regarding the Company's
short-term borrowed funds (consisting of FHLB advances and its warehouse line
of credit) at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR YEARS ENDED
DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances
Maximum month-end balance.......................... $ -- $ 4,000 $ 40,900
Balance at end of period........................... -- 4,000 28,000
Average balance for period......................... -- 1,170 18,526
Weighted average interest rate on
Balance at end of period........................... -- % 5.70% 7.07%
Average balance for period......................... -- % 6.15% 5.95%
Warehouse line of credit
Maximum month-end balance.......................... $ -- $ -- $ 64,359
Balance at end of period........................... -- -- 6,237
Average balance for period......................... -- -- 8,914
Weighted average interest rate on
Balance at end of period........................... -- % -- % 6.70%
Average balance for period......................... -- % -- % 6.10%
</TABLE>
The Company had no material contractual obligations or commitments for
capital expenditures at December 31, 1997. However, the Company is in the
process of expanding its mortgage and auto finance operations, which will
entail lease commitments and expenditures for leasehold improvements and
furniture, fixtures and equipment. At December 31, 1997, the Company had
outstanding commitments to originate loans of $117.4 million, compared to
$19.1 million at December 31, 1996. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
WAREHOUSE LINE OF CREDIT
In October 1997, the Bank entered into a $100 million master repurchase
agreement under which it may sell and repurchase at a set price mortgage loans
pending the sale or securitization of such loans. The arrangement provides for
an advance rate approximating 100% of the outstanding principal balance of
qualifying mortgage loans and a rate of interest to be determined by the
parties upon each such sale of mortgage loans, but which shall not exceed
LIBOR plus 0.70%. Qualifying mortgage loans consist of first and second
mortgage loans with an LTV that does not exceed 90%, subject to certain
restrictions. This agreement may be terminated at any time at the option of
either party.
RTC NOTES PAYABLE
In connection with its acquisition of certain assets from the RTC, the Bank
obtained loans from the RTC in the aggregate amount of $10.9 million under the
RTC's Minority Interim Capital Assistance Program provided for in Section
21A(u) of the Federal Home Loan Bank Act, as amended (the "FHLBA"). The FHLBA
gives the RTC authority to provide interim capital assistance to minority-
owned institutions, defined in the FHLBA as more than fifty percent (50%)
owned or controlled by one or more minorities. The Bank, PAFI and the RTC
entered into an Interim Capital Assistance Agreement on April 29, 1994 with
respect to a loan of $6,930,000 and a second Interim Capital Assistance
Agreement on September 9, 1994 with respect to a loan of $4,000,000 (together,
the "RTC Agreements"). The RTC Agreements provide for repayment of the entire
principal amount,
43
<PAGE>
plus any accrued, previously unpaid interest thereon, in a single lump sum
installment on April 28, 1999 and September 8, 1999, respectively. The RTC
Notes Payable may be prepaid at the option of the Bank and must be prepaid in
the event that PAFI obtains all or any material portion of its permanent
financing prior to maturity of the RTC Notes Payable. The RTC is entitled to
declare the entire unpaid principal amount of the RTC Notes Payable, plus all
interest accrued and unpaid thereon, immediately due and payable upon the
occurrence of certain events of default.
The rate at which interest accrues on the RTC Notes Payable is based on the
RTC's "Cost of Funds," defined in the RTC Agreements as the end of the
calendar quarter Monday auction yield price for 13 week United States Treasury
Bills plus 12.5 basis points, and adjusts annually, in the case of the $6.9
million loan due April 1999, and quarterly, in the case of the $4 million loan
due September 1999. Interest accrues on any amount of principal or interest
not paid when due at the rate of the RTC's Cost of Funds (5.375% at December
31, 1997) plus 300 basis points, beginning on the date such unpaid amount
became due.
Until all of the obligations of PAFI and the Bank have been discharged, the
Bank has agreed, pursuant to the RTC Agreements, among other things, not to:
(i) declare or pay any dividends, except under certain limited circumstances,
and not to issue any capital stock or any options or other rights in respect
thereto, or repurchase, redeem, retire or otherwise acquire for value any of
its capital stock; (ii) make any loan or advance to PAFI or any other
affiliate, except to United PanAm Mortgage Corporation and United Auto Credit
Corporation, as long as such transactions do not require the Bank to
repurchase any loans which would result in a loss to the Bank; (iii) increase
the compensation of, or pay any bonuses to, any of its officers, directors or
key employees unless such increases are approved by the RTC; or (iv) sell or
otherwise dispose of all or substantially all of its assets, enter into any
merger or consolidation or enter into any agreement providing for a change of
control of the Bank, unless such transaction is conditioned upon the prior or
simultaneous repayment in full of all amounts due under the RTC Agreements.
In connection with the RTC Agreements, PAFI and the RTC have entered into
Stock Pledge Agreements pursuant to which PAFI has pledged to the RTC all of
the issued and outstanding shares of the capital stock of the Bank as security
for the repayment of the RTC Notes Payable.
LENDING ACTIVITIES
To date, the Company has sold most of its loan originations to mortgage
companies and other investors through whole loan packages on a non-recourse,
servicing released basis. As a result, upon sale, all risks and rewards of
ownership, including those associated with loan payments, transfer to the
buyer. In December 1997, the Company completed its first securitization of
mortgage loans and in March 1998 sold its residual interests in this
securitization to a third party. Accordingly, to date, prepayments have not
had a significant effect on the Company's operations.
Summary of Loan Portfolio. At December 31, 1997, the Company's loan
portfolio constituted $268.5 million or 86.4% of the Company's total assets,
of which $148.5 million or 55.3% were held for investment and $120.0 million
or 44.7% were held for sale. Loans held for investment are reported at cost,
net of unamortized discounts or premiums and allowance for losses. Loans held
for sale are reported at the lower of cost or market value.
44
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE LOANS
Mortgage loans (purchased
primarily from RTC)...... $57,274 $124,483 $102,733 $ 81,995
------- -------- -------- --------
Subprime mortgage loans
Held for sale........... -- -- 20,766 120,002
Held for investment..... -- -- 1,294 5,375
------- -------- -------- --------
Total subprime mortgage
loans.................. -- -- 22,060 125,377
------- -------- -------- --------
Total mortgage loans.... 57,274 124,483 124,793 207,372
------- -------- -------- --------
CONSUMER LOANS
Automobile installment
contracts................ -- -- 10,830 40,877
Insurance premium
financing................ -- 16,975 32,058 39,990
Other consumer loans...... 235 31 230 267
------- -------- -------- --------
Total consumer loans.... 235 17,006 43,118 81,134
------- -------- -------- --------
Total loans............. 57,509 141,489 167,911 288,506
Unearned discounts and
premiums................. (4,333) (4,445) (3,697) (2,901)
Unearned finance charges.. -- -- (3,271) (10,581)
Allowance for loan
losses................... (378) (5,250) (5,356) (6,487)
------- -------- -------- --------
Total loans, net........ $52,798 $131,794 $155,587 $268,537
======= ======== ======== ========
</TABLE>
Loan Maturities. The following table sets forth the dollar amount of loans
maturing in the Company's loan portfolio at December 31, 1997 based on
scheduled contractual amortization. Loan balances are reflected before
unearned discounts and premiums, unearned finance charges and allowance for
losses.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN
ONE YEAR 1 YEAR TO 3 YEARS TO 5 YEARS TO 10 YEARS TO MORE THAN
OR LESS 3 YEARS 5 YEARS 10 YEARS 20 YEARS 20 YEARS TOTAL LOANS
-------- --------- ---------- ---------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans held for
investment............. $ 78 $ 484 $ 2,090 $7,185 $27,083 $ 50,450 $ 87,370
Mortgage loans held for
sale................... -- -- -- -- 4,983 115,019 120,002
Consumer loans.......... 40,527 19,933 20,674 -- -- -- 81,134
------- ------- ------- ------ ------- -------- --------
Total................. $40,605 $20,417 $22,764 $7,185 $32,066 $165,469 $288,506
======= ======= ======= ====== ======= ======== ========
</TABLE>
The following table sets forth, at December 31, 1997, the dollar amount of
loans receivable that were contractually due after one year and indicates
whether such loans have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1998
---------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans held for investment.............. $16,106 $ 71,186 $ 87,292
Mortgage loans held for sale.................... 24,898 95,104 120,002
Consumer loans.................................. 40,340 267 40,607
------- -------- --------
Total......................................... $81,344 $166,557 $247,901
======= ======== ========
</TABLE>
45
<PAGE>
CLASSIFIED ASSETS AND ALLOWANCE FOR LOAN LOSSES
The Company maintains an asset review and classification process for
purposes of assessing loan portfolio quality and the adequacy of its loan loss
allowances. The Company's Asset Review Committee reviews for classification
all problem and potential problem assets and reports the results of its review
to the Board of Directors quarterly. The Company has incorporated the OTS
internal asset classifications as a part of its credit monitoring systems and
in order of increasing weakness, these designations are "substandard,"
"doubtful" and "loss." Substandard assets have one or more defined weaknesses
and are characterized by the distinct possibility that some loss will be
sustained if the deficiencies are not corrected. Doubtful assets have the
weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, condition and values, questionable and there is a high
possibility of loss. Loss assets are considered uncollectible and of such
little value that continuance as an asset is not warranted. Assets which do
have weaknesses but do not currently have sufficient risk to warrant
classification in one of the categories described above are designated as
"special mention."
At December 31, 1997, the Company had $2.7 million in assets classified as
special mention, $6.9 million of assets classified as substandard, $70,000 in
assets classified as doubtful and no assets classified as loss.
The following table sets forth the remaining balances of all loans in the
Bank's held for investment portfolio (before specific reserves for losses)
that were more than 30 days delinquent at December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
LOAN DECEMBER 31, % OF TOTAL DECEMBER 31, % OF TOTAL DECEMBER 31, % OF TOTAL
DELINQUENCIES 1995 LOANS 1996 LOANS 1997 LOANS
- ------------- ------------ ---------- ------------ ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days........... $1,753 1.3% $1,866 1.3% $ 416 0.3%
60 to 89 days........... 842 0.6% 109 0.1% 641 0.4%
90+ days................ 6,507 4.7% 6,422 4.6% 7,130 4.6%
------ --- ------ --- ------ ---
Total................... $9,102 6.6% $8,397 6.0% $8,187 5.3%
====== === ====== === ====== ===
</TABLE>
46
<PAGE>
Nonaccrual and Past Due Loans. The Company's general policy is to
discontinue accrual of interest on a mortgage loan when it is delinquent 90
days or more, and on a non-mortgage loan when it is delinquent for 120 days or
more. When a loan is reclassified from accrual to nonaccrual status, all
previously accrued interest is reversed. Interest income on nonaccrual loans
is subsequently recognized only to the extent that cash payments are received
or the borrower's ability to make periodic interest and principal payments is
in accordance with the loan terms, at which time the loan is returned to
accrual status. Accounts which are deemed fully or partially uncollectible by
management are generally fully reserved or charged off for the amount that
exceeds the estimated fair value (net of selling costs) of the underlying
collateral. The Company does not generally modify, extend or rewrite loans and
at December 31, 1997 had no troubled debt restructured loans. The following
table sets forth the aggregate amount of nonaccrual loans (net of unearned
discounts and premiums, unearned finance charges and specific allowances) at
December 31, 1994, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 1996 1997
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans
Single-family residential................ $1,439 $5,086 $5,044 $5,219
Multi-family residential................. -- 154 81 81
Consumer and other loans................. -- -- 710 1,333
------ ------ ------ ------
Total.................................. $1,439 $5,240 $5,835 $6,633
====== ====== ====== ======
Nonaccrual loans as a percentage of
Total loans held for investment.......... 2.73% 3.85% 4.19% 4.31%
Total assets............................. 0.80% 3.28% 3.09% 2.13%
General allowance for loan losses as a
percentage of
Total loans held for investment.......... 0.71% 3.19% 3.14% 3.54%
Nonaccrual loans......................... 26.27% 82.80% 74.90% 82.33%
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, the amount of interest
income that would have been recognized on nonaccrual loans if such loans had
continued to perform in accordance with their contractual terms was $296,000,
$370,0000 and $367,000, respectively. The total amount of interest income
recognized on nonaccrual loans was $327,000, $364,000 and $212,000 for the
years ended December 31, 1995, 1996 and 1997, respectively. Accruing loans
over 90 days past due were $66,000 at December 31, 1997. There were no
accruing loans over 90 days past due at December 31, 1995 and 1996.
Real Estate Owned. Real estate acquired through foreclosure or by deed in
lieu of foreclosure ("REO") is recorded at the lower of cost or fair value at
the time of foreclosure. Subsequently, an allowance for estimated losses is
established when the recorded value exceeds fair value less estimated selling
costs. Holding and maintenance costs related to real estate owned are recorded
as expenses in the period incurred.
At December 31, 1995, 1996 and 1997, real estate owned was $298,000,
$988,000 and $562,000, respectively, and consisted entirely of one to four
family residential properties. For the twelve months ended December 31, 1997,
real estate owned expenses were $158,000 and gains of $239,000 were reported
on the sale of real estate owned.
47
<PAGE>
Allowance for Loan Losses. The following is a summary of the changes in the
consolidated allowance for loan losses of the Company for each of the years
ended December 31, 1995, 1996 and 1997 and for the period from April 29, 1994
(Inception) to December 31, 1994.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED
APRIL 29, 1994 DECEMBER 31,
(INCEPTION) TO -----------------------
DECEMBER 31, 1994 1995 1996 1997
----------------- ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period...... $ -- $ 378 $5,250 $ 5,356
Provision for loan losses......... 50 120 194 507
Charge-offs
Mortgage loans held for
investment..................... -- (108) (285) (373)
Mortgage loans held for sale.... -- -- -- --
Consumer loans.................. -- -- (433) (2,101)
----- ------ ------ -------
-- (108) (718) (2,474)
Recoveries
Mortgage loans held for
investment..................... -- -- -- 77
Mortgage loans held for sale.... -- -- -- --
Consumer loans.................. -- -- 274 1,068
----- ------ ------ -------
-- -- 274 1,145
----- ------ ------ -------
Net charge-offs................... -- (108) (444) (1,329)
Acquisition discounts allocated to
loss allowance................... 328 4,860 356 1,953
----- ------ ------ -------
Balance at end of period............ $ 378 $5,250 $5,356 $ 6,487
===== ====== ====== =======
Allowance as a percent of net
principal balance
Mortgage loans held for
investment....................... 0.71% 4.23% 4.28% 4.32%
Consumer loans.................... -- 1.00% 2.66% 3.18%
Net charge-offs to average loans.. -- 0.10% 0.30% 0.60%
Ending allowance to period end
loans, net....................... 0.71% 3.98% 3.97% 4.37%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
1994 1995 1996 1997
----------------------- ----------------------- ----------------------- -----------------------
PERCENT OF LOANS PERCENT OF LOANS PERCENT OF LOANS PERCENT OF LOANS
IN EACH CATEGORY IN EACH CATEGORY IN EACH CATEGORY IN EACH CATEGORY
AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
------ ---------------- ------ ---------------- ------ ---------------- ------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution of end of
period allowance by
loan type
Mortgage loans held
for investment....... $378 99.6% $5,080 87.9% $4,295 70.7% $3,653 51.9%
Consumer loans........ -- 0.4% 170 12.1% 1,061 29.3% 2,241 48.1%
Unallocated........... -- -- -- -- -- -- 593 --
---- ----- ------ ----- ------ ----- ------ -----
$378 100.0% $5,250 100.0% $5,356 100.0% $6,487 100.0%
==== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The Company's policy is to maintain an allowance for loan losses to absorb
future losses which may be realized on its loan portfolio. These allowances
include specific reserves for identifiable impairments of individual loans and
general valuation allowances for estimates of probable losses not specifically
identified.
The determination of the adequacy of the allowance for loan losses is based
on a variety of factors, including an assessment of the credit risk inherent
in the portfolio, prior loss experience, the levels and trends of non-
performing loans, the concentration of credit, current and prospective
economic conditions and other factors.
48
<PAGE>
The Company's management uses its best judgment in providing for possible
loan losses and establishing allowances for loan losses. However, the
allowance is an estimate which is inherently uncertain and depends on the
outcome of future events. In addition, regulatory agencies, as an integral
part of their examinations process, periodically review the Bank's allowance
for loan losses. Such agencies may require the Bank to increase the allowance
based upon their judgment of the information available to them at the time of
their examination.
CASH EQUIVALENTS AND SECURITIES PORTFOLIO
The Company's cash equivalents and securities portfolios are used primarily
for liquidity purposes and secondarily for investment income. Cash equivalents
and securities, which generally have maturities of less than 90 days, satisfy
regulatory requirements for liquidity.
The following is a summary of the Company's cash equivalents and securities
portfolios as of December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at end of period
Fed funds........................................ $ 8,500 $ -- $ --
Overnight deposits............................... 1,507 21,000 4,000
U.S. agency securities........................... -- -- 1,002
Commercial paper................................. 2,986 -- --
FHLB certificates of deposit..................... 9,000 -- --
------- ------- ---------
Total............................................ $21,993 $21,000 $ 5,002
======= ======= =========
Weighted average yield at end of period
Fed funds........................................ 5.29% -- --
Overnight deposits............................... 5.67% 5.02% 3.50%
U.S. agency securities........................... -- -- 6.54%
Commercial paper................................. 5.62% -- --
FHLB certificates of deposit..................... 5.61% -- --
Weighted average maturity at end of period
Fed funds........................................ 1 day -- --
Overnight deposits............................... 1 day 1 day 1 day
U.S. agency securities........................... -- -- 24 months
Commercial paper................................. 26 days -- --
FHLB certificates of deposit..................... 3 days -- --
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollar amounts without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike industrial companies, nearly all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
49
<PAGE>
ACCOUNTING CONSIDERATIONS
FASB No. 129, "Disclosure on Information about Capital Structure" ("FASB
129") is effective for financial statements for periods ending after December
15, 1997. It is not expected that FASB 129 will require significant revision
of prior disclosures since FASB 129 lists required disclosures that had been
included in a number of previously existing separate statements and opinions.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and displaying
comprehensive income and its components in the consolidated financial
statements. SFAS 130 does not, however, require a specific format for
presenting such information, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. The Company is in the process of determining its preferred format.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"), which establishes
standards for the way that public business enterprises are to report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 is
effective for financial statements for periods beginning after December 31,
1997.
50
<PAGE>
BUSINESS
GENERAL
The Company is a diversified specialty finance company engaged primarily in
originating and acquiring for investment or sale residential mortgage loans,
personal automobile insurance premium finance contracts and retail automobile
installment sales contracts. The Company targets customers who generally
cannot obtain financing from traditional lenders. These customers usually pay
higher loan origination fees and interest rates than those charged by
traditional lenders to gain access to consumer financing. The Company believes
that management's experience in originating, assessing, pricing and managing
credit risk enables the Company to earn attractive risk-adjusted returns. The
Company has funded its operations to date principally through retail deposits,
FHLB advances and whole loan sales at the Bank, and its first securitization
of mortgage loans completed in December 1997. The Company's strategy is to
undertake controlled geographic expansion of its existing businesses, with
particular emphasis in the near term on the national expansion of its mortgage
finance operations, and to evaluate possible entry into additional specialty
finance businesses which provide the opportunity for attractive risk-adjusted
returns.
The Company believes that the Bank currently is the largest Hispanic-
controlled savings association in California. The Company commenced operations
in 1994, as a Hispanic-controlled financial institution, by purchasing from
the RTC certain assets and assuming certain liabilities of the Bank's
predecessor, Pan American Federal Savings Bank. The Company has used the Bank
as a base for expansion into its current specialty finance businesses. In
1995, the Company commenced its insurance premium finance business through a
joint venture with BPN, which the Company believes to be the second largest
provider of financing for consumer automobile insurance premiums in
California. In 1996, the Company commenced its current mortgage and automobile
finance businesses.
BUSINESS STRATEGY
GROWTH STRATEGY
The Company intends to capitalize on its competitive strengths by expanding
its core businesses and entering other specialty finance businesses which
provide the opportunity for attractive risk-adjusted returns. The Company's
growth strategy includes the following key elements.
. Geographic Expansion of Existing Businesses. The Company intends to
expand its residential mortgage and automobile finance businesses into
new geographic areas, principally by opening offices staffed by
experienced local marketing and management personnel. The Company
believes that an emphasis on management with local experience, coupled
with comprehensive underwriting standards and financial controls, will
permit growth in loan originations without compromising loan
performance. The Company also may expand its insurance premium finance
business as opportunities arise outside of California. See "Risk
Factors--General--Management of Growth."
. Entry into New Specialty Finance Businesses. The Company continually
evaluates expansion into other specialty finance businesses which
provide the opportunity for attractive risk-adjusted returns in markets
(i) which it believes are underserved by traditional lenders or are
undergoing change, (ii) which are highly fragmented with no participant
having significant market share, or (iii) in which it can attract the
required management experience to assess, price and manage the credit
risk and, thereby, generate attractive risk-adjusted returns. The
Company may enter such new businesses on a de novo basis or through
acquisitions. See "Risk Factors--General--Management of Growth" and "Use
of Proceeds."
51
<PAGE>
OPERATING STRATEGY
The Company's operating strategy includes the following key elements.
. Centralized Risk Management Controls. For each of its businesses, the
Company has implemented comprehensive risk management policies and
portfolio parameters which are designed to identify the types and amount
of risk that can prudently be taken in each business. The Company
continually monitors the performance of each of its businesses against
these policies and parameters.
. Decentralized Management. The management of each of the Company's
businesses is responsible for its day-to-day operations, subject to
centralized risk management controls and individualized, goal oriented
incentive compensation programs that support the achievement of credit
quality, growth and profitability objectives. The Company believes that
the delegation of responsibility to the management of each business has
enabled the Company to attract, promote and retain experienced managers,
to provide high levels of customer service and to respond promptly to
changes in market conditions.
. Diversified Funding Sources. The Company has funded its lending
businesses to date primarily through the Bank's deposits, as well as
FHLB advances and whole loan sales. The Company believes that bank
deposits are a stable and cost-effective funding source which provide it
with a competitive advantage. To further diversify its funding sources,
in October 1997 the Company obtained a $100 million master repurchase
facility to finance the anticipated growth in its mortgage lending
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--
Warehouse Line of Credit." The Company completed its first
securitization of mortgage loans in December 1997 and expects to sell or
securitize mortgage loans on a periodic basis in the future. In
connection with any mortgage loan securitizations, the Company will seek
to maximize cash gains or arrange for the prompt sale of residual
interests retained in the securitizations at or above their net book
value. The Company will, in the future, consider the sale or
securitization of other financial assets. See "Risk Factors--General--
Securitizations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- General--Mortgage Finance."
MORTGAGE FINANCE
BUSINESS OVERVIEW
UPAM's loan production generally consists of subprime residential mortgage
loans which are made to borrowers whose borrowing needs may not be met by
traditional financial institutions due to credit history or other factors.
UPAM's customers use the proceeds of the mortgage loans primarily to finance
home purchases and improvements, debt consolidation, education and other
consumer needs, and may benefit from consolidating existing consumer debt
through mortgage loans with lower monthly payments.
UPAM generally targets borrowers who have substantial equity in the property
securing the loan, but may have (i) impaired or limited credit profiles, (ii)
higher debt-to-income ratios than traditional mortgage lenders allow or (iii)
difficulty verifying their income due to self-employment or other
circumstances. These borrowers are generally willing to pay higher loan
origination fees and interest rates than those charged by traditional lenders.
The Company believes that the amount of equity present in the real estate
securing UPAM's loans, together with the fact that approximately 88% of UPAM's
loans are secured by borrowers' primary residences and approximately 96% are
secured by first mortgages, mitigates certain risks inherent in subprime
lending. The average LTV ratio on loans originated by UPAM during the twelve
months ended December 31, 1997 was approximately 75%.
UPAM's strategy emphasizes a more balanced retail and wholesale origination
approach than many of its competitors. The retail division originates loans
through the direct solicitation of borrowers by mail and telemarketing and
accounted for $219.4 million, or 38%, of UPAM's total loan production during
the twelve months ended December 31, 1997. The wholesale division originates
loans through independent loan brokers and accounted for $359.2 million, or
62%, of UPAM's total loan production during the same period.
52
<PAGE>
Until December 1997, UPAM sold substantially all of its loan originations
with servicing released to other mortgage companies and investors through
whole loan packages offered for bid several times per month. During the twelve
months ended December 31, 1997, UPAM sold $360.2 million of loans through
whole loan sales at a weighted average sales price equal to 105.7% of the
original principal balance of the loans sold. UPAM completed its first
securitization of $114.9 million in mortgage loans in December 1997 at a net
gain on sale of 5.2% of the principal amount of loans securitized and expects
to sell or securitize its loans on a periodic basis in the future. No
assurances can be given that UPAM will be able to continue to securitize its
mortgage loans in the future or that any such securitizations will prove to be
profitable if commenced. See "Risk Factors--General--Securitizations."
SUBPRIME MORTGAGE INDUSTRY
The residential mortgage market can be separated into two major segments:
"prime" and "subprime." Prime borrowers comprise greater than 80% of the
market and have credit quality and documentation that satisfy the requirements
of the Government National Mortgage Association ("GNMA"), FNMA or FHLMC.
Historically, the subprime mortgage loan market has been a highly fragmented
niche market dominated by local brokers with direct ties to investors who
owned and serviced this relatively higher margin, riskier product. Although
there recently have been numerous new entrants into the subprime mortgage loan
business, the Company believes that the subprime mortgage market is still
highly fragmented.
BUSINESS STRATEGY
UPAM's strategic objective is to develop a national subprime residential
mortgage business. In order to achieve this objective, UPAM intends to (i)
continue to originate subprime mortgage loans through a balanced retail and
wholesale network, (ii) develop the capability to sell or securitize these
loans and (iii) over time develop an in-house collection capability to
complement third-party sub-servicing. Until December 1997, UPAM sold
substantially all of its loan originations with servicing released to mortgage
companies and investors through whole loan packages offered for bid several
times per month. UPAM completed its first securitization of mortgage loans in
December 1997 and may sell or securitize mortgage loans on a periodic basis in
the future.
The Company believes that the subprime residential mortgage market is highly
fragmented and that success in this market depends primarily on the ability to
provide superior customer service and competitive pricing. UPAM seeks to (i)
locate experienced loan officers in geographic proximity to large population
centers, (ii) issue conditional loan approvals promptly, generally within 24
hours after receipt of an application, (iii) avoid imposing unnecessarily
restrictive conditions on loan approvals, (iv) fund loans on a timely basis,
generally within 15 to 20 days following conditional approval, and in
accordance with approved terms, and (v) competitively price loans according to
market conditions.
53
<PAGE>
OPERATING SUMMARY
The following table presents a summary of UPAM's key operating and
statistical results on a quarterly basis for the years ended December 31, 1996
and 1997.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOAN ORIGINATION
STATISTICS
Loans originated........ $4,901 $15,168 $16,646 $34,796 $67,337 $108,481 $161,061 $241,743
Number of loans
originated............. 51 144 171 345 606 933 1,466 2,540
Average principal
balance per loan....... $ 96 $ 105 $ 97 $ 101 $ 111 $ 116 $ 110 $ 95
Weighted average
interest rate
Fixed-rate loans....... 10.21% 10.46% 11.61% 11.11% 10.60% 10.83% 10.78% 10.61%
Adjustable-rate loans.. 9.46% 10.00% 9.6% 9.38% 9.27% 9.38% 9.51% 9.58%
Weighted average loan-
to-value ratio......... 70% 72% 72% 72% 73% 74% 76% 75%
First mortgage loans.... 91% 94% 96% 96% 97% 97% 97% 95%
Fixed-rate loans........ 42% 29% 10% 8% 11% 10% 16% 26%
Owner occupied.......... 92% 93% 92% 86% 86% 88% 85% 88%
Retail origination...... 7% 1% 8% 32% 35% 41% 44% 34%
California.............. 21% 16% 36% 46% 53% 58% 50% 39%
BORROWER QUALITY
STATISTICS(1)
AA or A-................ 55% 67% 69% 67% 73% 71% 71% 69%
B or C.................. 40% 28% 28% 31% 23% 25% 25% 27%
C- or D................. 5% 5% 3% 2% 4% 4% 4% 4%
LOAN SALES STATISTICS
Loans sold or
securitized............ $1,097 $ 4,226 $16,234 $28,585 $40,254 $ 92,463 $140,363 $202,034
Average sales price
(% of principal
balance)............... -- 105.69% 105.32% 106.13% 106.15% 105.60% 105.73% 105.59%
OPERATING STATISTICS
States loans originated
in..................... 4 7 7 7 10 14 19 29
Retail loan branches.... -- -- 2 3 6 9 12 17
Retail loan officers.... -- -- 7 17 41 59 79 119
Wholesale loan centers.. 1 1 1 2 2 4 5 5
Wholesale account
executives............. 3 3 5 10 33 34 38 41
</TABLE>
- -------
(1)See "--Loan Production by Borrower Risk Classification."
LOAN ORIGINATION
Retail Division. UPAM's retail origination growth strategy emphasizes
geographic expansion and focused consumer marketing efforts through both
direct mail and telemarketing. Although retail loan originations entail
significantly higher operating costs than wholesale originations, the benefits
of retail origination result from (i) greater fee retention to compensate for
these costs and (ii) direct relationships with borrowers which create a more
sustainable loan origination franchise and increased control over the lending
process. During the twelve months ended December 31, 1997, the retail division
originated $219.4 million in loans, or 38%, of UPAM's total loan production.
As of December 31, 1997, the retail division employed 119 loan officers,
located in 17 retail branches. Ten of these branches are located in
California, two are in Arizona, and one each in Colorado, Washington, Nevada,
New Mexico and Oregon.
The retail division has implemented an expansion plan designed to control
the significant operating expenses associated with establishing new branch
offices. Under this plan, UPAM has housed several branches responsible for
specific geographic areas in one centrally located retail office, thereby
reducing overhead, increasing efficiency and allowing greater supervision,
while retaining locally-focused marketing efforts. As an example, only one
greater Los Angeles retail office exists (in Orange), but it houses six full-
service branches responsible for the Pasadena, Orange, Long Beach, Ontario,
West Los Angeles and Riverside areas.
54
<PAGE>
UPAM targets markets for expansion based on demographics and its ability to
recruit experienced sales office managers and other qualified personnel in
particular markets. Retail marketing activities include direct mail, followed
by outbound telemarketing calls from the local retail branch. Telemarketing
activities are aimed at identifying potential borrowers with subprime credit
characteristics. In December 1997, UPAM created a marketing department with
the objective of expanding and refining the target markets for direct mail and
telemarketing activities and increasing the overall effectiveness of existing
marketing efforts.
In February 1998, UPAM established a retail telemarketing group to maximize
the retail division's lead generation and follow-up on direct mail activities.
The telemarketing group will use a predictive dialer system which it expects
to have operational in the second quarter of 1998.
The following table sets forth selected information relating to UPAM's
retail loan originations during the periods shown.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans originated........ $1,391 $11,158 $23,616 $44,151 $70,258 $81,361
Number of loans
originated............. 19 102 222 372 604 778
Average principal
balance per loan....... $ 73 $ 109 $ 106 $ 118 $ 116 $ 104
Weighted average loan-
to-value ratio......... 63% 72% 74% 75% 77% 74%
First mortgage loans.... 97% 98% 98% 98% 98% 94%
Property securing loan
Owner occupied........ 74% 72% 77% 83% 86% 85%
Non-owner occupied.... 26% 28% 23% 17% 14% 15%
Weighted average
interest rate
Fixed-rate loans...... 10.11% 10.50% 10.28% 10.47% 10.48% 10.25%
Adjustable-rate
loans................ 8.65% 8.73% 8.95% 8.99% 9.03% 8.99%
</TABLE>
Wholesale Division. UPAM's wholesale origination growth strategy emphasizes
(i) geographic expansion, (ii) expanding relationships with existing brokers
through quality service, (iii) concentrating marketing efforts on a smaller
number of high-volume brokers and (iv) developing correspondent relationships.
The benefits of wholesale origination result from brokers conducting their own
marketing and employing their own personnel to complete loan applications,
allowing UPAM to increase quickly its loan origination volume through
increased leverage of fixed costs. The wholesale division funded $359.2
million in loans, or 62% of UPAM's total loan production, during the twelve
months ended December 31, 1997. At December 31, 1997, the wholesale division
had five loan centers located in Washington, Utah, California, Florida and
Ohio, and employed 41 account executives. These loan centers maintain
relationships with brokers that provide loans to UPAM. During the twelve
months ended December 31, 1997, UPAM originated loans through approximately
760 independent mortgage brokers, with the top 20 brokers generating 29% of
those loans and the largest broker accounting for 5.0%.
In January 1998, the wholesale division established a correspondent group
targeting mid-size brokers. Loans are initially funded through the broker's
warehouse lines (not affiliated with UPAM or the Bank) and delivered to UPAM
on a whole loan basis for underwriting and program review. All loans purchased
on this basis will have appraisal reviews performed and must conform with
UPAM's credit and underwriting guidelines. Whereas the margins on
correspondent business are generally less than traditional wholesale channels,
efficiencies are gained as correspondents perform more of the traditional
back-office work, allowing UPAM to purchase loans with a minimum of fixed
overhead.
55
<PAGE>
The following table sets forth selected information relating to wholesale
loan originations during the periods shown.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans originated........ $15,255 $23,637 $43,721 $64,330 $90,803 $160,382
Number of loans
originated............. 152 243 384 561 862 1,762
Average principal
balance per loan....... $ 100 $ 97 $ 113 $ 114 $ 105 $ 91
Weighted average loan-
to-value ratio......... 73% 72% 73% 74% 75% 75%
First mortgage loans.... 96% 95% 96% 97% 96% 96%
Property securing loan
Owner occupied....... 93% 93% 91% 92% 85% 90%
Non-owner occupied... 7% 7% 9% 8% 15% 10%
Weighted average
interest rate
Fixed-rate loans..... 11.93% 11.49% 10.83% 11.22% 10.99% 10.89%
Adjustable-rate
loans................ 9.67% 9.69% 9.44% 9.63% 9.89% 9.83%
</TABLE>
PRODUCTS AND PRICING
UPAM offers both fixed-rate loans and ARMs, as well as loans with an
interest rate that is initially fixed for a period of time and subsequently
converts to an adjustable-rate. Most of the ARMs originated by UPAM are
offered at a lower initial interest rate and are subject to lifetime interest
rate caps. At each interest rate adjustment date, UPAM adjusts the rate,
subject to certain limitations on the amount of any single adjustment, until
the rate charged equals the lower of the fully indexed rate or the lifetime
interest rate cap. There can be no assurance, however, that the interest rate
on these loans will reach the fully indexed rate if interest rates rise
rapidly, to the level of the cap, the loans are pre-paid or in cases of
foreclosure. UPAM's borrowers are classified under one of six subprime risk
classifications, and loan products are available at different interest rates
and with different origination points and fees depending on the particular
borrower's risk classification. UPAM's maximum loan amount is generally
$400,000 with an LTV of 90%, $500,000 with an LTV of 85% and $750,000 with an
LTV of 75%. Loans over $750,000 are made on a case-by-case basis. Loans
originated by UPAM during the twelve months ending December 31, 1997 had an
average loan amount of approximately $104,000 and an average LTV of
approximately 75%. Unless prohibited by law or otherwise waived by UPAM upon
the payment by the borrower of higher origination fees and a higher interest
rate, UPAM generally imposes a prepayment penalty on the borrower. As of
December 31, 1997, approximately 86% of UPAM's loans included a prepayment
penalty.
UNDERWRITING STANDARDS
UPAM originates loans in accordance with underwriting criteria that
generally do not satisfy traditional underwriting standards, such as those
utilized by GNMA, FNMA or FHLMC, and therefore may result in rates of
delinquencies and foreclosures that are higher, and may be substantially
higher, than those rates experienced by loans underwritten in a more
traditional manner. UPAM's underwriting guidelines are intended to evaluate
the applicant's credit history and capacity to repay the loan, the value of
the proposed collateral and the adequacy of such collateral for the loan. UPAM
determines the loan terms, including interest rate and maximum LTV based upon
the underwriting guidelines.
Underwriters are required to have had either substantial subprime
underwriting experience or substantial experience with UPAM in other aspects
of the Company's subprime mortgage finance business before becoming part of
UPAM's underwriting department. Underwriters are not given approval authority
until their work has been reviewed by a corporate-based underwriter or a
specifically identified branch underwriter. In addition,
56
<PAGE>
a sampling of a new underwriter's work is reviewed by a corporate level
underwriter. No branch-based underwriter has an approval limit greater than
$400,000. All loans over $400,000 require approval of the Chief Credit Officer
or a designated corporate-based underwriter. Exceptions from these established
guidelines are also subject to approvals, often at the corporate level. This
approval process is reviewed periodically by the Board of Directors. The Chief
Credit Officer periodically re-evaluates the authority levels of all
underwriting personnel.
UPAM's underwriting guidelines require a credit report on each applicant
from a credit reporting company. UPAM's underwriters review the applicant's
credit history based on the information contained in the application and
reports available from credit reporting bureaus in order to determine if the
applicant's credit history meets UPAM's underwriting guidelines. A number of
factors determine a loan applicant's creditworthiness, including debt ratios,
payment history and the combined LTV for all existing mortgages on a property.
Based on this review, the underwriter assigns a preliminary rating to the
application.
Assessment of the applicant's ability to pay is one of the principal
elements differentiating UPAM's underwriting process from methods employed by
traditional lenders that may rely heavily on automated credit scoring tools.
UPAM's underwriters review the applicant's credit profile to evaluate whether
an impaired credit history is a result of previous adverse circumstances or a
continuing inability or unwillingness to meet credit obligations in a timely
manner.
All mortgaged properties are appraised by qualified independent appraisers
prior to funding of the loan. All appraisals are required to conform to the
Uniform Standards of Professional Appraisal Practice. Review appraisals are
required on substantially all wholesale loans (consistent with industry
standards since the appraiser involved on a wholesale origination would
generally not be on a list of approved appraisers maintained by UPAM) and
retail loans where the appraisal was prepared by an appraiser who has not been
approved by UPAM.
UPAM has implemented a loan quality control process designed to ensure
compliance with its policies and procedures. Prior to funding a loan, UPAM
performs a pre-funding quality control audit which consists of verifying a
loan applicant's credit and employment. UPAM also ensures that the
documentation is complete once the loan is originated in order to facilitate
its subsequent sale.
The underwriting guidelines set forth in the following table, and the letter
grades applied to each sub-prime borrower category, reflect solely the
Company's internal standards, and may not be comparable to those used by other
subprime mortgage lenders. UPAM continually evaluates its underwriting
guidelines and periodically modifies the underwriting guidelines as required.
57
<PAGE>
<TABLE>
<CAPTION>
CREDIT CRITERIA MATRIX (LTV'S UP TO 85%)
--------------------------------------------------------------
AA A- B
-------------------- -------------------- --------------------
<S> <C> <C> <C>
MORTGAGE Maximum one 30-day Maximum two 30-day Maximum four 30-day
RATING late payment and no late payments and no late payments and
LAST 12 MONTHS 60-day late payments 60-day late payments one 60-day late
within last 12 within last 12 payment within last
months. Rolling 30- months. Rolling 30- 12 months if LTV is
day lates NOT day lates okay. Not 80% or less; no 60-
allowed. Not more more than 29 days day late payments if
than 29 days delinquent at LTV over 80%.
delinquent at closing. Rolling 30-day lates
closing. okay. Not more than
59 days delinquent
at closing.
<CAPTION>
EXCELLENT GOOD SATISFACTORY
CONSUMER CREDIT -------------------- -------------------- --------------------
24-MONTH HISTORY 12-MONTH HISTORY 12-MONTH HISTORY
-------------------- -------------------- --------------------
<S> <C> <C> <C>
All open and/or active - Excellent credit - Good credit prior - Reasonably good
accounts in the review prior 24 months. 12 months. credit last 2
period, are considered Isolated Isolated months. Isolated
when calculating the incidences of incidences of incidences of
ratio of derogatory ac- minor minor credit
counts to total ac- delinquencies delinquencies delinquencies
counts. greater than 30 greater than 60 greater than 90
days will be days will be days will be
considered. considered. considered.
-Sufficient number -Sufficient number -Demonstrate
of accounts paid of accounts paid ability/
as agreed to as agreed to willingness to pay
offset isolated offset isolated majority of
incidences of incidences of accounts as
delinquencies delinquencies agreed.
greater than 30 greater than 60 -Evidence of
days. days. significant
-Evidence of -Evidence of delinquencies
significant significant greater than 90
delinquencies delinquencies days or 90 days
greater than 30 greater than 60 overdue are not
days not allowed. days not allowed. allowed.
-< 25% of credit -< 35% of credit -< 50% of credit
report items report items report items
derogatory in last derogatory in last derogatory in last
24 months. 12 months. 12 months.
-Minimum of 3 -Minimum of 3 -Minimum 3
accounts open for accounts open for accounts open for
6 months. 6 months. 6 months. If no
minimum consumer
credit,
satisfactory "B"
mortgage rating or
VOR last 12 months
required.
BANKRUPTCY 3 years since If LTV is over 85%, 1 year since
FORECLOSURE discharge/dismissal. 2 years since discharge--Chapter
Re-established discharge--Chapter 7 7.
excellent ("A") and Chapter 13. 1 year since filing
credit since If LTV is 85% or Chapter 13.
discharge/dismissal. less, 2 years since Must be discharged
Minimum of 3 filing Chapter 13. prior to loan
accounts open at Must be discharged application.
least 6 months. No prior to loan Re-established good
delinquency credit application. ("B") credit since
report items since Re-established good discharge/dismissal;
discharge/dismissal. ("A") credit since or 18 months, if no
discharge/dismissal. re-established
Minimum of 3 credit since
accounts open at discharge/dismissal.
least 6 months. No
delinquent credit
items since
discharge/dismissal.
No foreclosures last No foreclosures last No foreclosures last
3 years. 2 years. 2 years.
COLLECTION No collections, No collections or No collections or
CHARGE-OFF charge-offs allowed charge-offs in the charge-offs in the
in last 24 months. last 12 months. last 12 months.
TAX LIENS No liens, judgments No liens, judgments No liens, judgments
JUDGMENTS last 24 months last 12 months last 12 months
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
CREDIT CRITERIA MATRIX (LTV'S UP TO 85%)
-------------------------------------------------------------
C C- D
------------------- ------------------- -------------------
<S> <C> <C> <C>
MORTGAGE Maximum six 30-day, Unlimited number of Greater than one
RATING two 60-day and one 30-day, 60-day and 120-day late
LAST 12 MONTHS 90-day late 90-day late payment within last
payments within payments or one 12 months. Current
last 12 months. 120-day late NOD allowed.
Rolling 30-day payment within last
lates okay. Not 12 months. Current
more than 89 days NOD allowed. Not
delinquent at more than 119 days
closing. delinquent at
closing.
<CAPTION>
FAIR POOR POOR
CONSUMER CREDIT ------------------- ------------------- -------------------
12-MONTH HISTORY 24-MONTH HISTORY 12-MONTH HISTORY
------------------- ------------------- -------------------
<S> <C> <C> <C>
All open and/or active - Moderate to - Majority of - Majority of
accounts in the review significant credit report credit report
period, are considered credit items derogatory items derogatory
when calculating the derogatories in in last 12 months in last 12
ratio of derogatory ac- the past. -Percentage of months.
counts to total ac- -Currently derogatory credit -Percentage of
counts. delinquent items are not a derogatory credit
accounts. factor. items are not a
-< 100% of credit factor.
report items
derogatory in
last 12 months.
This category
applies to
Borrowers who do
not have at least
3 accounts open
for a minimum of
6 months.
BANKRUPTCY 1 year since Bankruptcy filed Current bankruptcy
FORECLOSURE bankruptcy filing within last 12 or recent Chapter 7
date with some re- months. Must be dismissal or
established credit. discharged prior to discharge.
Must be discharged loan application. Current bankruptcy
prior to loan must be paid
application. through loan.
No foreclosures in Foreclosures cured N/A
last 12 months. in last 12 months.
COLLECTION Collections, Collections, Collections,
CHARGE-OFF charge-offs last 12 charge-offs last 12 charge-offs last 12
months allowed. months allowed. months allowed.
Unpaid collections Unpaid collections Unpaid collections
in last 12 months in last 12 months in last 12 months
must be paid must be paid must be paid
through closing, or through closing, or through closing, or
a monthly payment a monthly payment a monthly payment
calculated and calculated and calculated and
included in the included in the included in the
borrower's DTI. borrower's DTI. borrower's DTI.
Unpaid charge-offs Unpaid charge-offs Unpaid charge-offs
may remain, no may remain, no may remain, no
monthly payment monthly payment monthly payment
calculation calculation calculation
required. required. required.
TAX LIENS Liens, judgments Liens, judgments Liens, judgments
JUDGMENTS last 12 months last 12 months last 12 months
</TABLE>
59
<PAGE>
LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following table sets forth information concerning UPAM's loan production
by subprime borrower risk classification for the periods shown. The letter
grades applied to each subprime borrower category reflect solely the Company's
internal standards, and may not be comparable to those used by other subprime
mortgage lenders.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
AA Risk Grade
Percent of total
originations......... 15% 14% 20% 27% 32% 33%
Weighted average loan-
to-value ratio....... 74% 74% 75% 75% 75% 74%
Weighted average
interest rate........ 8.91% 9.65% 8.88% 9.06% 9.22% 9.62%
A- Risk Grade
Percent of total
originations......... 54% 53% 53% 44% 39% 37%
Weighted average loan-
to-value ratio....... 71% 71% 74% 76% 76% 76%
Weighted average
interest rate........ 9.48% 9.19% 9.28% 9.15% 9.55% 9.66%
B Risk Grade
Percent of total
originations......... 24% 26% 21% 21% 21% 22%
Weighted average loan-
to-value ratio....... 75% 73% 72% 75% 78% 76%
Weighted average
interest rate........ 10.43% 9.69% 9.56% 9.77% 10.17% 10.31%
C Risk Grade
Percent of total
originations......... 4% 5% 2% 4% 4% 4%
Weighted average loan-
to-value ratio....... 66% 69% 70% 69% 70% 69%
Weighted average
interest rate........ 11.53% 10.94% 10.81% 10.33% 10.61% 10.48%
C- Risk Grade
Percent of total
originations......... 1% 2% 1% 2% 2% 2%
Weighted average loan-
to-value ratio....... 55% 66% 68% 64% 69% 70%
Weighted average
interest rate........ 12.23% 11.54% 11.58% 11.17% 10.89% 11.48%
D Risk Grade
Percent of total
originations......... 2% -- 3% 2% 2% 2%
Weighted average loan-
to-value ratio....... 54% 53% 64% 59% 64% 63%
Weighted average
interest rate........ 13.25% 13.25% 12.61% 11.95% 12.88% 12.94%
</TABLE>
60
<PAGE>
LOAN PRODUCTION BY GEOGRAPHIC DISTRIBUTION
The following table sets forth the percentage of UPAM's loans (based upon
dollar amounts) originated by state for the periods shown.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
California.............. 36% 46% 53% 58% 50% 39%
Washington.............. 31% 27% 19% 12% 17% 12%
Utah.................... 22% 23% 13% 11% 5% 5%
Colorado................ 6% 1% 6% 5% 6% 8%
Arizona................. -- -- 5% 5% 6% 4%
Florida................. -- -- -- -- 5% 8%
Maryland................ -- -- -- -- -- 2%
Nevada.................. -- -- 2% 1% 1% 2%
New Jersey.............. -- -- -- -- 2% 3%
Oregon.................. 2% 1% 1% 5% 2% 3%
Ohio.................... -- -- -- -- 2% 6%
All others combined..... 3% 2% 1% 3% 4% 8%
--- --- --- --- --- ---
Total................. 100% 100% 100% 100% 100% 100%
=== === === === === ===
</TABLE>
LOAN SALES AND SECURITIZATIONS
Whole Loan Sales. During the twelve months ended December 31, 1997, UPAM
sold $360.2 million of mortgage loans through whole loan sales at a weighted
average sales price equal to 105.7% of the original principal balance of the
loans sold.
Whole loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by UPAM
regarding the underwriting criteria applied by UPAM in the origination
process. In the event of a breach of such representations and warranties, UPAM
may be required to repurchase or substitute loans. In addition, UPAM sometimes
commits to repurchase or substitute a loan if a payment default occurs within
the first month following the date the loan is funded, unless other
arrangements are made between UPAM and the purchaser. UPAM also is required in
some cases to repurchase or substitute a loan if the loan documentation is
alleged to contain fraudulent misrepresentations made by the borrower. UPAM's
repurchase history to date has been minimal.
UPAM seeks to maximize its premium on whole loan sales revenue by closely
monitoring institutional purchasers' requirements and focusing on originating
the types of loans that meet those requirements and for which institutional
purchasers tend to pay higher premiums. During the twelve months ended
December 31, 1997, UPAM sold loans to 16 institutional purchasers, four of
which purchased approximately 78% of the loans sold by UPAM in this period.
Securitizations. UPAM completed its first securitization of mortgage loans
in December 1997, in the principal amount of $114.9 million, and expects to
sell or securitize loans on a periodic basis in the future. Whether, when and
how significantly UPAM enters the securitization market will depend upon
economic and secondary market conditions and available financial resources. In
connection with any mortgage loan securitizations, the Company will seek to
maximize cash gains or arrange for the prompt sale of residual interests
retained in the securitizations at or above their net book value. See "Risk
Factors--General--Securitizations."
LOAN SERVICING AND DELINQUENCIES
UPAM currently sells most of its loans on a servicing released basis. All
loans held for sale, loans securitized, and those loans that cannot be sold,
are serviced and held by the Bank. The Bank subcontracts with a third-party
sub-servicer to conduct its servicing operations, and monitors the sub-
servicer's activities to ensure
61
<PAGE>
that they comply with its guidelines. As UPAM securitizes additional mortgage
loans, it expects to continue to use a third party sub-servicer to perform
payment processing, account maintenance, tax and insurance escrow accounting
and other primary servicing activities, but may develop expanded in-house
capabilities for delinquency, foreclosure and REO activities management.
UPAM began receiving applications for mortgage loans under its regular
lending programs in January 1996 and to date has sold substantially all of its
loans on a whole loan, servicing released basis. Accordingly, UPAM does not
have representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating future
delinquency, loss and prepayment data with respect to its loans.
INSURANCE PREMIUM FINANCE
BUSINESS OVERVIEW
In May 1995, the Company entered a joint venture with BPN under the name
"ClassicPlan." Under this joint venture, which commenced operations in
September 1995, (i) the Bank underwrites and finances automobile insurance
premiums in California and (ii) BPN markets this financing primarily to
independent insurance agents that sell automobile insurance in California and,
thereafter, services such loans for the Bank. IPF targets drivers who are
classified by insurance companies as non-standard or high risk for a variety
of reasons, including age, driving record, a lapse in insurance coverage or
ownership of high value or high performance automobiles. Insurance companies
that underwrite insurance for such drivers, including those participating in
the assigned risk programs established by California law, generally either do
not offer financing of insurance premiums or do not offer terms as flexible as
those offered by IPF.
Customers are directed to BPN through a non-exclusive network of insurance
brokers and agents who sell automobile insurance and offer financing through
programs like those offered by IPF. On a typical twelve-month insurance
policy, the borrower makes a cash down payment of 15% or 20% of the premium
(plus certain fees) and the balance is financed under a contract that contains
a payment period of shorter duration than the policy term. In the event that
the insured defaults on the loan, the Bank has the right to obtain directly
from the insurance company the unearned insurance premium held by the
insurance company, which can then be applied to the outstanding loan balance
(premiums are earned by the insurance company over the life of the insurance
policy). Each contract is designed to ensure that, at any point during the
term of the underlying policy, the unearned premium under the insurance policy
exceeds the unpaid principal amount due under the contract. Under the terms of
the contract, the insured grants IPF a power of attorney to cancel the policy
in the event the insured defaults under the contract. Upon cancellation, the
insurance company is required by California law to remit the unearned premium
to IPF which, in turn, offsets this amount against any amounts due from the
insured. IPF does not sell or have the risk of underwriting the underlying
insurance policy. IPF seeks to minimize its credit risk by (i) perfecting a
security interest in the unearned premium, (ii) avoiding concentrations of
policies with insurance companies that are below certain industry ratings and
(iii) doing business to date only in California which maintains an insurance
guaranty fund which protect consumers and insurance premium finance companies
against losses from failed insurance companies.
In addition to insurance premiums, IPF will also finance broker fees (i.e.,
fees paid by the insured to the agent). If a policy cancels, the agent repays
any unearned broker fee financed by IPF. Broker fee financing represents
approximately 3% of total loans outstanding. At December 31, 1997,
approximately 81% of all broker fee financing was to a single insurance
agency. When IPF agrees to finance an agent's broker fees, a credit limit is
established for the agent. Agents are required to maintain deposits with the
Bank to mitigate IPF's losses on broker fees financed. To date, the Bank has
not charged-off a broker fee balance.
The Company's portfolio of insurance premium finance contracts has grown
from 54,927 contracts in the aggregate gross amount of $32.1 million at
December 31, 1996 to 132,623 contracts in the aggregate gross amount of $40.0
million at December 31, 1997, primarily as a result of the adoption in
California of mandatory automobile insurance. These contracts were originated
solely in California by over 500 agents and were secured by policies
underwritten by over 200 insurance companies.
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<PAGE>
In January 1998, the Company and BPN purchased from Providian National Bank
and others for $450,000 the right to solicit new and renewal personal and
commercial insurance premium finance business from brokers who previously have
provided contracts to Providian National Bank and the servicers of its
insurance premium finance business. The purchase price for the agreement was
provided 60% by the Company and 40% by BPN. The relationship between the
Company and BPN continues to be governed by the joint venture arrangement
already in effect. See "--Relationship with BPN" below. The Company also
acquired the Commonwealth name and certain equipment and software. The
agreement also provides that Providian National Bank and the servicers of its
insurance premium finance business may not solicit or engage in the insurance
premium finance business in California for a period of three years from the
date of the agreement.
RELATIONSHIP WITH BPN
BPN is headquartered in Chino, California, and markets the Company's
insurance premium finance program under the trade name "ClassicPlan." The
Company believes that IPF is the largest provider of financing for consumer
automobile insurance premiums in California. On a very limited basis, IPF also
finances insurance premiums for businesses purchasing property, casualty and
liability insurance. At December 31, 1997, BPN had two stockholders and 45
employees.
BPN solicits insurance agents and brokers to submit their clients' financing
requests to the Bank. BPN is responsible for monitoring the agents'
performance and assisting with IPF's compliance with applicable consumer
protection, disclosure and insurance laws, and providing customer service,
data processing and collection services to IPF. The Bank pays fees to BPN for
these services. The amount of these fees is based on fixed charges, which
include a loan service fee per contract and cancellation fees charged by the
Bank, and the earnings of the loan portfolio, which include (i) 50% of the
interest earned on portfolio loans after the Bank subtracts a specified
floating portfolio interest rate and (ii) 50% of late fees and returned check
fees charged by the Bank. Additionally, BPN and the Bank share equally (i)
certain collection and legal expenses which may occur from time-to-time, (ii)
all net loan losses experienced on the insurance premium loan portfolio and
(iii) all net losses up to $375,000 experienced on the broker fees loan
portfolio. BPN bears losses over $375,000 experienced on the broker fees loan
portfolio.
The stockholders of BPN have entered into certain guaranty agreements in
favor of the Bank whereby they agree to pay any sums owed to the Bank and not
paid by BPN. The total potential liability of the guarantors to the Bank is
limited to $1,250,000 plus any amounts by which BPN is obligated to indemnify
the Bank. Under these guaranties, all debts of BPN to the guarantors are
subordinated to the full payment of all obligations of BPN to the Bank.
The Company has entered into an option agreement with BPN and its
stockholders whereby the Company may purchase all of the issued and
outstanding shares of BPN (the "Share Option") and all additional shares of
any BPN affiliate which may be organized outside of California (the "Affiliate
Share Option"). The option period expires March 31, 2005. The Company has
agreed not to exercise the Share Option prior to April 29, 1999 unless BPN or
its stockholders have breached their outstanding agreements with the Company.
Until the date occurring 90 days after delivery to the Company of a notice
stating that BPN has had $30,000,000 or more in loans outstanding for the six
months preceding delivery of such notice, which notice cannot be delivered
prior to October 29, 1999, the Company may exercise the Share Option for
$3,250,000 and must pay a $750,000 noncompete payment to certain stockholders
and key employees of BPN (the "Noncompete Payment"). If the Share Option is
exercised any time thereafter, the Noncompete Payment will be made and the
option exercise price shall be the greater of (a) $3,250,000 or (b) four times
BPN's pre-tax earnings for the twelve complete consecutive calendar months
immediately preceding the date of exercise less the Noncompete Payment. The
Affiliate Share Option may not be exercised independently of the Share Option.
The exercise price of the Affiliate Share Option will equal the sum of four
times BPN Affiliate's pre-tax earnings for the twelve month period prior to
exercise.
AUTOMOBILE INSURANCE PREMIUM FINANCE INDUSTRY
Insurance Finance. The private passenger automobile insurance industry in
the United States is estimated by A.M. Best Company ("A.M. Best"), a provider
of independent ratings on the financial strength and claims
63
<PAGE>
payment ability of insurance companies, to have been a $109 billion market in
annual premium volume during 1996, with nonstandard automobile insurance
comprising $23 billion of this market. Although reliable data concerning the
size and composition of the personal lines premium finance market is not
available, the Company believes that the industry is highly fragmented with no
independent insurance premium finance company accounting for a significant
share of the market.
The Company believes that the insurance premium finance industry is
attractive for the following reasons: (i) the nonstandard automobile insurance
premium market has grown rapidly in recent years, growing 56.7% over the past
five years; (ii) the insurance premium finance industry is consolidating
nationwide as both producers and insurance companies reduce the number of
their relationships with insurance premium finance companies; and (iii)
additional states may follow California in legislating mandatory insurance
coverage for all motorists. The Company believes that the insurance premium
finance industry in California is somewhat more concentrated than elsewhere in
the nation, with several long-established competitors.
California Insurance Laws. Under current law, automobiles in the state of
California cannot be registered without providing proof of automobile
insurance or posting required bonds with the Department of Motor Vehicles.
In California, as in most states, insurance companies fall into one of two
categories, admitted or non- admitted. All insurance companies licensed to do
business in California are required to be members of the California Insurance
Guarantee Association ("CIGA"), and are classified as "admitted" companies.
CIGA was established to protect insurance policyholders in the event the
company that issued a policy fails financially, and to establish confidence in
the insurance industry. Should an insurance company fail, CIGA is empowered to
raise money by levying member companies. CIGA pays off claims against
insurance companies, which protects both the customer and the premium
financiers should an admitted insurance company fail. In such event, CIGA will
refund any unearned premiums. This provides protection to companies, such as
IPF, that provide insurance premium financing. As a result, IPF's policy is to
limit financing of insurance policies issued by non-admitted carriers to less
than 5% of its total portfolio. At December 31, 1997, policies issued by non-
admitted carriers comprised 1.44% of IPF's total portfolio.
Because insurance companies will not voluntarily insure drivers whom they
consider to be excessively high risk, California has a program called the
California Automobile Assigned Risk Program ("CAARP"), to which all admitted
companies writing private passenger automobile insurance policies must belong.
This 43-year-old program is an insurance plan for high-risk, accident-prone
drivers who are unable to purchase insurance coverage from regular insurance
carriers. CAARP policies are distributed to the admitted companies in
proportion to their share of California's private passenger automobile
insurance market. The companies participating in CAARP do not have any
discretion in choosing the customers they insure under the program. The
customers are arbitrarily assigned to them by CAARP. Although CAARP offers
financing of its policy premiums, its terms are not as competitive as the
insurance premium finance companies and, therefore, many CAARP policies are
financed by others. At December 31, 1997, approximately 24.8% of the insurance
policies financed by IPF were issued under CAARP.
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<PAGE>
BUSINESS STRATEGY
IPF's business strategy is to increase profitably the volume of contracts
originated and maintained in its portfolio by expanding its relationships with
insurance brokers and agents and insurance companies in California and,
potentially, in other states. IPF intends to implement this strategy by:
. Strengthening its relationships with insurance brokers and agents by
offering a variety of high-quality support services (e.g., computer
hardware and software and customer reports) designed to enable them to
better serve their customers;
. Investing additional resources to ensure IPF's ability to continue to
provide technologically advanced and efficient contract origination and
servicing systems and support services;
. Expanding its premium financing to other insurance lines of business
(e.g., commercial, property, casualty and liability insurance); and
. Expanding the Company's operations into new states either through joint
ventures or the acquisition of existing insurance premium finance
businesses in those states.
OPERATING SUMMARY
The following table presents a summary of IPF's key operating and
statistical results for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1997
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PORTFOLIO AVERAGES)
<S> <C> <C>
OPERATING DATA
Loan originations................................ $ 99,012 $ 145,167
Loans outstanding at period end.................. 32,058 39,990
Average gross yield(1)........................... 19.18% 19.79%
Average net yield(2)............................. 13.62% 14.01%
Allowance for loan losses........................ $ 504 $ 450
LOAN QUALITY DATA
Allowance for loan losses (% of loans
outstanding).................................... 1.57% 1.13%
Net charge-offs (% of average loans
outstanding)(3)................................. 0.38% 0.35%
Delinquencies (% of loans outstanding)(4)........ 1.18% 1.64%
PORTFOLIO DATA
Average monthly loan originations (number of
loans).......................................... 6,986 10,443
Average loan size at origination................. $ 1,180 $ 1,158
Commercial insurance policies (% of loans
outstanding).................................... 1.6% 2.1%
CAARP policies (% of loans outstanding).......... 19.8% 24.8%
Cancellation rate (% of premiums financed)....... 45.0% 49.0%
</TABLE>
- --------
(1) Gross yield represents total rates and fees paid by the borrower.
(2) Net yield represents the yield to the Bank after interest and fee sharing
with BPN.
(3) Includes only the Bank's 50% share of charge-offs.
(4) This statistic measures delinquencies on canceled policy balances. Since
IPF seeks recovery of unearned premiums from the insurance companies,
which can take up to 90 days, loans are not considered delinquent until
more than 90 days past due.
PRODUCTS AND PRICING
IPF generally charges from 16% to 23% annualized interest (depending on the
amount financed) and a $40 processing fee for each consumer contract, which
the Company believes is competitive in IPF's industry. In
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<PAGE>
addition, contracts provide for the payment by the insured of a delinquency
charge and, if the default results in cancellation of any insurance policy
listed in the contract, for the payment of a cancellation charge. Certain of
these finance charges and fees are shared with BPN. See "--Relationship with
BPN." The insured makes a minimum 15% down payment on an annual policy and
pays the remainder in a maximum of ten monthly payments.
IPF designs its programs so that the unearned premium is equal to or greater
than the remaining principal amount due on the contract by requiring a down
payment and having a contract term shorter than the underlying policy term.
SALES AND MARKETING
IPF currently markets its insurance premium finance program through a
network of over 500 agents, primarily located in Los Angeles, Orange and San
Bernardino counties. Relationships with agents are established by BPN's
marketing representatives. The Company believes that IPF has been able to
attract and maintain its relationship with agents by offering a higher level
of service than its competitors. IPF focuses on providing each agent with up-
to-date information on its customers' accounts, which allows the agent to
service customers' needs and minimize the number of policies that are
canceled. Many of IPF's largest agents have computer terminals provided by BPN
in their offices which allow on-line access to customer information. Agents
for IPF receive their producer fees ($20, equal to 50% of the aforementioned
$40 processing fee per contract) in 30 days, as opposed to some of IPF's
competitors, who hold back 50% of the fee as collateral against early
cancellations. IPF does not require return of this $20 producer fee for early
policy cancellation unless the policy pays off in the first 30 days.
To minimize its exposure to reliance on a limited number of agents, the
Company has instituted portfolio guidelines generally limiting the dollar
amount of contracts originated by any agent to 15% of IPF's total portfolio.
The Company performs a quarterly analysis of all agents based on information
provided by BPN. At December 31, 1997, IPF had one agent that exceeded the 15%
portfolio parameter, accounting for 23.9% of IPF's total portfolio.
UNDERWRITING STANDARDS
IPF is a secured lender, and upon default, relies on its security interest
in the unearned premium held by the insurance company. IPF can, however,
suffer a loss on an insurance premium finance contract for four reasons: (i)
loss of all or a portion of the unearned premium due to its failure to cancel
the contract on a timely basis; (ii) an insolvency of the insurance company
holding the unearned premium not otherwise covered by CIGA; (iii) inadequacy
of the unearned premium to cover charges in excess of unpaid principal amount;
and (iv) cost of collection and administration, including the time value of
money, exceeding the unpaid principal and other charges due under the
contract. For the twelve months ended December 31, 1997, IPF canceled for
nonpayment contracts representing approximately 49% of all premiums financed.
Careful administration of contracts is critical to protecting IPF against
loss.
Credit applications are taken at the insurance agent's office. Given the
secondary source of repayment on unearned premiums due from the insurance
company on a canceled policy, and in most cases, access to CIGA, IPF does not
carry out a credit investigation of a borrower on loans under $25,000. At
December 31, 1997, IPF had one insurance premium finance loan with an original
principal amount over $25,000.
SERVICING AND COLLECTION
The Company believes that an efficient and accurate servicing and collection
system is the most important management tool that an insurance premium
financing company can use to protect itself from losses as a result of an
insured's default on a contract. The insurance premium finance industry is
acutely time sensitive because insurance premiums are earned each day that an
insurance policy remains in effect, thus reducing, on a daily basis, the
collateral support provided by the unearned premium.
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<PAGE>
BPN's current computer system is an Advisor 216x, manufactured by Computer
Design Systems, Inc. of Minneapolis. The system uses a UNIX operating system
and is based on RISC architecture. Although this system satisfies IPF's
current requirements for (i) application processing, (ii) payment processing
and collections and (iii) monitoring and reporting, and has significant
capacity remaining, BPN is developing a new generation of Oracle-based
management information system software which will provide complete online,
real-time information processing services. In addition, the system will
provide direct electronic processing of many processing functions that
currently are paper intensive.
Billing Process. A customer's monthly payments are recorded in BPN's
computer system on the date of receipt. BPN's computer system is designed to
provide protection against principal loss by automatically canceling a policy
no later than 18 days after the customer's latest payment due date. If a
payment is not received on its due date, BPN's computer system automatically
prints a notice of intent to cancel and assesses a late fee which is mailed to
the insured and his or her insurance agent stating that payment must be
received within 18 days after the due date or IPF will cancel the insurance
policy. If payment is received within the 18 day period, BPN's computer system
returns the account to normal status.
Collections Process. If IPF does not receive payment within the statutory
period set forth in the notice of intent to cancel, BPN's computer system will
automatically generate a cancellation notice on the next business day,
instructing the insurance company to cancel the insured's insurance policy and
refund any unearned premium directly to IPF for processing.
Although California law requires the insurance company to refund unearned
premiums within 30 days of the cancellation date, most insurance companies pay
on more extended terms. After cancellation, IPF charges certain allowable fees
and continues to earn interest. Although the gross return premium may not
fully cover the fees and accrued interest owed to IPF by the insured,
principal generally is fully covered. Policies which are canceled in the first
two months generally have a greater risk of loss of fees.
IPF charges against income a general provision for possible losses on
finance receivables in such amounts as management deems appropriate. Case-by-
case direct write-offs, net of recoveries on finance receivables, are charged
to IPF's allowance for possible losses. This allowance amount is reviewed
periodically in light of economic conditions, the status of the outstanding
contracts and other factors.
Insurance Company Failure. One of the principal risks involved in financing
insurance premiums is the possible insolvency of an insurance company. Another
risk is that an insurance company's financial circumstances cause it to delay
its refunds of unearned premiums. Either event can adversely affect the yield
to an insurance premium finance company on a contract. Despite the protection
afforded by CIGA, IPF also reviews the ratings assigned to the insurance
companies by A.M. Best or their financial statements. To minimize its exposure
to risks resulting from the insolvency of an insurance company, IPF limits the
number of policies financed that are issued by insurance companies rated "B"
or lower by A.M. Best.
AUTOMOBILE FINANCE
BUSINESS OVERVIEW
The Company entered the subprime automobile finance business in February
1996 through the establishment of United Auto Credit Corporation as a
subsidiary of the Bank. UACC purchases auto contracts primarily from dealers
in used automobiles, approximately 77% of which are independent dealers and
23% of which are franchisees of automobile manufacturers. The borrowers on
contracts purchased by UACC are classified as subprime because they typically
have limited credit histories or credit histories that preclude them from
obtaining loans through traditional sources. UACC maintains seven branch
offices located in California and one each in Arizona, Oregon and Utah. At
December 31, 1997, UACC's portfolio contained 4,750 auto contracts in the
aggregate gross amount of $40.9 million, including unearned finance charges of
$10.6 million.
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<PAGE>
SUBPRIME AUTOMOBILE FINANCE INDUSTRY
Automobile financing is one of the largest consumer finance markets in the
United States. In general, the automobile finance industry can be divided into
two principal segments: a prime credit market and a subprime credit market.
Traditional automobile finance companies, such as commercial banks, savings
institutions, thrift and loan companies, credit unions and captive finance
companies of automobile manufacturers, generally lend to the most
creditworthy, or so-called prime, borrowers. The subprime automobile credit
market, in which UACC operates, provides financing to borrowers who generally
cannot obtain financing from traditional lenders.
Historically, traditional lenders have not serviced the subprime market or
have done so only through programs that were not consistently available.
Recently, however, independent companies specializing in subprime automobile
financing and subsidiaries of larger financial services companies have entered
this segment of the automobile finance market, but it remains highly
fragmented, with no company having a significant share of the market.
BUSINESS STRATEGY
UACC's business strategy includes controlled growth at the branch level,
with limited volume goals and the gradual addition of new branches. Each
branch is targeted to generate between $650,000 and $750,000 in gross
contracts per month within four months of opening. The Company believes that
UACC's strategy of (i) controlled growth, (ii) disciplined underwriting, (iii)
strong internal audit procedures and (iv) focused servicing and collection
efforts at the branch level, will result in sustainable profitability and
lower levels of delinquency and loss than those experienced by many of its
competitors, whose rapid growth has resulted in portfolio quality problems.
The Company believes that the subprime automobile finance market is
inconsistently or poorly serviced by the consumer finance industry. As a
result, UACC's strategy is to differentiate itself by providing dealers with
consistent, same day decisions and rapid funding of approved contracts. The
Company believes that UACC is also more flexible than some of its competitors
in financing older, higher mileage vehicles and maintenance warranties.
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<PAGE>
OPERATING SUMMARY
The following table presents a summary of UACC's key operating and
statistical results for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
----------------------------------
1996 1997
---------------- ----------------
(DOLLARS IN THOUSANDS,
EXCEPT PORTFOLIO AND OTHER DATA)
<S> <C> <C>
OPERATING DATA
Gross contracts purchased.............. $ 12,216 $ 44,255
Gross contracts outstanding............ 10,830 40,877
Unearned finance charges............... 3,271 10,581
Net contracts outstanding.............. 7,559 30,296
Average purchase discount.............. 10.0% 9.9%
APR to customers....................... 21.0% 21.0%
Allowance for loan losses.............. $ 557 $ 1,791
LOAN QUALITY DATA
Allowance for loan losses (% of net
contracts)............................ 7.37% 5.91%
Delinquencies (% of net contracts)
31-60 days............................ 0.38% 0.84%
61-90 days............................ 0.34% 0.20%
90+ days.............................. -- 0.22%
Net charge-offs (% of average net
contracts)............................ 1.50% 4.94%
Repossessions (net) (% of net
contracts)............................ 1.44% 0.64%
PORTFOLIO DATA
Used vehicles.......................... 98.7% 99.0%
Vehicle age at time of contract
(years)............................... 6.4 6.1
Original contract term (months)........ 37.0 38.4
Gross amount financed to WSBB(1)....... 119% 116%
Net amount financed to WSBB(2) ........ 109% 105%
Net amount financed per contract ...... $ 7,399 $ 7,517
Down payment........................... 22% 20%
Monthly payment........................ $ 269 $ 270
OTHER DATA
Number of branches..................... 4 10
</TABLE>
- --------
(1) WSBB represents Kelly Wholesale Blue Book for used vehicles.
(2) Net amount financed equals the gross amount financed less unearned
finance charges or discounts.
PRODUCTS AND PRICING
UACC targets transactions which involve (i) a used automobile with an
average age of five to eight years and (ii) an average original contract term
of 38 to 42 months.
The financial profile of the target transaction includes (i) an amount
financed (before taxes, license, warranty and discount) equal to 95% to 100%
of invoice for new vehicles or current WSBB for used vehicles (after tax,
license, warranty and discount, the amount financed is targeted at 105% to
110%), (ii) a contract rate and discount which yields 28.5%, (iii) an amount
financed of $7,000 to $10,000, with a down payment of 15% to 20%, and (iv) a
monthly payment from $225 to $325.
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<PAGE>
The target profile of a UACC borrower includes (i) time on the job of three
to five years, (ii) time at current residence of three to five years, (iii) a
ratio of total debt to total income of 33% to 37% and (iv) a ratio of total
monthly automobile payments to total monthly income of 12% to 15%.
The application for an auto contract is taken by the dealer. UACC purchases
the auto contract from the dealer at a discount which increases the effective
yield on such contract. For the quarter ended December 31, 1997, the Company
allocated 70% of the discount to the allowance for loan losses, representing
7% of the gross contract amount. Management periodically reviews the portion
of the discount allocated to the allowance for loan losses in light of the
Company's operations and, in January 1998, increased the allocation to 80% of
the discount, representing 8% of the gross contract amount.
SALES AND MARKETING
UACC markets its financing program to both independent used and franchised
automobile dealers. UACC's marketing approach emphasizes scheduled calling
programs, marketing materials and consistent follow-up. The Company uses
facsimile software programs to send marketing materials to established dealers
and potential dealers on a twice weekly basis in each branch market. UACC's
experienced local staff seeks to establish strong relationships with dealers
in their vicinity.
UACC solicits business from dealers through its branch managers who meet
with dealers and provide information about UACC's programs, train dealer
personnel in UACC's program requirements and assist dealers in identifying
consumers who qualify for UACC's programs. In order to both promote asset
growth and achieve required levels of credit quality, UACC compensates its
branch managers on a salary with a bonus (up to 20% of base salary per year)
that requires the achievement of delinquency, charge-off, volume and return on
average assets targets established for the branch, as well as satisfactory
audit results.
As of December 31, 1997, UACC directly marketed its programs to dealers
through its ten branch offices in California, Utah, Oregon and Arizona.
<TABLE>
<CAPTION>
GROSS NUMBER OF CONTRACTS
CONTRACTS PURCHASED OVER
OUTSTANDING AT THE YEAR
DECEMBER 31, ENDED DECEMBER 31,
BRANCH LOCATION DATE ESTABLISHED 1997 1997
- --------------- ---------------- -------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Irvine, CA.................. March 1996 $ 9,713 811
San Diego, CA............... June 1996 7,526 723
Riverside, CA............... September 1996 7,533 858
San Jose, CA................ November 1996 4,559 489
Los Angeles, CA............. March 1997 4,635 499
San Fernando, CA............ May 1997 3,589 411
Upland, CA.................. July 1997 1,679 196
Salt Lake City, UT.......... August 1997 894 108
Phoenix, AZ................. September 1997 723 97
Portland, OR................ December 1997 26 3
------- -----
$40,877 4,195
======= =====
</TABLE>
When a UACC branch decides to begin doing business with a dealer, a dealer
profile and investigation worksheet are completed. UACC and the dealer enter
into an agreement that provides UACC with recourse to the dealer in cases of
dealer fraud or a breach of the dealer's representations and warranties. When
UACC holds auto contracts aggregating $50,000 or more from a dealer, UACC
obtains a Dun and Bradstreet Analysis Report for such dealer. Branch
management periodically monitors each dealer's overall performance and
inventory to ensure a satisfactory quality level, and regional managers
regularly conduct audits of the dealer's performance.
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The following table sets forth certain data for auto contracts purchased by
UACC for the periods indicated.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1997 1997 1997 1997
-------- ------------- ------------ --------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Gross amount of
contracts.............. $2,628 $4,022 $5,351 $7,686 $9,520 $12,236 $14,813
Average original term of
contracts (months)..... 36.9 36.9 37.0 36.1 38.0 38.2 38.4
</TABLE>
At December 31, 1997, 95% of UACC's auto contracts were written by its
California branches. In the quarter ended December 31, 1997, UACC expanded
into Salt Lake City, Phoenix and Portland, and UACC opened an office in Denver
at the end of January 1998. In addition to diversifying its geographic
concentrations, UACC intends to maintain a broad dealer base to avoid
dependence on a limited number of dealers. At December 31, 1997, no dealer
accounted for more than 2.7% of UACC's portfolio and the ten dealers from
which UACC purchased the most contracts accounted for approximately 19.0% of
its aggregate portfolio.
UNDERWRITING STANDARDS AND PURCHASE OF CONTRACTS
Underwriting Standards and Purchase Criteria. Dealers submit credit
applications directly to UACC's branches. UACC uses credit bureau reports in
conjunction with information on the credit application to make a final credit
decision or a decision to request additional information. Only credit bureau
reports that have been obtained by UACC are acceptable.
UACC's credit policy places specific accountability for credit decisions
directly within the branches. The branch manager or assistant branch manager
reviews all credit applications. In general, no branch manager will have
credit approval authority for contracts greater than $15,000. Any transaction
that exceeds a branch manager's approval limit must be approved by UACC's
Regional Manager, Operations Manager or President.
Verification. Upon approving or conditioning any application, all required
stipulations are presented to the dealer and must be satisfied before funding.
All dealers are required to provide UACC with written evidence of insurance
in force on a vehicle being financed when submitting the contract for
purchase. Prior to funding a contract, the branch must verify by telephone
with the insurance agent the customer's insurance coverage with UACC as loss
payee. If UACC receives notice of insurance cancellation or non-renewal, the
branch will notify the customer of his or her contractual obligation to
maintain insurance coverage at all times on the vehicle. However, UACC will
not "force place" insurance on an account if insurance lapses and,
accordingly, UACC bears the risk of an uninsured loss in these circumstances.
Post-Funding Quality Reviews. UACC's Regional Manager and Operations Manager
complete quality control reviews of the newly originated auto contracts. These
reviews focus on compliance with underwriting standards, the quality of the
credit decision and the completeness of auto contract documentation.
Additionally, UACC's Regional Manager and Operations Manager complete regular
branch audits that focus on compliance with UACC's policies and procedures and
the overall quality of branch operations and credit decisions.
SERVICING AND COLLECTION
UACC services at the branch level all of the auto contracts it purchases.
Billing Process. UACC sends each borrower a coupon book. All payments are
directed to the customer's respective UACC branch. UACC also accepts payments
delivered to the branch by a customer in person.
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<PAGE>
Collection Process. UACC's collection policy calls for the following
sequence of actions to be taken with regard to all problem loans: (i) call the
borrower at one day past due; (ii) immediate follow-up on all broken promises
to pay; (iii) branch management review of all accounts at ten days past due;
and (iv) Regional Manager or Operations Manager review of all accounts at 45
days past due.
UACC will consider extensions or modifications in working a collection
problem. All extensions and modifications require the prior approval of the
branch manager, and are monitored by the Operations Manager.
Repossessions. It is UACC's policy to repossess the financed vehicle only
when (i) payments are substantially in default, (ii) the customer demonstrates
an intention not to pay or (iii) the customer fails to comply with material
provisions of the contract. All repossessions require the prior approval of
the branch manager. In certain cases, the customer is able to pay the balance
due or bring the account current, thereby redeeming the vehicle.
When a vehicle is repossessed and sold at an automobile auction or through a
private sale, the sale proceeds are subtracted from the net outstanding
balance of the loan with any remaining amount recorded as a loss. UACC
generally pursues all customer deficiencies.
Allowance for Loan Losses. UACC's policy is to place on nonaccrual status
accounts delinquent in excess of 120 days on a contractual basis, and to
reverse all previously accrued but unpaid interest on such accounts. Accounts
that have had their collateral repossessed are placed on nonaccrual by the end
of the month in which they are repossessed regardless of delinquency status.
Accounts are not returned to accrual status until they are brought current.
UACC's policy is to charge-off accounts delinquent in excess of 120 days.
The remaining balance of accounts where the collateral has been repossessed
and sold is charged-off by the end of the month in which the collateral is
sold and the proceeds collected.
Loss reserves based on expected losses over the life of the contract are
established when each contract is purchased from the dealer. The reserve is
deducted from the discount that is taken on each transaction. Loss reserve
analyses are performed regularly to determine the adequacy of current reserve
levels. For the quarter ended December 31, 1997, the Company allocated 70% of
the acquisition discount on each loan to the allowance for loan losses. The
loss allowances recorded at the time of purchase represent an estimate of
expected losses for these loans. If actual experience exceeds estimates, an
additional provision for losses is established as a charge against earnings.
Management periodically reviews the portion of the discount allocated to the
allowance for loan losses in light of the Company's operations and, in January
1998, increased the allocation to 80% of the discount, representing 8% of the
gross contract amount.
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The following table reflects UACC's losses (i.e., net charge-offs as a
percent of original net contract balances) for each contract pool (defined as
the total dollar amount of net contracts purchased in a given quarter)
purchased since UACC's inception.
<TABLE>
<CAPTION>
QUARTER OF PURCHASE
-------------------------------------------------------
1996 1997
----------------------- -------------------------------
NUMBER OF SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
MONTHS QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
OUTSTANDING ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1...................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
2...................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
3...................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
4...................... 0.0% 0.0% 0.1% 0.1% 0.2% 0.1%
5...................... 0.0% 0.2% 0.1% 0.3% 0.2% 0.4%
6...................... 0.1% 0.5% 0.3% 0.6% 0.5% 0.8%
7...................... 0.6% 1.6% 0.8% 0.9% 0.9%
8...................... 1.0% 2.1% 1.0% 1.3% 1.2%
9...................... 1.7% 3.1% 1.4% 1.9% 1.4%
10..................... 1.9% 3.7% 2.2% 2.4%
11..................... 3.8% 3.9% 3.2% 2.9%
12..................... 4.5% 4.9% 3.4% 3.5%
13..................... 5.3% 5.6% 4.2%
14..................... 6.8% 6.2% 4.4%
15..................... 7.4% 7.0% 5.1%
16..................... 7.4% 7.5%
17..................... 7.7% 8.0%
18..................... 7.8% 8.4%
19..................... 7.9%
20..................... 8.3%
21..................... 8.6%
Original Pool ($000)... $2,030 $2,855 $3,792 $5,505 $6,794 $8,781 $10,128
====== ====== ====== ====== ====== ====== =======
Remaining Pool ($000).. $ 847 $1,396 $2,171 $3,801 $5,401 $7,663 $ 9,596
====== ====== ====== ====== ====== ====== =======
(%)................... 42% 49% 57% 69% 79% 87% 95%
====== ====== ====== ====== ====== ====== =======
</TABLE>
UACC purchased its first auto contracts in March 1996 and, accordingly, a
maximum of 21 months loss history was available at December 31, 1997.
THE BANK
BUSINESS OVERVIEW
The Bank is a federally chartered stock savings bank formed in 1994 to
purchase from the RTC certain assets and to assume certain liabilities of the
Bank's predecessor, Pan American Federal Savings Bank. The Bank has been the
principal funding source to date for the Company's residential mortgage,
insurance premium and automobile finance businesses primarily through its
deposits, FHLB advances and whole loan sales. In addition, the Bank holds a
portfolio of primarily traditional residential mortgage loans acquired from
the RTC in 1994 and 1995 at a discount from the unpaid principal balance of
such loans, which loans aggregated $82.0 million (before unearned discounts
and premiums) at December 31, 1997. The Bank has focused its branch marketing
efforts on building a middle income customer base, including efforts targeted
at local Hispanic communities. The Bank has bilingual employees in each of its
branches, and key members of the Company's and the Bank's Board of Directors
and management are of Hispanic heritage and are active in communities served
by the Bank. In addition to operating its retail banking business at four
branches located in Northern California and one in Southern California, the
Bank provides, subject to appropriate cost sharing arrangements, compliance,
risk
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management, executive, financial, facilities and human resources management to
other business units of the Company. The business of the Bank is subject to
substantial governmental supervision and regulatory requirements. See "--
Supervision and Regulation--Federal Savings Bank Regulation."
COMPETITION
Each of the Company's businesses is highly competitive. Competition in the
Company's markets can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms
of the loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company's competitors
in subprime mortgage finance include other consumer finance companies,
mortgage banking companies, commercial banks, credit unions, savings
associations and insurance companies. The Company competes in the insurance
premium finance business with other specialty finance companies, independent
insurance agents who offer premium finance services, captive premium finance
affiliates of insurance companies and direct bill plans established by
insurance companies. The Company competes in the subprime automobile finance
industry with commercial banks, the captive finance affiliates of automobile
manufacturers, savings associations and companies specializing in subprime
automobile finance, many of which have established relationships with
automobile dealerships and may offer dealerships or their customers other
forms of financing, including dealer floor plan financing and lending, which
are not offered by the Company. In attracting deposits, the Bank competes
primarily with other savings institutions, commercial banks, brokerage firms,
mutual funds, credit unions and other types of investment companies.
The profitability of the Company's lending activities and the low barriers
to entry could attract additional competitors. Certain large, national finance
companies and mortgage originators have announced their intention to adapt
their mortgage loan origination programs and allocate resources to the
origination of subprime loans. The Company and its competitors may also face
increasing competition from government-sponsored entities, such as FNMA and
FHLMC. FHLMC currently purchases what it terms "Alternative-A" mortgage loans
and has announced its intention to establish a program to purchase what it
terms "A-" mortgage loans in the near future. In addition, FHLMC has expressed
its intention to purchase so-called "B" and "C" mortgage loans in the future.
FHLMC also has purchased securities backed by subprime mortgage loans and has
re-securitized them for resale. Additional competition may lower the rates the
Company can charge borrowers, reduce the volume of the Company's loan
originations and increase demand for the Company's key employees with the
potential that such employees will leave the Company for its competitors.
Fluctuations in interest rates and general and localized economic conditions
also may affect the competition the Company faces. Competitors with lower
costs of capital have a competitive advantage over the Company. During periods
of declining interest rates, competitors may solicit the Company's customers
to refinance their loans. In addition, during periods of economic slowdown or
recession, the Company's borrowers may face financial difficulties and be more
receptive to offers of the Company's competitors to refinance their loans.
As the Company seeks to expand into new geographic markets, it will face
additional competition from lenders already established in these markets.
There can be no assurance that the Company will be able to compete
successfully with these lenders.
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SUPERVISION AND REGULATION
Set forth below is a brief description of various laws and regulations
affecting the operations of the Company and its subsidiaries. The description
of laws and regulations contained herein does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
Any change in applicable laws, regulations or regulatory policies may have a
material effect on the business, operations, and prospects of the Company.
HOLDING COMPANY REGULATION
The Company is a savings and loan holding company within the meaning of the
Home Owners' Loan Act, as amended ("HOLA"). For purposes of this discussion,
the description of holding company regulation also applies to Pan American
Financial, Inc., a direct subsidiary of the Company and the parent of the
Bank. The Company has registered with the OTS and is subject to OTS
regulation, examination, supervision, and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its other subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the Bank. In addition,
the Bank must notify the OTS at least 30 days before making any distribution
to the Company and the OTS has the authority to preclude a savings association
from paying a dividend under certain circumstances. See "--Federal Savings
Bank Regulations--Limitations on Capital Distributions."
HOLA prohibits a savings and loan holding company, directly or indirectly
through one or more subsidiaries, from (i) acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS, (ii) acquiring or retaining, with certain exceptions, more than 5% of the
voting shares of a nonsubsidiary savings institution, a nonsubsidiary holding
company, or a nonsubsidiary company engaged in activities other than those
permitted by HOLA, or (iii) acquiring or retaining control of a savings
institution that is not federally insured. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the Company and
institution involved, the effect of the acquisition on the risk to the
insurance funds, the convenience and needs of the community, and competitive
factors.
As a holding company that controls only one savings association, the Company
generally is not restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a
"qualified thrift lender" under HOLA ("QTL"). Upon any nonsupervisory
acquisition by the Company of another savings association or savings bank that
meets the QTL test and is deemed to be a savings institution by OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. HOLA generally limits the activities of a multiple savings and loan
holding company and its uninsured institution subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), subject to the
prior approval of the OTS, and activities authorized by OTS regulation.
Legislation has been proposed that would impose limits on the non-banking
activities of companies that acquire savings associations. It is anticipated
that the Company's holding company status would be "grandfathered" under such
legislation, but there can be no assurance that the Company would be exempt
from such limits. Furthermore, any available grandfathering might not continue
to be available to the Company as a result of a possible merger of the federal
banking agencies. Several proposals have been introduced in Congress over the
past several years. If the OTS and Office of the Comptroller of the Currency
(the "OCC") were merged, as one proposal would require, the federal thrift
charter would be eliminated. If adopted, such a proposal would require that
the Bank become a national bank and would subject it to regulation as such.
One effect of such a requirement would be that the Bank could not engage in
activities not permitted for national banks unless such activities were
grandfathered. In addition, the ability to branch interstate would become
subject to the restrictions of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Riegle Act"). Accordingly, any out-of-state
branches of the Bank in existence upon the effectiveness of such a proposal
that are not permissible
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<PAGE>
under the Riegle Act and, if not grandfathered, could be required to be
divested. There are also some benefits to such a charter conversion. For
example, the Bank would not, under regulations currently applicable to
national banks, be subject to the QTL test described below.
Federal law generally provides that no company may acquire control of a
federally insured savings institution without obtaining the approval of the
OTS. Such acquisitions of control may be disapproved if it is determined,
among other things, that the acquisition would substantially lessen
competition or the financial and managerial resources and further prospects of
the acquiror and savings institution involved or that the acquisition would be
detrimental to the institution or present enhanced insurance risk to the SAIF
or Bank Insurance Fund ("BIF").
REGULATION OF MORTGAGE FINANCE OPERATION
The consumer financing industry is a highly regulated industry. UPAM's
business is subject to extensive and complex rules and regulations of, and
examinations by, various federal, state and local government authorities.
These rules and regulations impose obligations and restrictions on UPAM's loan
origination, credit activities and secured transactions. In addition, these
rules limit the interest rates, finance charges and other fees UPAM may
assess, mandate extensive disclosure to UPAM's customers, prohibit
discrimination and impose multiple qualification and licensing obligations on
UPAM. Failure to comply with these requirements may result in, among other
things, demands for indemnification or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits, administrative
enforcement actions and civil and criminal liability. Management of UPAM
believes that UPAM is in compliance with these rules and regulations in all
material respects.
UPAM's loan origination activities are subject to the laws and regulations
in each of the states in which those activities are conducted. For example,
state usury laws limit the interest rates UPAM can charge on its loans. UPAM
presently is in the process of applying for licenses in California and other
states in which such licenses are required to conduct UPAM's activities. Until
such licenses are obtained, all such activities are being conducted by the
Bank or, to the extent permitted by such licensing laws, by UPAM on behalf of
the Bank. UPAM's lending activities are also subject to various federal laws,
including those described below.
UPAM is subject to certain disclosure requirements under TILA and the
Federal Reserve Board's Regulation Z promulgated thereunder. TILA is designed
to provide consumers with uniform, understandable information with respect to
the terms and conditions of loan and credit transactions. TILA also guarantees
consumers a three-day right to cancel certain credit transactions, including
loans of the type originated by UPAM. Such three-day right to rescind may
remain unexpired for up to three years if the lender fails to provide the
requisite disclosures to the consumer.
UPAM originates loans which are subject to the High Cost Mortgage Act, which
makes certain amendments to TILA. The High Cost Mortgage Act generally applies
to consumer credit transactions secured by the consumer's principal residence,
other than residential mortgage transactions, reverse mortgage transactions or
transactions under an open-end credit plan, in which the loan has either (i)
total points and fees upon origination in excess of the greater of eight
percent of the loan amount or $400 or (ii) an annual percentage rate of more
than ten percentage points higher than United States Treasury securities of
comparable maturity ("Covered Loans"). The High Cost Mortgage Act imposes
additional disclosure requirements on lenders originating Covered Loans. In
addition, it prohibits lenders from, among other things, originating Covered
Loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan and including
prepayment fee clauses in Covered Loans to borrowers with a debt-to-income
ratio in excess of 50% or Covered Loans used to refinance existing loans
originated by the same lender. The High Cost Mortgage Act also restricts,
among other things, certain balloon payments and negative amortization
features. UPAM commenced originating Covered Loans during 1996.
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<PAGE>
UPAM is also required to comply with ECOA and the Federal Reserve Board's
Regulation B promulgated thereunder, FCRA, RESPA and HMDA. Regulation B
restricts creditors from requesting certain types of information from loan
applicants. FCRA requires lenders, among other things, to supply an applicant
with certain information if the lender denies the applicant credit. RESPA
requires lenders, among other things, to supply an applicant with certain
disclosures concerning settlement fees and charges and mortgage servicing
transfer practices. It also prohibits the payment or receipt of kickbacks or
referral fees in connection with the performance of settlement services. In
addition, beginning with loans originated in 1994, UPAM must file an annual
report with the Department of Housing and Urban Development pursuant to HMDA,
which requires the collection and reporting of statistical data concerning
loan transactions.
In the course of its business, UPAM may acquire properties securing loans
that are in default. There is a risk that hazardous or toxic waste could be
found on such properties. In such event, UPAM could be held responsible for
the cost of cleaning up or removing such waste, and such cost could exceed the
value of the underlying properties.
Because UPAM's business is highly regulated, the laws, rules and regulations
applicable to UPAM are subject to regular modification. There are currently
proposed various laws, rules and regulations which, if adopted, could
materially affect UPAM's business. There can be no assurance that these
proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future which could make compliance
much more difficult or expensive, restrict UPAM's ability to originate, broker
or sell loans, further limit or restrict the amount of commissions, interest
and other charges earned on loans originated, brokered or sold by UPAM, or
otherwise adversely affect the business or prospects of UPAM.
REGULATION OF INSURANCE PREMIUM FINANCE COMPANIES
The auto insurance premium finance industry is subject to state regulation.
The regulatory structure of each state places certain restrictions on the
terms of loans made to finance insurance premiums. These restrictions, among
other things, generally provide that the lender must provide certain
cancellation notices to the insured and the insurer in order to exercise an
assigned right to cancel an automobile insurance policy in the event of a
default under an insurance premium finance agreement and to obtain in
connection therewith a return from the insurer of any unearned premiums that
have been assigned by the insured to the lender. Such state laws also require
that certain disclosures be delivered by the insurance agent or broker
arranging for such credit to the insured regarding the amount of compensation
to be received by such agent or broker from the lender.
REGULATION OF SUBPRIME AUTOMOBILE LENDING
UACC's automobile lending activities are subject to various federal and
state consumer protection laws, including TILA, ECOA, FCRA, the Federal Fair
Debt Collection Practices Act, the Federal Trade Commission Act, the Federal
Reserve Board's Regulations B and Z, and state motor vehicle retail
installment sales acts, retail installment sales acts and other similar laws
regulate the origination and collection of consumer receivables and impact
UACC's business. These laws, among other things, (i) require UACC to obtain
and maintain certain licenses and qualifications, (ii) limit the finance
charges, fees and other charges on the contracts purchased, (iii) require UACC
to provide specified disclosures to consumers, (iv) limit the terms of the
contracts, (v) regulate the credit application and evaluation process, (vi)
regulate certain servicing and collection practices and (vii) regulate the
repossession and sale of collateral. These laws impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
give rise to defense to payment of the consumer's obligation. In addition,
certain of the laws make the assignee of a consumer installment contract
liable for the violations of the assignor. See "--Regulation of Mortgage
Finance Operation."
Each dealer agreement contains representations and warranties by the dealer
that, as of the date of assignment, the dealer has compiled with all
applicable laws and regulations with respect to each contract. The dealer is
obligated to indemnify UACC for any breach of any of the representations and
warranties and to repurchase any non-conforming contracts. UACC generally
verifies dealer compliance with usury laws, but does
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<PAGE>
not audit a dealer's full compliance with applicable laws. There can be no
assurance that UACC will detect all dealer violations or that individual
dealers will have the financial ability and resources either to repurchase
contracts or indemnify UACC against losses. Accordingly, failure by dealers to
comply with applicable laws, or with their representations and warranties
unless the dealer agreement, could have a material adverse effect on UACC.
UACC believes it is currently in compliance in all material respects with
applicable laws, but there can be no assurance that UACC will be able to
maintain such compliance. The failure to comply with such laws, or a
determination by a court that UACC's interpretation of any such law was
erroneous, could have a material adverse effect upon UACC. Furthermore, the
adoption of additional laws, changes in the interpretation and enforcement of
current laws or the expansion of UACC's business into jurisdictions that have
adopted more stringent regulatory requirements than those in which UACC
currently conducts business, could have a material adverse effect upon UACC.
If a borrower defaults on a contract, UACC, as the servicer of the contract,
is entitled to exercise the remedies of a secured party under the Uniform
Commercial Code as adopted in a particular state (the "UCC"), which typically
includes the right to repossession by self-help unless such means would
constitute a breach of peace. The UCC and other state laws regulate
repossession and sales of collateral by requiring reasonable notice to the
borrower of the date, time and place of any public sale of collateral, the
date after which any private sale of the collateral may be held and the
borrower's right to redeem the financed vehicle prior to any such sale, and by
providing that any such sale must be conducted in a commercially reasonable
manner. Financed vehicles repossessed generally are resold by UACC through
unaffiliated wholesale automobile networks or auctions which are attended
principally by used automobile dealers.
FEDERAL SAVINGS BANK REGULATION
Business Activities. The activities of savings associations are governed by
HOLA and, in certain respects, the Federal Deposit Insurance Act, as amended
("FDI Act"). HOLA and the FDI Act were amended by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, as amended ("FIRREA"), and the
Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"). FIRREA was
enacted to resolve issues relating to problem institutions, including thrifts,
establish a new thrift insurance fund, reorganize the regulatory structure
applicable to savings associations and impose bank-like standards on savings
associations. FDICIA, among other things, requires that federal banking
agencies intervene promptly when a depository institution experiences
financial difficulties, mandates the establishment of a risk-based deposit
insurance assessment system, and requires imposition of numerous additional
safety and soundness operational standards and restrictions. Both FIRREA and
FDICIA contain provisions affecting numerous aspects of the operations and
regulations of federally insured savings associations and empower the OTS and
the FDIC, among other agencies, to promulgate regulations implementing their
provisions.
Provisions of the federal banking statutes, as amended by FIRREA and FDICIA,
among other matters (i) restrict the use of brokered deposits by savings
associations that are not well capitalized, (ii) prohibit the acquisition of
any corporate debt security that is not rated in one of the four highest
rating categories, (iii) subject to OTS waiver, restrict the aggregate amount
of loans secured by non-residential real estate property to 400% of total
capital, (iv) permit savings and loan holding companies to acquire up to 5% of
the voting shares of non- subsidiary savings associations or savings and loan
holding companies without prior approval, (v) permit bank holding companies to
acquire healthy savings associations, (vi) require the federal banking
agencies to establish by regulation standards for extensions of credit secured
by real estate and (vii) restrict transactions between a savings association
and its affiliates.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the national bank limits on loans to one borrower. Generally, a
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of the institution's unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if such loan is fully secured by readily
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<PAGE>
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate.
QTL Test. Savings associations that do not meet a QTL test are subject to
certain restrictions. Any savings institution is a QTL if (i) it qualifies as
a domestic building and loan association under Section 7701(a)(19) of the
Internal Revenue Code (which generally requires that at least 60% of the
institution's assets constitute loans secured by residential real estate or
deposits, educational loans, cash or certain governmental obligations) or (ii)
at least 65% of its "portfolio assets" (total assets less (a) specified liquid
assets up to 20% of total assets, (b) intangibles, including goodwill, and (c)
the value of property used to conduct business) consist of certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and related securities) on a monthly basis
in nine out of every 12 months.
A savings association that fails the QTL test for four or more months out of
the prior 12-month period must either convert to a bank charter or operate
under certain restrictions. If the savings association does not convert to a
national bank charter, generally it will be prohibited from: (i) making any
new investment or engaging in any new activity not permissible for a national
bank; (ii) paying dividends not permissible under national bank statutes and
regulations; (iii) obtaining any new advances from any FHLB; and (iv)
establishing any new branch office in a location not permissible for a
national bank with its head office located in the association's home state.
Any bank chartered as a result of failure of the QTL test must pay exit and
entrance fees as a consequence of leaving the SAIF and entering the BIF as
further described below. In addition, beginning three years after the
association fails the QTL test and unless it has requalified as a QTL, the
association will be prohibited from engaging in any activity or retaining any
investment not permissible for a national bank and will have to repay any
outstanding advances from the FHLB as promptly as possible consistent with
safety and soundness. One year from the date the association fails the QTL
test and unless it has requalified as a QTL, any holding company that controls
the association must register as and be deemed to be a bank holding company,
subject to the restrictions and limitations of the BHC Act, and to the
regulations of the Federal Reserve. The Company believes that the Bank met the
QTL test at December 31, 1997.
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by savings associations, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
associations that are based primarily on an institution's capital level. An
institution that has capital which is equal to or exceeds all capital
requirements before and after a proposed capital distribution ("Tier I
Institution") and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the
greater of (i) 100% of its net income to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its risk based capital requirements) at the beginning of
the calendar year or (ii) 75% of its net income for the previous four
quarters. Any additional capital distributions would require prior regulatory
approval. If the Bank's capital falls below its capital requirements or the
OTS notifies it that it is in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the
OTS could prohibit a proposed capital distribution by any institution, that
would otherwise be permitted by the regulation, if the OTS determines that
such distribution would constitute an unsafe or unsound practice. At December
31, 1997, the Bank was a Tier I Institution. See "Risk Factors--Risks
Associated With the Company and the Offering--Absence of Dividends" and
"Dividend Policy."
Liquidity. The Bank must maintain an average daily balance of liquid assets
and short-term liquid assets equal to a monthly average of not less than
specified percentages of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement may be changed from time to time by the
OTS. Monetary penalties may be imposed for failure to meet these liquidity
requirements. Since its acquisition in 1994, the Bank has never failed to meet
its liquidity requirements.
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Classification of Assets. Savings institutions are required to classify
their assets on a regular basis, establish appropriate allowances for losses
and report the results of such classification quarterly to the OTS. A savings
institution is also required to set aside adequate valuation allowances and
establish liabilities for off-balance sheet items, such as letters of credit,
when a loss becomes probable and estimable. The OTS has the authority to
review the institution's classification of its assets and to determine whether
additional assets must be classified or the institution's valuation allowances
must be increased.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low- and moderate-
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial associations nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best- suited to its particular community. The CRA requires the OTS, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in evaluating certain applications by such
institution. The CRA also requires all associations to publicly disclose their
CRA rating. The Bank received a CRA rating of "satisfactory" in its most
recent examination.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member of
the SAIF, which is administered by the FDIC. Savings deposits are insured up
to $100,000 by the FDIC per insured member (as defined by law and regulation).
Such insurance is backed by the full faith and credit of the United States. As
insurer, the FDIC imposes deposit insurance assessments and is authorized to
conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the FDIC. The FDIC also may initiate enforcement actions against
savings associations and may terminate the deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.
FDICIA required the FDIC to implement a risk-based deposit insurance
assessment system. Pursuant to this requirement, the FDIC has adopted a risk-
based assessment system under which all SAIF-insured depository associations
are placed into one of nine categories and assessed insurance assessments
based upon their level of capital and supervisory evaluation. Under this
system, associations classified as well capitalized and considered healthy pay
the lowest assessment while associations that are less than adequately
capitalized and considered of substantial supervisory concern pay the highest
assessment. In addition, under FDICIA, the FDIC may impose special assessments
on SAIF members to repay amounts borrowed from the United States Treasury or
for any other reason deemed necessary by the FDIC. The FDIC may increase
assessment rates, on a semiannual basis, if it determines that the reserve
ratio of the SAIF will be less than the designated reserve ratio of 1.25% of
SAIF insured deposits. In setting these increased assessments, the FDIC must
seek to restore the reserve ratio to that designated reserve level, or such
higher reserve ratio as established by the FDIC. Presently, well capitalized
institutions, such as the Bank, are not required to pay these special
assessments.
By contrast, financial institutions that are members of the BIF, which had
higher reserves and previously did not have an obligation to pay interest on
debt to the Financial Corporation ("FICO"), had certain competitive
advantages. The disparity in deposit insurance assessments between SAIF and
BIF members was exacerbated by the statutory requirement that both the SAIF
and the BIF funds be recapitalized to a 1.25% reserved deposits ratio and that
a portion of most thrifts' deposit insurance assessments be used to service
bonds issued by FICO.
To address this rate disparity, on September 30, 1996, the President signed
legislation intended to enable the SAIF to reach the designated reserve ratio.
The legislation provided for a one-time special assessment of 0.657% to be
imposed upon all SAIF deposits as of March 31, 1995. Based on the Bank's SAIF
deposits as of March 31, 1995, the cost of the one-time special assessment was
approximately $820,000 (pre-tax). This amount was accrued in December 1996 and
paid in June 1997.
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<PAGE>
The legislation also provides for BIF members to service a growing portion
of the FICO bond payments. Until January 1, 2000, annual assessments of 0.013%
of BIF deposits and 0.0648% of SAIF deposits will service the annual payments
due on the FICO bonds. Accordingly, the Bank's assessment rate on the FICO
bonds is 0.0648% of the deposits. This legislation provides for subsequent
full pro rata sharing of FICO bond payments by BIF and SAIF institutions.
Accordingly, the effect of this legislation has been to lessen the competitive
advantage of BIF members over SAIF members because of the disparity in deposit
insurance assessments and FICO payments. The legislation called for a merger
of the SAIF and BIF as of January 1, 1999, but only if the thrift charter has
been eliminated.
The financing corporations created by FIRREA and the Competitive Equality
Banking Act of 1987 are also empowered to assess premiums on savings
associations to help fund the liquidation or sale of troubled associations.
Such premiums cannot, however, exceed the amount of SAIF assessments and are
paid in lieu thereof.
Transactions With Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution with certain
exceptions) is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA") and Section 11 of HOLA. Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution and also limits the aggregate amount of
transactions with all affiliates to 20% of the savings institution's capital
and surplus. Certain transactions with affiliates are required to be secured
by collateral in an amount and of a type described in Section 23A and the
purchase of low-quality assets from affiliates is generally prohibited.
Section 23B generally requires that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition to restrictions
imposed under Sections 23A and 23B, Section 11 of HOLA prohibits savings
institutions from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies under Section 4(c) of the BHC
Act. Further, no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings associations such as the Bank and has the
authority to bring enforcement action against all "institution-related
parties," including shareholders, attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action that caused or is
likely to cause more than a minimal financial loss to, or a significant
adverse effect on, an insured depository institution. Civil penalties cover a
wide range of violations and actions and range up to $25,000 per day unless a
finding of reckless disregard is made, in which case fines of up to $1 million
per day are permitted. Criminal penalties for most financial institution
crimes include fines of up to $1 million and imprisonment for up to 30 years.
In addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements. Possible enforcement
action ranges from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance. Under
the FDI Act, the FDIC has the authority to recommend to the Director of the
OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. The Bank is not presently
subject to any of the foregoing enforcement actions.
Standards for Safety and Soundness. FDICIA requires each federal banking
agency to prescribe for all insured depository institutions and, to some
extent, their holding companies standards relating to internal controls,
information systems and audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, and compensation,
fees and benefits, and such other operational and managerial standards as the
agency deems appropriate. In addition, federal banking regulatory agencies are
required to prescribe by regulation: (i) maximum classified assets to capital
ratios; (ii) minimum earnings sufficient to absorb losses without impairing
capital; (iii) to the extent feasible, a minimum ratio of market value to book
value for publicly traded shares of depository institutions or the depository
institution holding companies; (iv) standards for extensions of credit secured
by real estate or made for the purpose of financing the construction of
improvements on real estate; and (v) such other standards relating to asset
quality, earnings, and valuation as the agency deems
81
<PAGE>
appropriate. Finally, each federal banking agency is required to prescribe
standards for employment contracts and other compensation arrangements of
executive officers, employees, directors, and principal shareholders of
insured depository associations that would prohibit compensation, benefits and
arrangements that are excessive or that could lead to a material financial
loss for the institution. If an insured depository institution or its holding
company fails to meet any of the standards described above, it must submit to
the appropriate federal banking agency a plan specifying the steps that will
be taken to cure the deficiency. If an institution fails to submit an
acceptable plan or fails to implement the plan, the appropriate federal
banking agency will require the institution or holding company to correct the
deficiency and, until corrected, may impose restrictions on the institution or
the holding company, including any of the restrictions applicable under the
prompt corrective action provisions of FDICIA. See "--Prompt Corrective
Action."
Capital Requirements. FDICIA added a provision establishing "capital
categories" in order to facilitate prompt corrective action by federal banking
regulators. The purpose of this amendment is to impose more scrutiny and
restrictions on institutions, and to prohibit savings institutions from making
capital distributions or paying certain management fees that would leave the
institution undercapitalized. FDICIA established five capital categories for
this purpose:
. An institution will be deemed to be well-capitalized if it (i) has a
total risk-based capital ratio of 10% or more, (ii) has a Tier 1 risk-
based capital ratio of 6% or more, (iii) has a leverage ratio of 5% or
more and (iv) is not subject to any regulatory order or directive
regarding capital.
. An institution will be deemed to be adequately capitalized if it (i) has
a total risk-based capital ratio of at least 8%, (ii) has a Tier I risk-
based capital ratio of at least 4% and (iii) subject to certain
exceptions, has a leverage ratio of at least 4%.
. An institution will be deemed to be undercapitalized if it (i) has a
total risk-based capital ratio of less than 8%, (ii) has a Tier I risk-
based capital ratio that is less than 4%, or (iii) subject to certain
exceptions, has a leverage ratio of less than 4%.
. An institution will be deemed to be significantly undercapitalized if it
(i) has a total risk-based capital ratio of less than 6%, (ii) has a
Tier I risk-based capital ratio of less than 3%, or (iii) has a leverage
ratio of less than 3%.
. An institution will be deemed to be critically undercapitalized if it
has a ratio of tangible equity to total assets of less than 2%.
Recent Legislation. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. The Treasury Department has been
studying the development of a common charter for federal savings associations
and commercial banks. In the event that the thrift charter is eliminated by
January 1, 1999, the Economic Growth and Paperwork Reduction Act of 1996 would
require the merger of the BIF and the SAIF into a single Deposit Insurance
Fund on that date. In the absence of appropriate "grandfather" provisions,
legislation eliminating the thrift charter could have a material adverse
effect on the Bank and the Company because, among other things, the
regulatory, capital and accounting treatment for national and state banks and
savings associations differs in certain significant respects. The Bank cannot
determine whether, or in what form, such legislation eventually may be
enacted, and there can be no assurance that any legislation that is enacted
would contain adequate grandfather rights for the Bank and the Company.
Year 2000 Compliance. In May 1997, the Federal Financial Institutions
Examination Council issued an interagency statement to the chief executive
officers of all federally supervised financial institutions regarding year
2000 project management awareness. It is expected that, unless financial
institutions address the technology issues relating to the coming of the year
2000, there will be major disruptions in the operations of financial
institutions. The statement provides guidance to financial institutions,
providers of data services, and all examining personnel of the federal banking
agencies regarding the year 2000 problem. The federal banking agencies intend
to conduct year 2000 compliance examinations, and the failure to implement a
year 2000 program may be seen by the federal banking agencies as an unsafe and
unsound banking practice. In addition, federal banking agencies will be taking
into account year 2000 compliance programs when analyzing applications and may
deny an application based on year 2000 related issues.
82
<PAGE>
Prompt Corrective Action. FDICIA establishes a system of prompt corrective
action to resolve the problem of undercapitalized associations. Under that
system, banking regulators must take certain supervisory actions against
undercapitalized associations, the severity of which depends upon the
institution's level of capitalization. Generally, subject to a narrow
exception, FDICIA requires the appropriate federal banking regulator to
appoint a receiver or conservator for an institution that is critically
undercapitalized. FDICIA authorizes banking regulators to specify the ratio of
tangible capital to assets at which an institution becomes critically
undercapitalized and requires that ratio to be no less than 2% of assets.
A savings association may be reclassified to an even lower category than is
indicated by its current capital position if the OTS determines the
institution to be otherwise in an unsafe or unsound condition or to be engaged
in an unsafe or unsound practice. This could include a failure by the
institution to correct deficiencies following receipt of a less-than-
satisfactory rating on its most recent examination report. Among other things,
undercapitalized institutions are subject to growth limitations and are
required to submit capital restoration plans. If an institution fails to
submit an acceptable plan or fails in any material respect to implement an
approved plan, it is treated as significantly undercapitalized.
Pan American Bank's Capital Ratios. The following table indicates the Bank's
regulatory capital ratios at December 31, 1997.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------
RISK-
CORE CAPITAL BASED
TANGIBLE CAPITAL (LEVERAGE) CAPITAL
---------------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Shareholder's equity/GAAP capital... $22,918 $22,918 $22,918
Reductions to capital
Goodwill and other intangibles.... (457) (457) (457)
Disallowed portion of deferred
taxes............................ (82) (82) (82)
Additions to capital
General valuation allowances...... -- -- 2,559
------- ------- -------
Regulatory capital as reported to
the OTS............................ 22,379 22,379 24,938
Minimum capital requirements as
reported to the OTS................ 4,619 9,239 16,171
------- ------- -------
Regulatory capital-excess........... $17,760 $13,140 $ 8,767
======= ======= =======
Capital ratios...................... 7.27% 7.27% 12.34%
Well-capitalized requirement........ 3.00% 5.00% 10.00%
</TABLE>
Federal Home Loan Bank System. The Bank is a member of the FHLB system.
Among other benefits, each FHLB serves as a reserve or central bank for its
members within its assigned region. Each FHLB is financed primarily from the
sale of consolidated obligations of the FHLB system. Each FHLB makes available
to members loans (i.e., advances) in accordance with the policies and
procedures established by the Board of Directors of the individual FHLB.
As a member, the Bank is required to own capital stock in an FHLB in an
amount equal to the greater of: (i) 1% of the aggregate outstanding principal
amount of its residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, (ii) 0.3% of total assets,
or (iii) 5% of its FHLB advances (borrowings). At December 31, 1997, the Bank
had $1.9 million in FHLB stock, which was in compliance with this requirement.
The FHLBs must provide funds to service the FICO bonds and contribute funds
for affordable housing programs. These requirements have affected adversely
the level of FHLB dividends paid and could continue to do so. Such
requirements could also result in the FHLB imposing a higher rate of interest
on advances to their members and could have an adverse effect on the value of
FHLB stock in the future, with a corresponding reduction in the Bank's
capital. For the years ended December 31, 1995, 1996 and 1997, dividends from
the FHLB to the Bank amounted to $37,000, $74,000, and $95,000, respectively.
If dividends were reduced, the Bank's income would likely also be reduced.
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<PAGE>
Federal Reserve System. Federal Reserve regulations require savings
associations to maintain non-interest earning reserves against their
transaction accounts (primarily regular checking and NOW accounts). The Bank
is in compliance with these regulations. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve may be used to satisfy
liquidity requirements imposed by the OTS. Because required reserves must be
maintained in the form of vault cash, a non-interest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB system members are also authorized to borrow
from the Federal Reserve, but applicable regulations require associations to
exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
conduct of its businesses. The Company currently is not a party to any
material pending litigation.
PROPERTIES
The Company's principal executive offices occupy approximately 8,881 square
feet of office space located at 1300 South El Camino Real, San Mateo,
California 94402. As of December 31, 1997, the Company maintained five
branches for its banking business, 22 branches for its mortgage finance
business, ten branches for its automobile finance business and one branch for
its insurance premium finance business. The size of the branches typically
range from 250 square feet to 19,081 square feet. All of the Company's leased
properties are leased for terms expiring on dates ranging from the date hereof
to March 2006, many with options to extend the lease term. The Company
believes that no single lease is material to its operations, its facilities
are adequate for the foreseeable future and alternative sites presently are
available at market rates.
EMPLOYEES
At December 31, 1997, the Company had 490 full-time equivalent employees.
The Company believes its relations with its employees are satisfactory.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information regarding the directors,
executive officers and key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Directors and Executive Officers
Guillermo Bron.................. 46 Chairman of the Board and a director of the Company
and the Bank
Lawrence J. Grill............... 61 President, Chief Executive Officer, Secretary and a
director of the Company and the Bank
John T. French.................. 66 Director of the Company and Chairman of the Board,
President and Chief Executive Officer of United
PanAm Mortgage Corporation
Ray C. Thousand................. 40 President and Chief Executive Officer of United Auto
Credit Corporation
Carol M. Bucci.................. 40 Senior Vice President, Treasurer and Chief Financial Officer
of the Company and the Bank
Edmund M. Kaufman(1)(2)......... 68 Director of the Company and the Bank
Luis Maizel(1)(2)............... 47 Director of the Company
Daniel L. Villanueva(1)(2)...... 39 Director of the Company and the Bank
Key Employees
Stephen W. Haley................ 44 Senior Vice President--Compliance and Risk
Management of the Company and the Bank
Sharon Macchiarella............. 48 Vice President of the Bank
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
DIRECTORS AND EXECUTIVE OFFICERS
Guillermo Bron has served as Chairman of the Board and a director of the
Company and the Bank since April 1994. Mr. Bron is President of BVG West
Corp., the sole general partner of Pan American Financial, L.P. Mr. Bron
founded the Company and organized an Hispanic investor group that acquired
certain assets and assumed certain liabilities of the Bank's predecessor from
the RTC in April 1994. Since July 1994, Mr. Bron has been an officer, director
and principal stockholder of a general partner of Bastion Capital Fund, L.P.,
a private equity investment fund. Previously, Mr. Bron was a Managing Director
of Corporate Finance and Mergers and Acquisitions at Drexel Burnham Lambert.
Mr. Bron is a director of Telemundo Group, Inc.
Lawrence J. Grill has served as the President, Chief Executive Officer,
Secretary and a director of the Company and the Bank since April 1994. From
1984 through 1994, Mr. Grill was President of Lawrence J. Grill & Associates,
a consulting firm specializing in business strategy and operations improvement
for financial institutions, and in connection therewith served as a director,
officer and consultant to various thrifts and banks. Previously, Mr. Grill
held senior executive positions with Kaufman and Broad, Wickes Companies and
AM International and practiced corporate law in California and Illinois. Mr.
Grill is a CPA in Illinois and is licensed to practice law in California and
Illinois.
John T. French has served as a director of the Bank since October 1996 and
as a director of the Company and Chairman of the Board, President and Chief
Executive Officer of United PanAm Mortgage Corporation since October 1997.
From 1986 through March 1995, he served as Chief Executive Officer of Plaza
Home Mortgage, and also founded and was Chairman of Option One Mortgage
Corporation. From 1977 through 1985, Mr. French
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<PAGE>
served as President of the General Loan Brokerage division of Western Real
Estate Financial, a general loan brokerage company. Mr. French has over 38
years of experience in the mortgage industry.
Ray C. Thousand has served as President, Chief Executive Officer and a
director of United Auto Credit Corporation since February 1996. Previously,
Mr. Thousand held positions in consumer and commercial lending with Norwest
Financial (from 1979 to 1985), and executive positions with Bank of
America/Security Pacific Credit (from 1985 to 1993), TransAmerica Business
Credit (1994) and Fidelity Funding Financial Group (from 1994 to 1995) with
emphasis on lending to consumer finance companies engaged in indirect
automobile lending.
Carol M. Bucci has served as Senior Vice President and Controller of the
Bank since January 1997 and as Senior Vice President and the Chief Financial
Officer of the Company since October 1997. She served as Vice President and
Controller of the Bank from December 1995 to December 1996. From February 1995
to December 1995, she served as Vice President and Controller of Home Federal
Savings and Loan in San Francisco, California. She served as Vice President
and Chief Financial Officer of American Liberty Mortgage Corp. from April 1992
through December 1994, as First Vice President and Assistant Controller of
First Nationwide Bank from January 1990 to April 1992 and as Executive Vice
President and Chief Financial Officer of Cal America Savings and Loan from May
1987 to April 1989. Ms. Bucci is a CPA in California.
Edmund M. Kaufman has served as a director of the Bank since August 1996 and
of the Company since October 1997. Mr. Kaufman is a partner in the Los Angeles
law firm of Irell & Manella, where he has specialized for 37 years in mergers
and acquisitions and corporate finance. Mr. Kaufman also serves as a director
of the Los Angeles Music Center Opera Company and of Structural Research and
Analysis, a software corporation.
Luis Maizel has served as a director of the Company since October 1997. Mr.
Maizel has been President of LM Capital Management since 1988 and LM Advisors
Inc. since 1984. Both such companies are pension funds management and
financial consulting firms of which he is the principal stockholder. From 1980
to 1984, he was President of Industrias Kuick, S.A. and Blount Agroindustras,
S.A., manufacturers of agribusiness equipment.
Daniel L. Villanueva has served as a director of the Bank since August 1994
and of the Company since October 1997. Mr. Villanueva is President of the Los
Angeles Galaxy Soccer Team and was a co-founder of Moya, Villanueva &
Associates, a marketing and public relations firm which is now part of
Manning, Selvage & Lee, where he worked from 1986 until 1996.
Officers serve at the discretion of the Board of Directors. None of the
directors or executive officers were selected pursuant to any arrangement or
understanding, other than with the directors and executive officers of the
Company acting within their capacity as such.
KEY EMPLOYEES
Stephen W. Haley has served as Senior Vice President--Compliance and Risk
Management of the Bank and the Company since August 1997. From November 1996
to August 1997, he was a management consultant with Coopers & Lybrand LLP.
From April 1991 to November 1996, Mr. Haley was a self-employed management
consultant and from July 1981 to April 1991, he was a management consultant
with KPMG Peat Marwick LLP's financial services group, where he was a partner
for the last four years.
Sharon Macchiarella has served as Vice President of the Bank since February
1997, Vice President - Administrator Corporate Risk Management of the Bank
since April 1997 and IPF Administrator of the Company since November 1995. Ms.
Macchiarella also served as an insurance premium finance consultant with the
Bank from March 1995 to November 1995 and Rancho Vista National Bank from
January 1995 to December 1995. Previously, Ms. Macchiarella held executive
positions in insurance premium finance with World Trade Bank, N.A. (from March
1988 to July 1992), First National Bank of Marin (from September 1992 to
September 1994) and First Deposit National Corporation (from July 1992 to
September 1992).
86
<PAGE>
COMMITTEES OF THE BOARD
The Board of Directors has an Audit Committee and a Compensation Committee,
each of which consists of two or more independent directors who serve at the
pleasure of the Board of Directors.
The Audit Committee is chaired by Mr. Maizel, and its other members are
Messrs. Kaufman and Villanueva. The primary purposes of the Audit Committee
are (i) to review the scope of the audit and all non- audit services performed
by the Company's independent certified public accountants and the fees
incurred by the Company in connection therewith, (ii) to review the results of
such audit, including the independent accountants' opinion and letter of
comment to management and management's response thereto, (iii) to review with
the Company's independent accountants, the Company's internal accounting
principles, policies and practices and financial reporting, (iv) to make
recommendations regarding the selection of the Company's independent
accountants and (v) to review the Company's quarterly financial statements
prior to public issuance.
The Compensation Committee is chaired by Mr. Kaufman, and its other members
are Messrs. Maizel and Villanueva. The primary purposes of the Compensation
Committee are (i) to review and recommend to the Board of Directors the
salaries, bonuses and perquisites of the Company's executive officers, (ii) to
determine the individuals to whom, and the terms upon which, awards under the
Company's Stock Incentive Plan, management incentive plans and 401(k) plan are
granted, (iii) to make periodic reports to the Board of Directors as to the
status of such plans and (iv) to review and recommend to the Board of
Directors additional compensation plans.
DIRECTOR COMPENSATION
The Company pays each director who is not employed by the Company $500 for
each meeting of the Board of Directors attended and $300 for each meeting of a
committee of the Board of Directors attended (other than a telephonic
meeting). In addition, each Committee Chairman receives a $500 quarterly fee.
The Company reimburses directors for all reasonable and documented expenses
incurred as a director. Directors who are also employees of the Company,
including Messrs. Bron, Grill and French, are not compensated for their
services as directors. The Board of Directors may change such compensation in
the future.
87
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
paid or accrued by the Company for services rendered in all capacities during
the fiscal year ended December 31, 1997 to the President and Chief Executive
Officer and the Company's four other most highly compensated executive
officers during 1997 (the "Named Executives").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------- ----------------------- -------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
BONUS COMPENSATION RESTRICTED OPTIONS/ LTIP COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) ($) ($)(1) STOCK AWARDS SARS(2) PAYOUTS ($)
- --------------------------- ---------- ------- ------------ ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence J. Grill....... 176,667 75,000 4,725 -- -- -- --
President and Chief
Executive Officer
Guillermo Bron.......... 137,500 -- -- -- -- -- --
Chairman of the Board
John T. French.......... 95,000 100,000 -- -- 60,000 -- --
Chairman of the Board,
President and Chief
Executive Officer of
United PanAm Mortgage
Corporation(3)
Ray C. Thousand......... 137,283 33,750 2,200 -- -- -- --
President and Chief
Executive Officer of
United Auto Credit
Corporation
Carol M. Bucci.......... 104,600 18,000 -- -- 40,000 -- --
Senior Vice President,
Treasurer and Chief
Financial Officer
</TABLE>
- --------
(1) Consists primarily of an automobile allowance.
(2) Consists of shares issuable pursuant to options granted under the Stock
Incentive Plan.
(3) Mr. French was a consultant to United PanAm Mortgage Corporation and the
Bank, and in that capacity was acting President and Chief Executive
Officer of United PanAm Mortgage Corporation from March 11, 1997 until
October 1, 1997 when he became the Chairman of the Board, President and
Chief Executive Officer of United PanAm Mortgage Corporation.
88
<PAGE>
Stock Option Grants. The following table sets forth certain information
concerning the grant of stock options during fiscal 1997 to the Named
Executives pursuant to the Stock Incentive Plan.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
SHARES OF POTENTIAL REALIZABLE VALUE
COMMON PERCENT OF AT ASSUMED ANNUAL RATES
STOCK TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ----------------------------
NAME GRANTED FISCAL YEAR PRICE(4) DATE 5% 10%
---- ---------- ------------- -------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
John T. French(2)....... 60,000 10% $10.50 October 15, 2007 $ 31,500 $ 63,000
Carol M. Bucci(3)....... 40,000 7% $10.50 October 15, 2007 $ 21,000 $ 42,000
</TABLE>
- --------
(1) The Potential Realizable Value is the product of (a) the difference
between (i) the product of the market price per share at the date of grant
and the sum of (A) 1 plus (B) the assumed rate of appreciation of the
Common Stock compounded annually over the term of the option and (ii) the
per share exercise price of the option and (b) the number of shares of
Common Stock underlying the option at December 31, 1997. These amounts
represent certain assumed rates of appreciation only. Actual gains, if
any, on stock option exercises are dependent on a variety of factors,
including market conditions and the price performance of the Common Stock.
There can be no assurance that the rate of appreciation presented in this
table can be achieved.
(2) The options vest in four equal annual installments commencing on October
15, 1997.
(3) The options vest in four equal annual installments commencing on October
15, 1998.
(4) The Company believes that the exercise price is equal to or greater than
the fair market value of the Common Stock on the date of grant, based upon
the book value of the Common Stock and the early stage of the Company's
development.
Option Exercises and Holdings. The following table sets forth certain
information with respect to the Named Executives concerning the exercise of
options during fiscal 1997 and unexercised options held by the Named
Executives as of December 31, 1997.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1997
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END(1)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence J. Grill....... 281,250 -- -- 93,750 -- $909,375
John T. French.......... -- -- 80,625 110,625 $636,563 $636,563
Carol M. Bucci.......... -- -- 28,125 68,125 $272,813 $272,813
</TABLE>
- --------
(1) The value of unexercised "in-the-money" options is the difference between
the market price of the Common Stock on December 31, 1997 and the exercise
price of the option, multiplied by the number of shares subject to the
option.
Management Incentive Plans. Key management employees of the Bank and its
subsidiaries and divisions are eligible to participate in a management
incentive plan. Under this plan, a bonus pool is established for the payment
of bonuses. These bonuses are established based on the achievement of
corporate, divisional and personal goals. A minimum level of pre-tax profits
must be achieved for the payment of any bonus under this plan. Bonuses earned
during the calendar year are paid out subsequent to the certified audit of the
fiscal year during which the bonus was earned. The Company intends to
establish similar plans for each of its businesses.
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<PAGE>
Employment Agreements. The Company has entered into employment agreements
with Messrs. Bron, Grill, French and Thousand. All other executive officers
are employed on an "at will" basis.
The Company has entered into an employment agreement with Guillermo Bron
under which Mr. Bron has been employed as the Chairman of the Board of the
Company and the Bank for the term commencing on October 1, 1997 and ending on
December 31, 2000, unless extended by the Company to December 31, 2001. Under
this agreement, Mr. Bron is entitled to (i) an annual base salary of $150,000,
(ii) an annual cash bonus of up to 100% of his base salary, in an amount
determined by the Board of Directors, (iii) $500,000 of term life insurance
above the amount normally provided to employees under the Company's group term
life insurance, (iv) a monthly car allowance of $500 and (v) the premium cost
under the Company's plan for family medical, dental, vision, long-term
disability and accidental death and dismemberment insurance. In addition,
concurrently with the sale of the shares of Common Stock offered hereby, Mr.
Bron will be granted a ten-year option to purchase 60,000 shares of Common
Stock at an exercise price of equal to 110% of the initial Offering price,
which options vest 25% per year, commencing on October 15 1998. In the event
the Company terminates his employment without cause, or Mr. Bron terminates
his employment as the result of a reduction in authority, Mr. Bron shall be
entitled to receive (i) a lump sum payment equal to his base salary from the
date of termination to the next to occur of December 31, 1999, 2000 or 2001,
but in no event less than six months salary, (ii) a lump sum payment equal to
the bonus received by him in the prior year prorated for that portion of the
current year for which Mr. Bron was employed by the Company and (iii) any
additional benefits accrued through the date of termination. In the event the
Company terminates Mr. Bron's employment with cause, the Company is obligated
to pay the compensation required by the agreement only through the date of
termination.
The Bank has entered into a salary continuation agreement with Mr. Bron
pursuant to which Mr. Bron is entitled to receive an annual benefit of up to
$100,000 payable over a period of 15 years upon either (i) the termination of
his employment by the Bank for any reason other than termination for cause
after attaining 65 years of age or (ii) his death if he is actively employed
by the Bank at such time. Upon the termination of his employment for any of
the following reasons, Mr. Bron is entitled to receive reduced annual benefits
before 2003 which increase to $100,000 if such termination occurs in or after
2003: (i) the termination of his employment by the Bank without cause or after
the occurrence of a change of control of the Bank or the Company, (ii) the
termination of his employment due to disability, (iii) the termination of his
employment as the result of a reduction in authority or (iv) the voluntary
termination of his employment prior to attaining 65 years of age. The Bank may
purchase insurance on the life of Mr. Bron to fund payments to Mr. Bron under
this agreement. Any such insurance policy will be an asset of the Bank in
which Mr. Bron will have no rights. The Bank is not required to make any
payments under this agreement if Mr. Bron is terminated for cause.
The Company has entered into an employment agreement with Lawrence J. Grill
under which Mr. Grill has been employed as the President, Chief Executive
Officer and Secretary of the Company and the Bank for the term commencing on
October 1, 1997 and ending on December 31, 2000, unless extended by the
Company to December 31, 2001. Under this agreement, Mr. Grill is entitled to
(i) an annual base salary of $190,000, (ii) an annual cash bonus of up to 50%
of his base salary based upon the satisfaction of performance goals relating
to pre-tax net income, return on stockholders' equity and such other factors
as may be established by the Board of Directors, (iii) $500,000 of term life
insurance above the amount normally provided to employees under the Company's
group term life insurance, (iv) a monthly car allowance of $500 and (v) the
premium cost under the Company's plan for family medical, dental, vision,
long-term disability and accidental death and dismemberment insurance. In
addition, concurrently with the sale of the shares of Common Stock offered
hereby, Mr. Grill will be granted a ten-year option to purchase 60,000 shares
of Common Stock at an exercise price equal to the initial Offering price,
which options vest 25% per year, commencing on October 15, 1998. In the event
the Company terminates his employment without cause, or Mr. Grill terminates
his employment as the result of a reduction in authority, Mr. Grill shall be
entitled to receive (i) a lump sum payment equal to his base salary from the
date of termination to the next to occur of December 31, 1999, 2000 or 2001,
but in no event less than six months salary, (ii) a lump sum payment equal to
the bonus received by him in the prior year prorated for that portion of the
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<PAGE>
current year for which Mr. Grill was employed by the Company, (iii) any
additional benefits accrued through the date of termination and (iv)
continuation of group medical, disability and life insurance coverage for up
to the balance of the stated term. In the event the Company terminates Mr.
Grill's employment with cause, the Company is obligated to pay the
compensation required by the agreement only through the date of termination.
The Bank has entered into a salary continuation agreement with Mr. Grill
pursuant to which Mr. Grill is entitled to receive an annual benefit of up to
$100,000 payable over a period of 15 years upon either (i) the termination of
his employment by the Bank for any reason other than termination for cause
after attaining 67 years of age or (ii) his death if he is actively employed
by the Company at such time. Upon the termination of his employment for any of
the following reasons, Mr. Grill is entitled to receive reduced annual
benefits before 2003 which increase to $100,000 if such termination occurs in
or after 2003: (i) the termination of his employment by the Bank without cause
or after the occurrence of a change of control of the Bank or the Company,
(ii) the termination of his employment due to disability, (iii) the
termination of his employment as the result of a reduction in authority or
(iv) the voluntary termination of his employment prior to attaining 67 years
of age. The Bank may purchase insurance on the life of Mr. Grill to fund
payments to Mr. Grill under this agreement. Any such insurance policy will be
an asset of the Bank in which Mr. Grill will have no rights. The Bank is not
required to make any payments under this agreement if Mr. Grill is terminated
for cause.
United PanAm Mortgage Corporation has entered into an employment agreement
with John T. French under which Mr. French has been employed as Chairman of
the Board, President and Chief Executive Officer for the term commencing on
October 1, 1997 and ending on September 30, 1999. Under this agreement, Mr.
French is entitled to (i) a monthly base salary of $16,667, (ii) an annual
cash bonus in an amount determined by the Board of Directors, but in no event
less than $100,000 if Mr. French reasonably performs his obligations under the
agreement, (iii) participate in all benefits made generally available by the
company to its executives and (iv) the assumption by the company of an office
lease in an amount not to exceed $1,500 per month for a term expiring on
October 31, 1998. In addition, Mr. French has been granted a ten-year option
to purchase 60,000 shares of Common Stock at an exercise price of $10.50 per
share, which options vest in four equal annual installments commencing on
October 15, 1997. Notwithstanding the option period described above, the
options will fully vest on September 30, 1999 if Mr. French is an employee of
the company on that date and the company and Mr. French neither renew this
agreement nor enter into a new employment agreement. In the event the company
terminates his employment without cause, or Mr. French terminates his
employment for specified causes, Mr. French shall make himself available to
perform such consulting services as the company deems reasonable and, in
consideration thereof, shall be entitled to receive a monthly consulting fee
of $10,000, all for the period from the date of termination to the later of
the first anniversary of such termination or September 30, 1999, unless such
consulting term is extended by the company for one additional year. In the
event the company terminates Mr. French's employment with cause, the company
is obligated to pay only the base salary through the date of termination.
The Company has entered into an employment agreement with Ray C. Thousand
under which Mr. Thousand has been employed as the President and Chief
Executive Officer of United Auto Credit Corporation for the three years
commencing on December 7, 1995. Under this agreement, Mr. Thousand is entitled
to (i) an annual base salary of $135,000, (ii) an annual cash bonus of up to
100% of his base salary based upon the satisfaction of specified performance
goals relating to loan volume, pre-tax profit, delinquencies and charge-offs
and (iii) a monthly automobile allowance of $200. In addition, Mr. Thousand
has been granted an option to purchase up to a 7.5% ownership interest in
United Auto Credit Corporation at an exercise price equal to the book value of
such interest (subject to certain adjustments), which option vests 20% per
year and are exercisable based upon the satisfaction of specified performance
goals. In the event the Company terminates his employment before the end of
the stated term without cause, Mr. Thousand shall be entitled to receive the
base salary until the earlier to occur of the end of the stated term or the
first anniversary of the date of termination, all compensation required by the
agreement accrued to the date of termination and a prorated bonus. In the
event the Company terminates Mr. Thousand's employment before the end of the
stated term as a result of the failure of United Auto Credit Corporation to
achieve specified performance goals, he shall be entitled to receive 15% of
the remaining base salary that would have been paid under the agreement. In
the event the Company terminates Mr. Thousand's
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<PAGE>
employment before the end of the stated term with cause, the Company is
obligated to pay the compensation required by the agreement only through the
date of termination, and any accrued but unpaid bonus is forfeited.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All decisions involving executive officer compensation are made by the
Company's Compensation Committee, consisting of Messrs. Kaufman, Maizel and
Villanueva.
STOCK INCENTIVE PLAN
General. In 1994, the Company adopted a stock option plan and, on November
5, 1997, amended and restated such plan as the United PanAm Financial Corp.
1997 Employee Stock Incentive Plan. Pursuant to the Stock Incentive Plan,
officers, directors, employees and consultants of the Company are eligible to
receive shares of Common Stock or other securities or benefits with a value
derived from the value of the Common Stock.
The purpose of the Stock Incentive Plan is to enable the Company to attract,
retain and motivate officers, directors, employees and consultants by
providing for or increasing their proprietary interests in the Company and, in
the case of non-employee directors, to attract such directors and further
align their interests with those of the Company's stockholders by providing
for or increasing their proprietary interests in the Company.
The maximum number of shares of Common Stock that may be issued pursuant to
awards granted under the Stock Incentive Plan currently is 2,287,500 (subject
to adjustment to prevent dilution).
Administration. The Stock Incentive Plan is administered by a committee of
two or more directors appointed by the Board of Directors of the Company (the
"Committee"). The Committee has full and final authority to select the
recipients of awards and to grant such awards. Subject to the provisions of
the Stock Incentive Plan, the Committee has a wide degree of flexibility in
determining the terms and conditions of awards and the number of shares to be
issued pursuant thereto, including conditioning the receipt or vesting of
awards upon the achievement by the Company of specified performance criteria.
The expenses of administering the Stock Incentive Plan are borne by the
Company.
Terms of Awards. The Stock Incentive Plan authorizes the Committee to enter
into any type of arrangement with an eligible recipient that, by its terms,
involves or might involve the issuance of Common Stock or any other security
or benefit with a value derived from the value of Common Stock. Awards are not
restricted to any specified form or structure and may include, without
limitation, sales or bonuses of stock, restricted stock, stock options, reload
stock options, stock purchase warrants, other rights to acquire stock,
securities convertible into or redeemable for stock, stock appreciation
rights, phantom stock, dividend equivalents, performance units or performance
shares. An award may consist of one such security or benefit or two or more of
them in tandem or in the alternative.
An award granted under the Stock Incentive Plan may include a provision
accelerating the receipt of benefits upon the occurrence of specified events,
such as a change of control of the Company or a dissolution, liquidation,
merger, reclassification, sale of substantially all of the property and assets
of the Company or other significant corporate transactions. The Committee may
grant options that either are intended to be "incentive stock options" as
defined under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or are not intended to be incentive stock options ("non-
qualified stock options"). Awards to consultants and non-employee directors
may only be non-qualified stock options.
An award may permit the recipient to pay all or part of the purchase price
of the shares or other property issuable pursuant thereto by (i) delivering
previously owned shares of capital stock of the Company or other property or
(ii) reducing the amount of shares or other property otherwise issuable
pursuant to the award. If an option permits the recipient to pay for the
shares issuable pursuant thereto with previously owned shares, the recipient
would be able to exercise the option in successive transactions, starting with
a relatively small number of shares and, by a series of exercises using shares
acquired from each such transaction to pay the purchase price
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of the shares acquired in the following transaction, to exercise an option for
a large number of shares with no more investment than the original share or
shares delivered. The exercise price is payable in cash by consultants and
non-employee directors, although the Committee at its discretion may permit
such payment by delivery of shares of Common Stock, or by delivery of broker
instructions authorizing a loan secured by the shares acquired upon exercise
or payment of proceeds from the sale of such shares.
Subject to limitations imposed by law, the Board of Directors may amend or
terminate the Stock Incentive Plan at any time and in any manner. However, no
such amendment or termination may deprive the recipient of an award previously
granted under the Stock Incentive Plan of any rights thereunder without his
consent.
Pursuant to Section 16(b) of the Exchange Act, directors, certain officers
and ten percent stockholders of the Company are generally liable to the
Company for repayment of any "short-swing" profits realized from any non-
exempt purchase and sale of Common Stock occurring within a six-month period.
Rule 16b-3, promulgated under the Exchange Act, provides an exemption from
Section 16(b) liability for certain transactions by an officer or director
pursuant to an employee benefit plan that complies with such Rule.
Specifically, the grant of an option under an employee benefit plan that
complies with Rule 16b-3 will not be deemed a purchase of a security for
purposes of Section 16(b). The Stock Incentive Plan is designed to comply with
Rule 16b-3.
Awards may not be granted under the Stock Incentive Plan after the tenth
anniversary of the adoption of the Stock Incentive Plan. Although any award
that was duly granted on or prior to such date may thereafter be exercised or
settled in accordance with its terms, no shares of Common Stock may be issued
pursuant to any award after the twentieth anniversary of the adoption of the
Stock Incentive Plan.
The business criteria on which performance goals are based under the Stock
Incentive Plan will be determined on a case-by-case basis, except that with
respect to stock options and stock appreciation rights compensation is based
on increases in value of the Common Stock after the date of grant or award.
Similarly, the maximum amount of compensation that could be paid to any
participant or the formula used to calculate the amount of compensation to be
paid to the participant if a performance goal is obtained will be determined
on a case-by-case basis, except that in the case of stock options maximum
possible compensation will be calculated as the difference between the
exercise price of the option and the fair market value of the Common Stock on
the date of option exercise, times the maximum number of shares for which
grants may be made to any participant (200,000 shares per year under the Stock
Incentive Plan).
Recent Awards. Since 1994, options have been granted to (i) Lawrence J.
Grill, the President and Chief Executive Officer of the Company, to purchase
up to 375,000 shares of Common Stock at an exercise price of $0.80 per share,
(ii) Carol M. Bucci, Senior Vice President, Treasurer and Chief Financial
Officer of the Company, to purchase up to 56,250 shares of Common Stock at an
exercise price of $0.80 per share and up to an additional 40,000 shares at
$10.50 per share, (iii) Stephen W. Haley, the Senior Vice President-Compliance
and Risk Management of the Company, to purchase up to 60,000 shares of Common
Stock at an exercise price of $10.50 per share, (iv) Daniel L. Villanueva, a
director of the Company, to purchase up to 18,750 shares of Common Stock at an
exercise price of $0.80 per share, (v) Edmund M. Kaufman, a director of the
Company, to purchase up to 18,750 shares of Common Stock at an exercise price
of $0.80 per share, (vi) John T. French, a director of the Company and the
Chairman of the Board, President and Chief Executive Officer of United PanAm
Mortgage Corporation, to purchase up to 131,250 shares of Common Stock at an
exercise price of $0.80 per share and up to an additional 60,000 shares at an
exercise price of $10.50 per share, and (vii) 21 current or former employees
or consultants of the Company to purchase up to an aggregate of 1,101,250
shares at an average exercise price of $4.77 per share. Such options vest in
installments before October 15, 2001 and expire on or before October 15, 2007.
Concurrently with the sale of the shares of Common Stock offered hereby,
options will be granted to (i) Guillermo Bron, the Chairman of the Board of
the Company, to purchase up to 60,000 shares of Common Stock at an exercise
price equal to 110% of the initial public offering price, (ii) Mr. Grill to
purchase up to 60,000 shares of Common Stock at an exercise price equal to the
initial public offering price and (iii) Mr. Maizel to
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<PAGE>
purchase up to 20,000 shares of Common Stock at an exercise price equal to the
initial public offering price. These options will become exercisable in four
equal annual installments commencing on the first anniversary of the date of
grant and will expire on the tenth anniversary of the date of grant.
The Company intends to register under the Securities Act the shares of
Common Stock issuable pursuant to the Stock Option Plans. See "Description of
Capital Stock--Shares Eligible For Future Sale."
PROFIT SHARING PLAN
The Bank maintains the Pan American Bank 401(k) Profit Sharing Plan (the
"401(k) Plan"), initially effective as of April 1, 1995, for the benefit of
all eligible employees of the Company. The purpose of the 401(k) Plan is to
provide participating employees a vehicle for deferring a part of their pre-
tax salary to provide security for their retirement.
All employees of the Company who have completed six months of service are
eligible to participate in the 401(k) Plan on the first day of the month
following completion of the service requirement. The 401(k) Plan provides for
two types of contributions: employee elective deferrals and employer profit
sharing contributions. Participating employees can contribute, by way of
payroll deductions, up to the lesser of 15% of their pre-tax salary or the
annual dollar limit of $9,500 for 1997 as an elective deferral, subject to
certain legal limits. In addition, the 401(k) Plan permits participating
employees to make rollover contributions. The 401(k) Plan does not permit
participants to make voluntary after-tax contributions.
The 401(k) Plan provides for discretionary profit sharing contributions.
Each plan year (which is the calendar year), the Board of Directors of the
Bank will determine whether or not to make a contribution to the 401(k) Plan
and, if so, in what amount. If the Bank determines to make a contribution to
the 401(k) Plan, the amounts contributed by each affiliated employer will be
allocated to the accounts of participating employees who are employed on the
last day of the plan year on a pro rata basis. The Bank has not elected to
make a discretionary profit sharing contribution for any of the plan years
that the 401(k) Plan has been in existence. Effective January 1, 1998, the
Company may commence matching contributions to the 401(k) Plan.
Participating employees have the right to invest all contributions allocated
to their accounts under one or more of the six investment options offered. A
participating employee is always 100% vested in elective deferrals.
Participating employees become vested in their employer contributions 20%
after the completion of one year of service and 20% for each year thereafter,
with 100% vesting after the completion of five or more years of service.
Upon a participating employee's retirement, death, total and permanent
disability, attainment of age 59 1/2 or other termination of employment with
the Company, he is entitled to receive a distribution of vested benefits. The
participating employee will receive these benefits in the form of a lump sum.
While a participating employee is still in the employ of the Company, he may
withdraw benefits only from his elective deferral account and only upon a
showing of financial hardship. A participating employee may also borrow
against his vested benefits, but those benefits must be repaid.
Tax law limits deductible contributions in 1998 to the lesser of 15% of the
total amount of pre-tax salary paid during the plan year or $10,000 to
participating employees. The 401(k) Plan is designed to qualify under Section
401(k) of the Code and, therefore, contributions by the Company and the
participating employees are deductible by the Company and not includible in
the income of participating employees for federal income tax purposes.
The Internal Revenue Service has determined that the 401(k) Plan is a
qualified plan within the meaning of Section 401(a) and 401(k) of the Code as
of September 20, 1996.
The Bank, through its Board of Directors, appoints one or more
administrators to administer the 401(k) Plan. Pursuant to the terms of the
401(k) Plan, the plan administrator will operate the 401(k) Plan so as not to
discriminate in favor of participating employees who are officers,
stockholders or highly compensated employees of the Company. All trust assets
are held in trust by the trustee for the exclusive benefit of the
participating employees and their beneficiaries under the 401(k) Plan.
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The account balances of the Named Executives under the 401(k) Plan,
consisting solely of such officers' electing deferrals as of December 31,
1997, are as follows.
<TABLE>
<CAPTION>
NAME ACCOUNT BALANCE
---- ---------------
<S> <C>
Lawrence J. Grill............................................ $35,745.01
Guillermo Bron............................................... $10,273.38
John T. French............................................... $ 9,302.22
Ray C. Thousand.............................................. -0-
Carol M. Bucci............................................... $17,976.03
</TABLE>
CERTAIN TRANSACTIONS
Subsequent to July 1, 1997, the shareholders of the Company loaned the
Company an aggregate of $2.0 million, each substantially in proportion to the
number of shares of Common Stock held by the shareholder. The amount borrowed
was used to finance the establishment and initial operations of United PanAm
Mortgage Corporation. These loans are unsecured, bear interest at an annual
rate of 8% payable on July 15, 1998 and June 30, 1999 and are due and payable
on June 30, 1999. The Company intends to use a portion of the net proceeds of
the Offering to repay this indebtedness. See "Use of Proceeds."
On October 15, 1997, the Company loaned $225,000 to Lawrence J. Grill to
finance his exercise of an option to purchase 281,250 shares of Common Stock.
This loan is secured by the shares purchased, bears interest at an annual rate
of 5.81% payable annually and is due and payable on the earlier of October 15,
2000 or the termination of Mr. Grill's employment by the Company.
United Auto Credit Corporation has granted to certain of its key employees
the right to purchase up to a 13.5% ownership interest in that company, and
may, in the future, grant options to purchase an additional 1.5%. These
options generally vest over a five-year period beginning with the date of
employment and are exercisable at prices which increase for each subsequent
installment. In addition, the options held by senior management, representing
11.5% of the 13.5% contingent ownership interest, generally may only be
exercised if the company has achieved a 30% cumulative annual return on equity
from inception through the date of vesting.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the shares of
Common Stock beneficially owned as of March 31, 1998, and as adjusted to
reflect the sale of the shares offered hereby, by (i) each person known to the
Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (ii) each director and Named Executive and (iii) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(2) AFTER OFFERING(2)(3)
----------------------------- -----------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME AND ADDRESS(1) SHARES CLASS(4) SHARES CLASS(4)
------------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Pan American Financial,
L.P.(5)
1999 Avenue of the Stars,
Suite 2960
Los Angeles, California
90067.................... 8,681,250 79.3% 8,681,250 52.8%
BVG West Corp.(6)......... 1,368,750 12.5% 1,368,750 8.3%
1999 Avenue of the Stars,
Suite 2960
Los Angeles, California
90067
Lawrence J. Grill(7)...... 615,000 5.6% 615,000 3.7%
Guillermo Bron(8)......... -- -- -- --
John T. French(9)......... 80,625 * 80,625 *
Ray C. Thousand........... -- -- -- --
Carol M. Bucci(10)........ 42,188 * 42,188 *
Edmund M. Kaufman(11)..... 9,375 * 9,375 *
Daniel L. Villanueva(12).. 18,750 * 18,750 *
Luis Maizel(13)........... -- -- -- --
All directors and
executive officers as a
group (eight
persons)(14)............. 765,938 6.8% 765,938 4.6%
</TABLE>
- --------
* Less than one percent.
(1) The business address of each director and executive officer of the Company
is 1300 South El Camino Real, San Mateo, California 94402.
(2) Each person has sole voting and investment power over the shares of Common
Stock shown as beneficially owned, subject to community property laws
where applicable.
(3) Assumes no exercise of the Underwriters' over-allotment option.
(4) Shares of Common Stock which the person (or group) has the right to
acquire within 60 days after March 31, 1998 are deemed to be outstanding
in calculating the percentage ownership of the person (or group), but are
not deemed to be outstanding as to any other person or group.
(5) PAFLP is a Delaware limited partnership, the sole general partner of which
is BVG West Corp. BVG West Corp. is wholly owned by Mr. Bron. Mr. Bron and
members of his family hold 58.9% of the Class A Limited Partnership Units
and 52.2% of the Class B Limited Partnership Units of PAFLP, which entitle
the holders to receive 5,002,419 shares of the Common Stock held by PAFLP.
Mr. Bron and BVG West Corp. each disclaims beneficial ownership of the
shares of Common Stock held by PAFLP.
(6) BVG West Corp. is the sole general partner of PAFLP and is wholly owned by
Mr. Bron. Mr. Bron disclaims beneficial ownership of the shares of Common
Stock held by BVG West Corp.
(7) Includes 93,750 shares issuable upon the exercise of stock options granted
pursuant to the Stock Incentive Plan, which options are exercisable within
60 days after March 31, 1998. Excludes (i) 37,500 shares held by Mr.
Grill's adult children and 1,875 shares held by Mr. Grill's father-in-law,
as to which shares he disclaims beneficial ownership, and (ii) 60,000
shares issuable upon the exercise of stock options to be granted pursuant
to the Stock Incentive Plan concurrently with the completion of the
Offering. See "Management--Stock Incentive Plan." Mr. Grill holds 10.2% of
the Class B Limited Partnership Units of PAFLP which entitle Mr. Grill to
receive 168,465 shares of the Common Stock held by PAFLP. Mr. Grill
disclaims beneficial ownership of the shares of Common Stock held by
PAFLP.
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(8) Excludes (i) 1,368,750 shares held by BVG West Corp., a corporation owned
by Mr. Bron, (ii) 8,681,250 shares held by PAFLP the sole general partner
of which is BVG West Corp., and (iii) 60,000 shares issuable upon the
exercise of stock options to be granted pursuant to the Stock Incentive
Plan concurrently with the completion of the Offering. See "Management--
Stock Incentive Plan."
(9) Consists of shares issuable upon the exercise of stock options granted
pursuant to the Stock Incentive Plan. Excludes 110,625 shares issuable
upon the exercise of stock options granted pursuant to the Stock Incentive
Plan, which options are not exercisable within 60 days of March 31, 1998.
See "Management--Stock Incentive Plan." Mr. French holds 12.4% of the
Class B Limited Partnership Units of PAFLP which entitle Mr. French to
receive 204,890 shares of the Common Stock held by PAFLP. Mr. French
disclaims beneficial ownership of the shares of Common Stock held by
PAFLP.
(10) Consists of shares issuable upon the exercise of stock options granted
pursuant to the Stock Incentive Plan. Excludes 54,062 shares issuable
upon the exercise of stock options granted pursuant to the Stock
Incentive Plan, which options are not exercisable within 60 days after
March 31, 1998. See "Management--Stock Incentive Plan."
(11) Consists of shares issuable upon the exercise of stock options granted
pursuant to the Stock Incentive Plan. Excludes 9,375 shares issuable upon
the exercise of stock options granted pursuant to the Stock Incentive
Plan, which options are not exercisable within 60 days after March 31
1998. See "Management--Stock Incentive Plan." Mr. Kaufman holds 1.8% of
the Class B Limited Partnership Units of PAFLP which entitle Mr. Kaufman
to receive 30,354 shares of the Common Stock held by PAFLP. Mr. Kaufman
disclaims beneficial ownership of the shares of Common Stock held by
PAFLP.
(12) Consists of shares issuable upon the exercise of stock options granted
pursuant to the Stock Incentive Plan. Excludes 150,000 shares and
warrants to purchase an additional 75,000 shares held by Villanueva
Management Inc., an investment company owned by Daniel D. Villanueva. See
"Management--Stock Incentive Plan." Daniel L. Villanueva holds 2.7% of
the Class B Limited Partnership Units by PAFLP which entitle Mr.
Villanueva to receive 45,531 shares of the Common Stock held by PAFLP.
Mr. Villanueva disclaims beneficial ownership of the shares of Common
Stock held by Villanueva Management Inc. or PAFLP.
(13) Excludes 20,000 shares issuable upon the exercise of stock options to be
granted pursuant to the Stock Incentive Plan concurrently with the
completion of the Offering. Mr. Maizel holds 1.5% of the Class A Limited
Partnership Units of PAFLP which entitle Mr. Maizel to receive 106,239
shares of the Common Stock held by PALFP. See "Management--Stock Option
Plan."
(14) Includes 255,001 shares issuable upon the exercise of stock options
granted pursuant to the Stock Incentive Plan. Excludes (i) 223,749 shares
issuable upon the exercise of stock options granted pursuant to the Stock
Incentive Plan, which options are not exercisable within 60 days after
March 31, 1998 and (ii) 140,000 shares issuable upon the exercise of
stock options to be granted pursuant to the Stock Incentive Plan
concurrently with the completion of the Offering. See "Management--Stock
Incentive Plan."
97
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock. At March 31, 1998, there
were 10,950,000 shares of Common Stock outstanding, held of record by nine
persons. The following description of capital stock reflects the consummation
of the reincorporation of the Company in California.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders. While the Company's
shareholders currently may cumulate their votes for the election of directors,
cumulative voting will no longer be required or permitted under the Company's
Articles of Incorporation (the "Articles") at such time as the Company's
shares of Common Stock are listed on the Nasdaq National Market and the
Company has at least 800 holders of its equity securities as of the record
date of the Company's most recent annual meeting of shareholders. At such
time, the Company will divide its Board into two classes of directors. Subject
to preferences which may be granted to the holders of Preferred Stock, each
holder of Common Stock is entitled to share ratably in distributions to
shareholders and to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor and, in the event
of the liquidation, dissolution or winding up of the Company, is entitled to
share ratably in all assets of the Company remaining after payment of
liabilities. Holders of Common Stock have no conversion, preemptive or other
rights to subscribe for additional shares, and there are no redemption rights
or sinking fund provisions with respect to the Common Stock. The outstanding
shares of Common Stock are, and the shares to be sold by the Company in this
Offering will be, when issued and delivered against receipt of the
consideration set forth in this Prospectus, validly issued, fully paid and
nonassessable. Additional shares of Common Stock may be issued by the Company
from time to time.
PREFERRED STOCK
The Board of Directors, without further action by the holders of Common
Stock, may issue shares of Preferred Stock in one or more series and may fix
or alter the relative, participating, optional or other rights, preferences,
privileges and restrictions, including the voting rights, redemption
provisions (including sinking fund provisions), dividend rights, dividend
rates, liquidation preferences and conversion rights, and the description of
and number of shares constituting any wholly unissued series of Preferred
Stock. The Board of Directors, without further shareholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. No shares of Preferred Stock
presently are outstanding, and the Company currently has no plans to issue
shares of Preferred Stock. The issuance of Preferred Stock in certain
circumstances may delay, defer or prevent a change in control of the Company
without further action by the shareholders, may discourage bids for the
Company's Common Stock at a premium over the market price of the Common Stock
and may adversely affect the market price, and the voting and other rights of
the holders, of Common Stock.
CERTAIN PROVISIONS IN THE COMPANY'S ARTICLES AND BYLAWS
SHAREHOLDER MEETING
The Articles provide that any action required to be taken or that may be
taken at any meeting of the Company's shareholders may only be taken at a
meeting of shareholders or by the written consent of the holders of two-thirds
of the outstanding voting shares. Special meetings of shareholders may only be
called by the Company's Board of Directors, Chairman of the Board or Chief
Executive Officer, or at the written request of holders of not less than 10%
of the Company's voting shares. In addition, if a shareholder wishes to
propose an item for consideration at a special meeting of shareholders, or at
the annual meeting of shareholders to be held in May 1999, he must give
written notice to the Company not less than 30 nor more than 60 days prior to
the meeting or, if later, the tenth day following the first public
announcement of such meeting, or such other date as is necessary to comply
with applicable federal proxy solicitation rules or other regulations. The
Bylaws of the Company (the "Bylaws") provide that, if a shareholder wishes to
propose an item for consideration at any annual meeting of shareholders, he
must give written notice to the Company not less than 120 days prior to the
day and month on which, in the immediately preceding year, the proxy statement
for such year had been released to shareholders.
98
<PAGE>
BOARD OF DIRECTORS
The Bylaws provide that the number of directors shall be not less than five
nor more than nine until changed by an amendment duly adopted by the Company's
shareholders. The Bylaws further provide that the exact number of directors
shall be fixed from time to time, within such range, by the Board of
Directors. The number of directors currently is fixed at six. The Articles
provide that, upon the satisfaction of certain conditions, the Board of
Directors will be divided into two classes of directors, each serving for
staggered two-year terms. It is anticipated that this will occur at the next
annual meeting of shareholders of the Company, which is scheduled to be held
in May 1999.
AMENDMENT OF ARTICLES AND BYLAWS
The Bylaws may not be amended without the approval of the holders of at
least two-thirds of the outstanding voting shares or the approval of at least
a majority of the authorized directors; provided, however, that the provisions
of the Bylaws relating to shareholder proposals and the number and nomination
of directors require the approval of the holders of at least two-thirds of the
outstanding voting shares. In addition, the provisions contained in the
Articles and Bylaws with respect to the required vote for shareholder action
without a meeting, the classification of the Board of Directors, the
elimination of cumulative voting and indemnification of directors, officers
and others may not be amended without the affirmative vote of at least two-
thirds of the outstanding voting shares.
The foregoing provisions of the Articles and the Bylaws may delay, defer or
prevent a change in control of the Company without further action by the
shareholders, may discourage bids for the Company's Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of the Common Stock.
TRANSFER AGENT AND REGISTRAR
The Company has appointed U.S. Stock Transfer Corporation, Glendale,
California as the transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock. Future
sales of substantial amounts of the Common Stock in the public market could
adversely affect prevailing market prices.
Upon completion of the Offering, there will be 16,450,000 shares of Common
Stock outstanding. Of these shares, the 5,500,000 shares sold in the Offering
will be freely tradable without restriction or further registration under the
Securities Act, except for any such shares held by an "affiliate" of the
Company. The remaining 10,950,000 shares (the "Restricted Shares"), and any
shares purchased in the Offering by an "affiliate" of the Company, may not be
sold without registration under the Securities Act or pursuant to an
applicable exemption therefrom.
In general, under Rule 144 promulgated under the Securities Act, as
currently in effect, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year (including the
holding period of any prior owner other than an "affiliate" of the Company),
or who is an "affiliate" of the Company, is entitled to sell within any three-
month period a number of such Restricted Shares or, in the case of an
"affiliate," a number of such Restricted Shares and shares purchased in the
public market, that does not exceed the greater of (i) 1% of the then
outstanding shares of the Common Stock (approximately 164,500 shares
immediately after the Offering) or (ii) the average weekly trading volume of
the Common Stock in the public market during the four calendar weeks
immediately preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and availability of
current public information regarding the Company. A person who has not been an
"affiliate" of the Company at any time during the 90 days preceding a sale,
and who has beneficially owned Restricted Shares for at least two years, is
entitled to sell such
99
<PAGE>
shares under Rule 144 without regard to the volume limitations, manner of sale
provisions or notice requirements. As of March 31, 1998, 10,668,750 of the
Restricted Shares may be deemed to have been held for more than one year.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act ("Rule
701") may be relied upon with respect to the resale of securities originally
purchased from the Company by its employees, directors, officers, consultants
or advisers prior to the closing of the Offering, pursuant to written
compensatory benefit plans or written contracts relating to the compensation
of such persons. In addition, the Commission has indicated that Rule 701 will
apply to stock options granted by the Company under its employee benefit plans
before the Offering, along with the shares of Common Stock acquired upon
exercise of such options. Securities issued in reliance on Rule 701 are deemed
to be restricted securities and, beginning 90 days after the date of this
Prospectus (unless subject to the lock-up agreements described below), may be
sold by persons other than affiliates of the Company subject only to the
manner-of-sale provisions of Rule 144 and by affiliates of the Company under
Rule 144 without compliance with its minimum holding period requirement.
All of the Company's officers and directors and certain of its other
stockholders have agreed that they will not, without the prior written consent
of NationsBanc Montgomery Securities LLC (which consent may be withheld in its
sole discretion) and subject to certain limited exceptions, directly or
indirectly, sell, offer, contract or grant any option to sell, make any short
sale, pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or otherwise dispose of any shares of Common Stock,
options or warrants to acquire Common Stock, or securities exchangeable or
exercisable for or convertible into Common Stock currently owned either of
record or beneficially by them or announce the intention to do any of the
foregoing, for a period commencing on the date of this Prospectus and
continuing to a date 180 days after such date. NationsBanc Montgomery
Securities LLC may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to these lock-up
agreements. In addition, the Company has agreed that, for a period of 180 days
after the date of this Prospectus, it will not, without the consent of
NationsBanc Montgomery Securities LLC, issue, offer, sell or grant options to
purchase or otherwise dispose of any equity securities or securities
convertible into or exchangeable for equity securities except for (i) the
issuance of shares of Common Stock offered hereby and (ii) the grant of
options to purchase shares of Common Stock pursuant to the Stock Incentive
Plan and shares of Common Stock issued pursuant to the exercise of such
options, provided that such options shall not vest, or the Company shall
obtain the written consent of the grantee not to transfer such shares, until
the end of such 180-day period. See "Underwriting."
The Company has granted options to purchase up to 1,580,000 shares of Common
Stock pursuant to the Stock Incentive Plan. Concurrently with the sale of the
shares offered hereby, the Company will grant options to purchase an
additional 140,000 shares of Common Stock pursuant to the Stock Incentive
Plan. An additional 567,500 shares currently are reserved for issuance under
the Stock Incentive Plan. The Company intends to register the sale of such
shares under the Securities Act. See "Management--Stock Incentive Plan."
Accordingly, as awards under the Stock Incentive Plan vest, shares issued
pursuant thereto will be freely tradable, except such shares as may be
acquired by an "affiliate" of the Company.
100
<PAGE>
UNDERWRITING
The Underwriters named below represented by NationsBanc Montgomery
Securities LLC and Piper Jaffray Inc. (the "Representatives") have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
NationsBanc Montgomery Securities LLC..........................
Piper Jaffray Inc..............................................
---------
Total........................................................ 5,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters are
committed to purchase all of such shares if any are purchased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more that $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the Offering, the offering
price and other selling terms may be changed by the Representatives. The
shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters and to certain other conditions, including the right to reject
orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 825,000 additional shares of Common Stock to cover over-allotments,
if any, at the offering price less the underwriting discount set forth on the
cover page of this Prospectus. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that the Company and certain of its
stockholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
that the Underwriters may be required to make in respect thereof.
All of the Company's officers and directors and certain of its other
stockholders have agreed that they will not, without the prior written consent
of NationsBanc Montgomery Securities LLC (which consent may be withheld in its
sole discretion) and subject to certain limited exceptions, directly or
indirectly, sell, offer, contract or grant any option to sell, make any short
sale, pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any
shares of Common Stock, options or warrants to acquire Common Stock, or
securities exchangeable or exercisable for or convertible into Common Stock
currently owned either of record or beneficially by them or announce the
intention to do any of the foregoing, for a period commencing on the date of
this Prospectus and continuing to a date 180 days after such date. NationsBanc
Montgomery Securities LLC may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to these lock-up
agreements. In addition, the Company has agreed that, for a period of 180 days
after the date of this Prospectus, it will not, without the consent of
101
<PAGE>
NationsBanc Montgomery Securities LLC, issue, offer, sell or grant options to
purchase or otherwise dispose of any equity securities or securities
convertible into or exchangeable for equity securities except for (i) the
issuance of shares of Common Stock offered hereby and (ii) the grant of
options to purchase shares of Common Stock pursuant to the Stock Incentive
Plan and shares of Common Stock issued pursuant to the exercise of such
options, provided that such options shall not vest, or the Company shall
obtain the written consent of the grantee not to transfer such shares, until
the end of such 180-day period. See "Management--Stock Incentive Plan" and
"Description of Capital Stock--Shares Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price will be determined by
negotiations among the Company and the Representatives. Among the factors to
be considered in such negotiations are the history of, and prospects for, the
Company and the industry in which it competes, an assessment of the Company's
management, its past and present operations and financial performance, the
prospects for further earnings of the Company, the present state of the
Company's development, the general condition of the securities markets at the
time of the Offering, the market prices of and demand for the publicly traded
common stock of comparable companies in recent periods and other factors
deemed relevant.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Common Stock. If the Underwriters create a short position in the Common
Stock in connection with the Offering (i.e., if they sell more shares of
Common Stock than are set forth on the cover page of this Prospectus), the
Representatives may reduce that short position by purchasing Common Stock in
the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above. The Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representatives
purchase shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
LEGAL MATTERS
Certain matters relating to the offering are being passed upon for the
Company by Manatt, Phelps & Phillips, LLP, Los Angeles, California. Certain
legal matters will be passed upon for the Underwriters by Gibson, Dunn &
Crutcher LLP, San Francisco, California.
102
<PAGE>
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997, for each of the years in the three year period ended December 31,
1997 have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers
to a change in the Company's method of accounting for transfers and servicing
of financial assets in 1997.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement under the Securities Act with
the Commission with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits thereto on file with the Commission pursuant to the Securities Act
and the rules and regulations of the Commission. Statements contained in this
Prospectus, such as the contents of any contract or other document referred
to, are not necessarily complete and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Upon completion of the Offering, the Company will be subject
to the information reporting requirements of the Exchange Act and, in
accordance therewith, will file reports and other information with the
Commission. A copy of the Registration Statement, including the exhibits
thereto, may be inspected without charge at the Commission's principal office
at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New
York, New York 10048. Copies of such materials may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 upon the payment of certain fees prescribed by the Commission. The
Commission also maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants, such
as the Company, that file electronically with the Commission. The address of
the site is http://www.sec.gov.
103
<PAGE>
UNITED PANAM FINANCIAL CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................................ F-2
Consolidated Statements of Financial Condition
as of December 31, 1997 and 1996........................................... F-3
Consolidated Statements of Operations for the
years ended December 31, 1997, 1996 and 1995............................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995............................... F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995............................... F-6
Consolidated Statements of Cash Flows, Continued for the
years ended December 31, 1997, 1996 and 1995............................... F-7
Notes to Consolidated Financial Statements.................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United PanAm Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of United PanAm Financial Corp. and subsidiaries (the "Company") as
of December 31, 1997 and 1996, and the consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1997. The consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
PanAm Financial Corp. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows, for each of the years in
the three year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
As discussed in Note 2 of the consolidated financial statements, effective
January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125 "Accounting for Transactions and Servicing of Financial
Assets and Extinguishment of Liabilities".
/s/ KPMG Peat Marwick LLP
San Francisco, California
March 6, 1998
F-2
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) -------- --------
<S> <C> <C>
ASSETS
Cash and due from banks...................................... $ 5,063 $ 15,026
Short term investments....................................... 21,000 4,000
-------- --------
Cash and cash equivalents.................................... 26,063 19,026
Securities available for sale, at fair value................. -- 1,002
Residual interests in securitizations, at fair value......... -- 8,230
Loans, net................................................... 134,821 148,535
Loans held for sale.......................................... 20,766 120,002
Federal Home Loan Bank stock, at cost........................ 1,288 1,945
Accrued interest receivable.................................. 845 1,494
Real estate owned, net....................................... 988 562
Premises and equipment, net.................................. 822 3,085
Deferred tax assets.......................................... 1,392 3,171
Intangible assets............................................ 584 457
Other assets................................................. 1,174 3,333
-------- --------
Total assets............................................... $188,743 $310,842
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits..................................................... $159,061 $233,194
Federal Home Loan Bank advances.............................. 4,000 28,000
Notes payable................................................ 10,930 12,930
Warehouse line of credit..................................... -- 6,237
Accrued expenses and other liabilities....................... 7,991 17,472
-------- --------
Total liabilities.......................................... 181,982 297,833
-------- --------
Commitments and contingencies................................ -- --
Preferred stock (par value $0.01 per share):
Authorized, 2,000,000 shares
None issued and outstanding................................ -- --
Common stock (par value $0.01 per share):
Authorized, 20,000,000 shares
Issued and outstanding, 10,668,750 and 10,950,000 shares at
December 31, 1996 and 1997, respectively................... 107 110
Additional paid-in capital................................... 5,130 5,127
Retained earnings............................................ 1,524 7,772
-------- --------
Total stockholders' equity................................. 6,761 13,009
-------- --------
Total liabilities and stockholders' equity................. $188,743 $310,842
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ---------------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Loans.................................................... $ 9,207 $ 15,159 $ 25,150
Accretion of discount on loans purchased................. 873 696 722
RTC interest............................................. 248 -- --
Short term investments and securities available
for sale................................................ 3,205 706 639
------- -------- --------
Total interest income.................................. 13,533 16,561 26,511
------- -------- --------
INTEREST EXPENSE:
Deposits................................................. 7,240 7,225 10,095
Federal Home Loan Bank advances.......................... -- 72 1,103
Warehouse line of credit................................. -- -- 544
Notes payable............................................ 487 556 669
------- -------- --------
Total interest expense................................. 7,727 7,853 12,411
------- -------- --------
Net interest income.................................. 5,806 8,708 14,100
Provision for loan losses................................ 120 194 507
------- -------- --------
Net interest income after provision for loan losses.. 5,686 8,514 13,593
------- -------- --------
NON-INTEREST INCOME:
Gain on sale of loans, net............................... 90 2,333 26,526
Loan related charges and fees............................ 48 116 422
Service charges and fees................................. 121 272 230
Other income............................................. 59 55 50
------- -------- --------
Total non-interest income.............................. 318 2,776 27,228
------- -------- --------
NON-INTEREST EXPENSE:
Compensation and benefits................................ 2,750 5,248 19,043
Occupancy expense........................................ 407 809 2,891
SAIF special assessment.................................. -- 820 --
Other expenses........................................... 2,005 2,772 8,148
------- -------- --------
Total non-interest expense............................. 5,162 9,649 30,082
------- -------- --------
Income before income taxes............................. 842 1,641 10,739
Income taxes............................................. 384 691 4,491
------- -------- --------
Net income............................................... $ 458 $ 950 $ 6,248
======= ======== ========
Earnings per share-basic................................. $ 0.04 $ 0.09 $ 0.58
======= ======== ========
Earnings per share-diluted .............................. $ 0.04 $ 0.09 $ 0.53
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
NUMBER OF COMMON PAID-IN RETAINED STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS EQUITY
(DOLLARS IN THOUSANDS) ---------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1994..................... 10,668,750 $107 $5,130 $ 116 $ 5,353
Net income................ -- -- -- 458 458
---------- ---- ------ ------ -------
Balance, December 31,
1995..................... 10,668,750 107 5,130 574 5,811
Net income................ -- -- -- 950 950
---------- ---- ------ ------ -------
Balance, December 31,
1996..................... 10,668,750 107 5,130 1,524 6,761
Net income................ -- -- -- 6,248 6,248
Options exercised......... 281,250 3 222 -- 225
Note receivable from
shareholder.............. -- -- (225) -- (225)
---------- ---- ------ ------ -------
Balance, December 31,
1997..................... 10,950,000 $110 $5,127 $7,772 $13,009
========== ==== ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
(DOLLARS IN THOUSANDS) -------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 458 $ 950 $ 6,248
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Gain on sale of loans......................... (90) (2,333) (26,526)
Origination of mortgage loans held for sale... -- (71,848) (582,433)
Sales of mortgage loans held for sale......... -- 52,224 493,526
Provision for loan losses..................... 120 194 507
Accretion of discount on loans................ (873) (696) (722)
Depreciation and amortization................. 142 270 842
FHLB stock dividend........................... (37) (74) (95)
Decrease (increase) in accrued interest
receivable................................... 669 324 (649)
Decrease (increase) in other assets........... 3,181 (117) (2,159)
Deferred income taxes......................... 93 (420) (1,779)
Increase in accrued expenses and other
liabilities.................................. 114 6,127 9,481
-------- -------- ---------
Net cash (used in) provided by operating
activities.................................. 3,777 (15,399) (103,759)
-------- -------- ---------
Cash flows from investing activities:
Proceeds from maturities of investment
securities................................... -- -- 1,000
Originations, net of repayments, of mortgage
loans........................................ 10,728 19,538 22,431
Purchase of mortgage loans.................... (75,878) -- --
Sales of mortgage loans....................... 3,470 -- --
Originations, net of repayments, of non-
mortgage loans............................... (16,771) (22,485) (29,782)
Purchase of securities available for sale..... -- -- (2,002)
Purchase of premises and equipment............ (212) (776) (2,975)
Purchase of FHLB stock, net................... -- (448) (563)
Proceeds from sale of real estate owned....... -- 923 2,243
-------- -------- ---------
Net cash used in investing activities........ (78,663) (3,248) (9,648)
-------- -------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits........... (21,190) 17,137 74,133
Proceeds, net of repayments, from warehouse
line of credit............................... -- -- 6,237
Proceeds from notes payable................... -- -- 2,000
Proceeds, net of repayments, from FHLB
advances..................................... -- 4,000 24,000
-------- -------- ---------
Net cash provided by (used in) financing
activities.................................... (21,190) 21,137 106,370
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................... (96,076) 2,490 (7,037)
Cash and cash equivalents at beginning of
period........................................ 119,649 23,573 26,063
-------- -------- ---------
Cash and cash equivalents at end of period..... $ 23,573 $ 26,063 $ 19,026
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) ------------------------
1995 1996 1997
------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for:
Interest.......................................... $ 7,720 $ 7,856 $ 12,087
======= ======= ========
Taxes............................................. $ 763 $ 1,512 $ 5,360
======= ======= ========
Supplemental schedule of non-cash investing and
financing activities:
Acquisition of real estate owned through foreclosure
of related mortgage loans........................... $ 298 $ 1,613 $ 1,817
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
ORGANIZATION
United PanAm Financial Corp. (the "Company"), was organized as a holding
company for Pan American Financial, Inc. ("PAFI") and Pan American Bank, FSB
(the "Bank") to purchase certain assets and assume certain liabilities (the
"Purchase Agreement") of Pan American Federal Savings Bank from the Resolution
Trust Corporation (the "RTC") on April 29, 1994. The Company, PAFI and the
Bank are considered to be minority owned. The Company is owned substantially
by Pan American Financial, LP and individual investors. PAFI is a wholly-owned
subsidiary of the Company and the Bank is a wholly-owned subsidiary of PAFI.
United PanAm Mortgage Corporation was organized in 1997 as a wholly-owned
subsidiary of the Company and is presently acting as agent for the Bank in
secondary marketing activities.
These financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing these financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and the reported amount of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
In 1997, the Company changed its fiscal year end from June 30 to December 31
for financial reporting purposes. For income tax purposes, the Company has
filed an application with the appropriate taxing authorities to change its
fiscal year end from June 30 to December 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United PanAm
Financial Corp., Pan American Financial, Inc., United PanAm Mortgage
Corporation and Pan American Bank, FSB. Substantially all of the Company's
revenues are derived from the operations of the Bank and United PanAm Mortgage
Corporation and they represent substantially all of the Company's consolidated
assets and liabilities as of December 31, 1997 and 1996. Significant inter-
company accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For financial statement purposes, cash and cash equivalents include cash on
hand, non-interest-bearing deposits, certificates of deposit, Federal funds
sold, Commercial Paper and highly liquid interest-bearing deposits with
maturities of three months or less.
In accordance with regulations, the Bank must maintain an amount equal to 4%
of the sum of total deposits and short-term borrowings in cash and U.S.
Government and other approved securities that are readily convertible to cash.
The Bank exceeded these requirements at December 31, 1997 and 1996.
SECURITIES
Securities are classified in one of three categories; held to maturity,
trading, or available for sale. Investments classified as held to maturity are
carried at amortized cost because management has both the intent and ability
to hold these investments to maturity. Investments classified as trading are
carried at fair value with any gains and losses reflected in earnings. All
other investments are classified as available for sale and are carried at fair
value with any unrealized gains and losses included as a separate component of
stockholders' equity, net of applicable taxes.
LOANS
The Company originates and purchases loans for investment as well as for
sale in the secondary market. At the date of acquisition, loans are designated
as either held for sale or held for investment, and accounted for
F-8
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accordingly. Loans held for sale are reported at the lower of cost or market
value applied on an aggregate basis. Market values of loans held for sale are
based upon prices available in the secondary market for similar loans. Loans
which are held for investment are reported at cost, net of unamortized
discounts or premiums, unearned loan origination fees and allowances for
losses. Transfers of loans from the held for sale portfolio to the held for
investment portfolio are recorded at the lower of cost or market value on the
transfer date.
INTEREST INCOME
Interest income is accrued as it is earned. Loan origination fees and
certain direct loan origination costs are deferred and recognized in interest
income over the contractual lives of the related loans using the interest
method. When a loan is paid-off or sold, the unamortized balance of these
deferred fees and costs is recognized in income. The Company ceases to accrue
interest on mortgage loans that are delinquent 90 days or more and on non-
mortgage loans delinquent 120 days or more, or earlier, if the ultimate
collectibility of the interest is in doubt. Interest income deemed
uncollectible is reversed. The Company ceases to amortize deferred fees on
non-performing loans. Income is subsequently recognized only to the extent
cash payments are received, until in management's judgment, the borrower's
ability to make periodic interest and principal payments is in accordance with
the loan terms, at which time the loan is returned to accrual status.
RESIDUAL INTERESTS IN SECURITIZATIONS
In December 1997, the Company completed a securitization and sale of
approximately $115.0 million in mortgage loans held for sale and recorded a
net gain on sale of $5.9 million. As a result of this securitization, the
Company recorded residual interests in securitizations consisting of
beneficial interests in the form of an interest-only strip representing the
subordinated right to receive cash flows from the pool of securitized loans
after payment of required amounts to the holders of the securities and certain
costs associated with the securitization.
The Company classifies its residual interests in securitizations as trading
securities and records them at fair market value with any unrealized gains or
losses recorded in the results of operations.
Valuations of the residual interests in securitizations at each reporting
period are based on discounted cash flow analyses. Cash flows are estimated as
the amount of the excess of the weighted-average coupon on the loans sold over
the sum of the pass-through on the senior certificates, a servicing fee, an
estimate of annual future credit losses and prepayment assumptions and other
expenses associated with the securitization, discounted at an interest rate
which the Company believes is commensurate with the risks involved. The
Company uses prepayment and default assumptions that market participants would
use for similar instruments subject to prepayment, credit and interest rate
risks.
In connection with its securitization transaction, the Company is required
to maintain an overcollateralization amount which serves as credit enhancement
to the senior certificate holders. The overcollateralization amount initially
consists of the excess of the principal balance of the mortgage loans sold,
less the principal balance of the certificates sold to investors. The
overcollateralization is required to be maintained at a specified target level
of the principal balance of the certificates and can be increased as specified
in the related securitization documents. Cash flows received in excess of the
obligations to the senior certificate holders and certain costs of the
securitization are deposited into a trust account until the
overcollateralization target is reached. Once this target is reached,
distributions of excess cash from the trust account are remitted to the
Company.
F-9
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GAIN ON SALE OF LOANS
Gains or losses resulting from sales of mortgage loans are recognized at
settlement and are based on the difference between the sales proceeds and the
carrying value of the related loans sold. Non-refundable fees and direct costs
associated with the origination of mortgage loans are deferred and recognized
when the loans are sold. For securitizations, the gain on sale is calculated
based on the excess of cash received and residual interests retained over the
net book value of loans sold. The retained interest in the securitization is
measured by allocating the previous carrying value between the loans sold and
the interest retained, based on their relative fair values at the date of
securitization.
ALLOWANCE FOR LOAN LOSSES
The Company charges current earnings with a provision for estimated losses
on loans. The provision consists of losses identified specifically with
certain problem loans and a general provision for losses not specifically
identified in the loan portfolio. In addition, the allowance for loan losses
includes a portion of acquisition discounts from the Company's purchase of
automobile installment contracts. Management's analysis takes into
consideration numerous factors, including an assessment of the credit risk
inherent in the portfolio, prior loss experience, the levels and trends of
non-performing loans, the concentration of credit, current and prospective
economic conditions and other factors. Additionally, regulatory authorities,
as an integral part of their examination process, review the Company's
allowance for estimated losses based on their judgment of information
available to them at the time of their examination and may require the
recognition of additions to the allowance.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed on the straight-
line method over the shorter of the estimated useful lives of the related
assets or terms of the leases. Furniture, equipment, computer hardware,
software and data processing equipment are currently depreciated over 3-5
years.
PURCHASE ACCOUNTING
The Company applied business combinations purchase accounting principles to
its acquisition of assets and liabilities from the RTC. The purchase price was
allocated primarily to the assets acquired by the Company. The fair value was
determined based on management's best estimates in conformity with Accounting
Principles Board Opinion ("APB") No. 16 "Business Combinations".
Loan discount resulting from the valuation of the Company's loan portfolio
under purchase accounting requirements at the acquisition date is netted
against loans. The discount is being amortized over the contractual terms of
the related loans using the interest method.
INTANGIBLE ASSETS
Intangible assets consist of the difference between the estimated fair
values of the liabilities assumed over the amount paid to the RTC to acquire
the Company's Panorama City branch.
At December 31, 1996 and 1997 intangible assets totaling $584,000 and
$457,000, respectively, are being amortized over seven years, the estimated
life of the acquired assets, using the straight-line method.
REAL ESTATE OWNED
Real estate owned consists of properties acquired through foreclosure and is
recorded at the lower of cost or fair value at the time of foreclosure.
Subsequently, allowance for estimated losses are established when the
F-10
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
recorded value exceeds fair value less estimated costs to sell. As of December
31, 1996 and 1997, there were no such allowances. Real estate owned at
December 31, 1996 and 1997 consisted of one to four unit residential real
estate.
INCOME TAXES
The Company uses the asset/liability method of accounting for income taxes.
Under the asset/liability method, deferred tax assets and liabilities are
recognized for the future consequences of differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases (temporary differences). Deferred tax assets and
liabilities are measured using tax rates expected to apply to taxable income
in the years in which those temporary differences are recovered or settled.
The effect of deferred tax assets and liabilities from a change in tax rate is
recognized in income in the period of enactment. For income tax return
purposes, the Company files as part of a consolidated group. Income taxes are
allocated to the group members in accordance with an income tax allocation
agreement adopted by each party in the group.
EARNINGS PER SHARE
At December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share.
Under SFAS No. 128, basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted from issuance
of common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets, and
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. In December 1996, SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127")
was issued as an amendment to SFAS No. 125. On January 1, 1997, the Company
adopted SFAS 125.
3. SECURITIES AVAILABLE FOR SALE
Securities available for sale are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
--------------- ----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(DOLLARS IN THOUSANDS) --------- ----- --------- ------
<S> <C> <C> <C> <C>
U. S. Agency securities....................... $-- $-- $1,002 $1,002
</TABLE>
The weighted average yield on U. S. agency securities was 6.54% at December
31, 1997. At December 31, 1997 there were no gross unrealized gains or losses.
The following is a summary of the contractual terms to maturity of
securities at their fair value as of December 31, 1997:
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
---------------------------------------
AFTER ONE AFTER THREE
WITHIN THROUGH THROUGH
ONE YEAR THREE YEARS FOUR YEARS TOTAL
(DOLLARS IN THOUSANDS) -------- ----------- ----------- ------
<S> <C> <C> <C> <C>
U. S. Agency securities................ $1,002 $-- $-- $1,002
</TABLE>
F-11
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1997
(DOLLARS IN THOUSANDS) -------- --------
<S> <C> <C>
Mortgage loans:
Fixed rate................................................. $ 19,505 $ 16,480
Adjustable rate............................................ 84,522 70,890
-------- --------
104,027 87,370
-------- --------
Consumer loans:
Insurance premium financing................................ 32,058 39,990
Automobile installment contracts........................... 10,830 40,877
Other...................................................... 230 267
-------- --------
43,118 81,134
-------- --------
Total loans............................................... 147,145 168,504
Less:
Unearned discounts and premiums............................ (3,697) (2,901)
Unearned finance charges................................... (3,271) (10,581)
Allowance for loan losses.................................. (5,356) (6,487)
-------- --------
Total loans, net.......................................... $134,821 $148,535
======== ========
Contractual weighted average interest rate.................. 10.20% 13.01%
-------- --------
</TABLE>
At December 31, 1996 and 1997, approximately 99% of the Company's mortgage
loans were collateralized by first deeds of trust on one-to-four family
residences. At December 31, 1996 and 1997, approximately 81% and 82%,
respectively, of the Company's loan portfolio is related to collateral or
borrowers located in California.
The activity in the allowance for loan losses consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1995 1996 1997
(DOLLARS IN THOUSANDS) ------ ------ ------
<S> <C> <C> <C>
Balance at beginning of period........................ $ 378 $5,250 $5,356
Provision for loan losses............................. 120 194 507
Purchase discounts allocated to the allowance for loan
losses, net.......................................... 4,860 356 1,953
Charge-offs........................................... (108) (718) (2,474)
Recoveries............................................ -- 274 1,145
------ ------ ------
Net charge-offs...................................... (108) (444) (1,329)
------ ------ ------
Balance at end of period.............................. $5,250 $5,356 $6,487
====== ====== ======
</TABLE>
The discounts allocated to the allowance for loan losses in 1996 and 1997
are comprised primarily of acquisition discounts on the Company's purchase of
automobile installment contracts. The discounts allocated to the allowance for
loan losses in 1995 primarily relate to the purchase of loan portfolios from
the RTC. The Company allocated the estimated amount of discounts attributable
to credit risk to the allowance for loan losses.
F-12
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth information with respect to the Company's
non-performing assets:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
(DOLLARS IN THOUSANDS) ------ ------
<S> <C> <C>
Nonaccrual loans................................................ $5,835 $6,633
Real estate owned, net.......................................... 988 562
------ ------
Totals........................................................ $6,823 $7,195
====== ======
Percentage of non-performing assets to total assets............. 3.61% 2.31%
====== ======
</TABLE>
A loan is impaired when, based on current information and events, management
believes it will be unable to collect all amounts contractually due under a
loan agreement. Loans are evaluated for impairment as part of the Company's
normal internal asset review process. When a loan is determined to be
impaired, a valuation allowance is established based upon the difference
between the Company's investment in the loan and the fair value of the
collateral securing the loan.
At December 31, 1997, the aggregate investment in loans considered to be
impaired was $6,630,000 of which $6,490,000 were on a nonaccrual basis. At
December 31, 1996 the aggregate investment in loans considered to be impaired
was $7,298,000 of which $6,196,000 were on a nonaccrual basis. Allowance for
loan losses was provided for all impaired loans at December 31, 1997 and 1996;
the related allowances were $1,033,000 and $984,000, respectively. For the
years ended December 31, 1997 and 1996, the Company recognized interest income
on impaired loans of $239,000 and $408,000, respectively. The average recorded
investment in impaired loans during the years ended December 31, 1997 and 1996
was approximately $6,774,000 and $7,022,000, respectively.
Under Federal regulations, the Company may not make real estate loans to one
borrower in an amount exceeding 15% of its unimpaired capital and surplus,
plus an additional 10% for loans secured by readily marketable collateral. At
December 31, 1996 and 1997, such limitation would have been approximately
$2.5 million and $3.4 million, respectively, or $4.1 million and $5.7 million
if secured by readily marketable collateral. There are no loans in excess of
these limitations.
5. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System ("FHLB") and as
such is required to maintain an investment in capital stock of the FHLB of San
Francisco. At December 31, 1996 and 1997 the Bank owned 12,880 and 19,450
shares, respectively, of the FHLB's $100 par value capital stock. The amount
of stock required is adjusted annually based on a determination made by the
FHLB. The determination is based on the balance of the Bank's outstanding
residential loans and advances from the FHLB.
6. INTEREST RECEIVABLE
Interest receivable is as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
(DOLLARS IN THOUSANDS) -----------
1996 1997
---- ------
<S> <C> <C>
Loans............................................................... $824 $1,429
Investment securities............................................... 21 65
---- ------
Total............................................................. $845 $1,494
==== ======
</TABLE>
F-13
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(DOLLARS IN THOUSANDS) -------------
1996 1997
----- ------
<S> <C> <C>
Furniture and equipment.......................................... $ 867 $3,650
Leasehold improvements........................................... 173 366
----- ------
1,040 4,016
Less accumulated depreciation and amortization................... (218) (931)
----- ------
$ 822 $3,085
===== ======
</TABLE>
Depreciation and amortization expense was $50,000, $163,000 and $715,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
8. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1997
--------------------- ---------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
(DOLLARS IN THOUSANDS) -------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Deposits with no stated maturity:
Regular and money market
passbook........................ $ 17,054 2.84% $ 26,095 3.76%
NOW accounts..................... 7,757 .88 6,558 .80
Money market checking............ 2,885 2.49 3,401 2.35
-------- ---- -------- ----
27,696 2.25 36,054 3.09
-------- ---- -------- ----
Time deposits less than $100,000... 123,914 5.47 144,926 5.56
Time deposits $100,000 and over.... 7,451 5.89 52,214 5.89
-------- ---- -------- ----
131,365 5.49 197,140 5.65
-------- ---- -------- ----
Total deposits................... $159,061 4.68% $233,194 5.25%
======== ==== ======== ====
</TABLE>
A summary of certificate accounts by remaining maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
(DOLLARS IN THOUSANDS) -------- --------
<S> <C> <C>
Maturity within one year..................................... $103,369 $181,858
Maturity within two years.................................... 26,819 14,984
Maturity within three years.................................. 1,177 298
-------- --------
Total...................................................... $131,365 $197,140
======== ========
</TABLE>
Broker-originated deposits totaled $17.5 million at December 31, 1997. There
were no broker-originated deposits at December 31, 1996.
F-14
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FEDERAL HOME LOAN BANK ADVANCES
The Company had short term FHLB advances of $4.0 million and $28.0 million
at December 31, 1996 and 1997, respectively. The advances outstanding at
December 31, 1996 and 1997 had a weighted average interest rate of 5.70% and
7.07%, respectively, and were secured by the Company's stock in the FHLB of
San Francisco and by pledges of certain mortgages with an aggregate balance of
$55.3 million at December 31, 1997.
10. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
(DOLLARS IN THOUSANDS) ------- -------
<S> <C> <C>
RTC notes payable.............................................. $10,930 $10,930
Notes payable to stockholders.................................. -- 2,000
------- -------
$10,930 $12,930
======= =======
</TABLE>
The RTC notes payable were issued in connection with the Company's
acquisition of certain assets and liabilities from the RTC. See Note 15 for a
description of the terms and conditions of these notes.
The notes payable to stockholders are unsecured loans bearing interest at 8%
per year with interest payable semi-annually and principal maturing on June
30, 1999. The proceeds from the notes payable were contributed to United PanAm
Mortgage Corporation, a wholly-owned subsidiary of United PanAm Financial
Corp., for working capital purposes. The notes payable may be prepaid at any
time, without penalty.
The maturities of notes payable at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Due in 1 year or less........................................... $ --
Due in 1 to 3 years............................................. 12,930
-------
$12,930
=======
</TABLE>
11. WAREHOUSE LINE OF CREDIT
The Company has available a $100.0 million uncommitted master repurchase
credit facility bearing interest based on one month LIBOR. At December 31,
1997, $6.2 million was outstanding under this credit facility at an interest
rate of 6.70%. The maximum amount outstanding at any month-end during the year
and the average amount outstanding during the year was $64.4 million and $8.9
million, respectively. The credit facility is secured by mortgage loans held
for sale.
F-15
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1995 1996 1997
(DOLLARS IN THOUSANDS) ---- ---- -------
<S> <C> <C> <C>
Federal taxes:
Current.................................................... $233 $807 $ 4,705
Deferred................................................... 55 (302) (1,386)
---- ---- -------
288 505 3,319
---- ---- -------
State taxes:
Current.................................................... 58 304 1,565
Deferred................................................... 38 (118) (393)
---- ---- -------
96 186 1,172
---- ---- -------
Total..................................................... $384 $691 $ 4,491
==== ==== =======
</TABLE>
The tax effects of significant items comprising the Company's net deferred
taxes as of December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
(DOLLARS IN THOUSANDS) ------ ------
<S> <C> <C>
Deferred tax assets:
Franchise taxes................................................ $ 239 $ 462
Loans marked to market for tax purposes........................ 1,348 2,866
Intangible assets.............................................. 82 95
Other.......................................................... 72 172
------ ------
Total gross deferred tax assets............................... 1,741 3,595
------ ------
Deferred tax liabilities:
Residual interests in securitizations.......................... -- (116)
Loan loss allowances........................................... (240) (197)
FHLB stock dividends........................................... (73) (98)
Other.......................................................... (36) (13)
------ ------
Total gross deferred tax liabilities.......................... (349) (424)
------ ------
Net deferred tax assets......................................... $1,392 $3,171
====== ======
</TABLE>
The Company believes a valuation allowance is not needed to reduce the net
deferred tax assets as it is more likely than not that the deferred tax assets
will be realized through recovery of taxes previously paid or future taxable
income.
The Company's effective income tax rate differs from the federal statutory
rate due to the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected statutory rate....................................... 34.0% 34.0% 34.0%
State taxes, net of federal benefits.......................... 7.5 7.5 7.2
Other, net.................................................... 4.1 0.6 0.6
---- ---- ----
Effective tax rate............................................ 45.6% 42.1% 41.8%
==== ==== ====
</TABLE>
F-16
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company filed its income tax returns using a fiscal year end of June 30,
1996 and 1997. Accordingly, the amounts reflected in this note are
management's estimates of income tax expenses and deferred income taxes at the
dates presented.
13. REGULATORY CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") established new capital standards for savings institutions,
requiring the Office of Thrift Supervision ("OTS") to promulgate regulations
to prescribe and maintain uniformly applicable capital standards for savings
institutions. Such regulations include three capital requirements: a tangible
capital requirement equal to 1.5% of adjusted total assets, a leverage limit
or core capital requirement equal to 3.0% of adjusted total assets, and a
risk-based capital requirement equal to 8.0% of risk-weighted assets. At
December 31, the Bank had the following regulatory capital requirements and
capital position:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------- --------------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
(DOLLARS IN THOUSANDS) ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital........ $16,499 $2,795 $13,704 $22,379 $ 4,619 $17,760
Tangible capital ratio.. 8.85% 1.50% 7.35% 7.27% 1.50% 5.77%
Core capital............ $16,499 $5,590 $10,909 $22,379 $ 9,239 $13,140
Core capital (leverage)
ratio.................. 8.85% 3.00% 5.85% 7.27% 3.00% 4.27%
Risk-based capital...... $17,893 $8,751 $ 9,142 $24,938 $16,171 $ 8,767
Percent of risk-weighted
assets................. 16.36% 8.00% 8.36% 12.34% 8.00% 4.34%
</TABLE>
The FDIC Improvement Act of 1991 ("FDICIA") required each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. In response to these requirements, the OTS adopted final rules,
effective December 19, 1992, based upon FDICIA's five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
The rules provide that a savings association is "well capitalized" if its
leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or
greater, its total risk-based capital ratio is 10% or greater, and the
institution is not subject to a capital directive.
As used herein, leverage ratio means the ratio of core capital to adjusted
total assets, Tier 1 risk-based capital ratio means the ratio of core capital
to risk-weighted assets, and total risk-based capital ratio means the ratio of
total capital to risk-weighted assets, in each case as calculated in
accordance with current OTS capital regulations. Under these new regulations,
the Bank is deemed to be "well capitalized".
The Bank had the following regulatory capital calculated in accordance with
FDICIA's capital standards for a "well capitalized" institution:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------- --------------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
(DOLLARS IN THOUSANDS) ------- -------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Leverage................ $16,499 $ 9,316 $7,183 $22,379 $15,398 $ 6,981
Leverage ratio.......... 8.85% 5.00% 3.85% 7.27% 5.00% 2.27%
Tier 1 risk-based....... $16,499 $ 6,563 $9,936 $22,379 $12,128 $10,251
Tier 1 risk-based
ratio.................. 15.08% 6.00% 9.08% 11.07% 6.00% 5.07%
Total risk-based........ $17,893 $10,939 $6,954 $24,938 $20,213 $ 4,725
Total risk-based ratio.. 16.36% 10.00% 6.36% 12.34% 10.00% 2.34%
</TABLE>
F-17
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At periodic intervals, both the OTS and Federal Deposit Insurance
Corporation ("FDIC") routinely examine the Bank's financial statements as part
of their legally prescribed oversight of the savings and loan industry. Based
on these examinations, the regulators can direct that the Bank's financial
statements be adjusted in accordance with their findings.
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act ("Act") of 1996 was enacted. The Act included a Special
Assessment ("Special SAIF Assessment") related to the recapitalization of the
SAIF, which was levied based on a rate of 65.7 cents per $100 of SAIF-insured
domestic deposits held as of March 31, 1995. As a result of the Act, the
Company recorded a pre-tax charge of $820,000 in the year ended December 31,
1996.
14. COMMITMENTS AND CONTINGENCIES
Certain branch and office locations are leased by the Company under
operating leases expiring at various dates through the year 2006. Rent expense
was $227,000, $475,000 and $1,462,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
Future minimum rental payments as of December 31, 1997 under existing leases
are set forth as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
YEAR ENDING DECEMBER 31:
<S> <C>
1998............................................................ $1,930
1999............................................................ 1,837
2000............................................................ 1,457
2001............................................................ 971
2002............................................................ 589
Thereafter...................................................... 437
------
Total......................................................... $7,221
======
</TABLE>
Under the RTC Minority Preference Resolution Program, the Company's Mission
Street branch is subject to a rent-free lease and purchase option. This lease
and purchase option is available to minority owned institutions for branches
located in a predominantly minority neighborhood. The term of the lease is
five years with an option to purchase the branch at a price equal to 95% of
the appraised value at the time of the purchase and can be exercised anytime
during the term of the lease. The lease was effective as of April 30, 1994.
In order to meet the borrowing needs of its customers, the Company is a
party to certain commitments to extend credit which have specified interest
rates and fixed expiration dates. These commitments, substantially all of
which are to fund mortgages on one-to-four family residences, are considered
off-balance sheet financial instruments. These instruments involve elements of
credit risk and interest rate risk in excess of amounts recognized in the
accompanying statements of financial condition. The Company's exposure to
credit loss from these commitments to extend credit, in the event of borrower
nonperformance, is represented by the contractual amount of these commitments.
Certain of the commitments are expected to expire without being drawn upon
and, accordingly, the total commitment amounts do not necessarily represent
future cash requirements.
At December 31, 1996 and 1997, the Company had outstanding commitments to
originate loans of approximately $19.1 million and $117.4 million,
respectively. Commitments outstanding included $17.1 million and $93.3 million
of adjustable rate loans at December 31, 1996 and 1997 and $2.0 million and
$24.1 million of fixed rate loans at December 31, 1996 and 1997, respectively.
The fixed rate loan commitments have interest rates ranging from 8.88% to
14.90% at December 31, 1996 and 7.75% to 16.0% at December, 1997. At
F-18
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1996 and 1997, the Company had outstanding commitments to sell
loans on a nonrecourse basis of $1.3 million and $16.2 million, respectively.
The Company has entered into loan sale agreements with investors in the
normal course of business which include standard representations and
warranties customary to the mortgage banking industry. Violations of these
representations and warranties may require the Company to repurchase loans
previously sold or to reimburse investors for losses incurred. In the opinion
of management, the potential exposure related to the Company's loan sale
agreements will not have a material effect on the financial position and
operating results of the Company.
The Company is involved in various claims or legal actions arising in the
normal course of business. In the opinion of management, the ultimate
disposition of such matters will not have a material effect on the financial
position and operating results of the Company.
15. NOTES PAYABLE, RESTRICTION ON DIVIDEND PAYMENTS AND PLEDGE OF BANK STOCK.
In accordance with Federal Regulation 12 CFR 563.134, federal savings banks
which meet fully phased-in capital requirements may distribute dividends up to
100% of their net income to date plus the amount that would reduce by one-half
their surplus capital ratio at the beginning of the calendar year. The Bank
exceeds the fully phased-in capital requirements. In connection with the April
29, 1994 purchase of assets and assumption of certain liabilities from the
RTC, the Bank and the Company, entered into a five year Interim Capital
Assistance Loan Agreement ("ICA") with the RTC (the Bank is not a direct or
indirect obligor, or a guarantor of the loan) for $6,930,000 at a fixed
interest rate of 3.69% for two years and 0.125% above the 13-week Treasury
Bill auction rate for the remaining three years, adjusted annually. On
September 9, 1994, the Bank acquired deposits from the RTC totaling
approximately $65,000,000 located in Panorama City in Southern California.
This branch is located in a "Predominately Minority Neighborhood," as defined
by the RTC. In connection with this acquisition, the RTC provided the Bank's
Holding Company, Pan American Financial, Inc., $4,000,000 in the form of an
additional ICA loan for a term of five years with interest at 0.125% above the
13 week Treasury Bill auction rate, adjusted quarterly. The entire amount was
invested in the Bank and qualifies as regulatory capital for the Bank. In
addition, the OTS required $750,000 of additional capital from the
shareholders to be invested in the Bank in connection with the Panorama City
branch acquisition.
These Agreements, as amended, provide among other things, that the Bank may
not declare or pay any dividends until the loan is repaid by the Company.
Dividends may be paid to the Company if the funds are used exclusively for
payment of principal or interest on the obligation of PAFI to the RTC or the
Bank has provided the FDIC with 30 days prior written notice of its intent to
declare or pay such dividends and the Bank is in compliance with certain
conditions as required under the Agreements. The stock of the Bank was pledged
by PAFI to the RTC as collateral for the loan.
16. STOCK OPTIONS
In 1994, the Company adopted a stock option plan and, in November 1997,
amended and restated such plan as the United PanAm Financial Corp. 1997
Employee Stock Incentive Plan (the "Plan"). The maximum number of shares that
may be issued to officers, directors, employees or consultants under the Plan
is 2,287,500. Options issued pursuant to the Plan have been granted at an
exercise price of not less than fair market value on the date of grant.
Options generally vest over a three to five year period and have a maximum
term of ten years.
F-19
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1995 PRICE 1996 PRICE 1997 PRICE
(DOLLARS IN THOUSANDS) ------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. 900,000 $0.80 900,000 $0.80 1,143,750 $0.80
Granted................. -- -- 243,750 .80 717,500 9.06
Canceled or expired..... -- -- -- -- -- --
Exercised............... -- -- -- -- (281,250) 0.80
------- --------- ---------
Balance at end of
period................. 900,000 $0.80 1,143,750 $0.80 1,580,000 $4.55
======= ========= =========
Options exercisable..... 225,000 510,938 833,125
======= ========= =========
Weighted average fair
value per share of
options granted during
the year............... -- $ 0.23 $ 2.61
======= ========= =========
</TABLE>
Shares exercised in 1997 were executed by a stockholder and officer of the
Company. In connection with this transaction, the Company loaned this
individual $225,000 to finance the exercise of these options which loan is
full recourse and secured by the shares purchased. The loan bears interest at
an annual rate of 5.81% payable on the earlier of October 15, 2000 or the
termination of this individual's employment with the Company.
The Company applies APB Opinion No. 25 in accounting for the Plan and
accordingly, no compensation cost has been recognized for its stock option
plan in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the Company's net earnings and earnings per
share would have been reduced to the pro-forma amounts indicated below for the
years ended December 31:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1996 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ----- ------
<S> <C> <C>
Net income to common stockholders:
As reported................................................. $ 950 $6,248
Pro-forma................................................... $ 942 $6,031
Net income per share:
As reported-basic........................................... $0.09 $ 0.58
As reported - diluted....................................... $0.09 $ 0.53
Pro-forma - basic........................................... $0.09 $ 0.56
Pro-forma - diluted......................................... $0.09 $ 0.51
</TABLE>
The fair value of options granted under the Plan was estimated on the date
of grant using the Black-Sholes option-pricing model with the following
weighted average assumptions used: no dividend yield, no volatility, risk-free
interest rate of 7% and expected lives of 5 years.
The Company's auto finance subsidiary has granted options to certain of its
key employees to purchase up to 13.5% of that subsidiary. These options are
exercisable only upon an initial public offering or sale of such subsidiary.
These options vest based upon the satisfaction of specified performance goals.
F-20
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. OTHER EXPENSES
Other expenses are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
(DOLLARS IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Marketing........................................... $ 78 $ 171 $ 1,740
Telephone........................................... 71 185 921
Professional fees................................... 224 339 788
Travel and entertainment............................ 88 170 885
Stationery and supplies............................. 115 217 741
Postage and delivery................................ 51 167 560
Data processing..................................... 284 364 529
Deposit insurance premiums.......................... 395 371 309
Loan servicing expense.............................. 84 168 349
Insurance premiums.................................. 102 93 253
Amortization of intangible assets................... 169 132 127
Other............................................... 344 395 946
-------- -------- --------
Total........................................... $ 2,005 $ 2,772 $ 8,148
======== ======== ========
</TABLE>
18. EARNINGS PER SHARE
On December 31, 1997, the Company adopted SFAS 128 for calculating earning
per share as shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- --------
<S> <C> <C> <C>
Earnings per share - basic:
Net income applicable to common stock (numerator).. $ 458 $ 950 $ 6,248
======== ======== ========
Average common shares outstanding (denominator).... 10,669 10,669 10,739
======== ======== ========
Per share.......................................... $ 0.04 $ 0.09 $ 0.58
======== ======== ========
Earnings per share - diluted:
Net income (numerator)............................. $ 458 $ 950 $ 6,248
======== ======== ========
Average common shares outstanding.................. 10,669 10,669 10,739
Add: Stock options................................. -- -- 1,136
-------- -------- --------
Average common shares outstanding - diluted
(denominator)..................................... 10,669 10,669 11,875
======== ======== ========
Per share.......................................... $ 0.04 $ 0.09 $ 0.53
======== ======== ========
</TABLE>
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments are as
follows at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
----------------- -----------------
FAIR FAIR
CARRYING VALUE CARRYING VALUE
VALUE ESTIMATE VALUE ESTIMATE
(DOLLARS IN THOUSANDS) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents.................. $ 26,063 $ 26,063 $ 19,026 $ 19,026
Securities................................. -- -- 1,002 1,002
Residual interests in securitizations...... -- -- 8,230 8,230
Loans, net................................. 134,821 143,926 148,535 161,324
Loans held for sale........................ 20,766 21,767 120,002 126,782
Federal Home Loan Bank Stock............... 1,288 1,288 1,945 1,945
Accrued interest........................... 845 845 1,494 1,494
Liabilities:
Deposits................................... $159,061 $159,506 $233,194 $233,538
Notes payable.............................. 10,930 10,930 12,930 12,930
Federal Home Loan Bank advances............ 4,000 4,000 28,000 28,000
Warehouse line of credit................... -- -- 6,237 6,237
</TABLE>
F-21
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Because no ready market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision. The
use of different assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statements of financial
condition, which are reasonable estimates of fair value due to the relatively
short period to maturity of the instruments.
Securities: Securities are valued at quoted market prices where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Residual interests in securitizations: The fair value of residual interests
in securitizations is determined by discounting the estimated cash flows
received over the life of the asset using prepayment, default, and interest
rate assumptions that market participants would use for similar financial
instruments also subject to prepayment, credit and interest rate risk.
Loans, net: For real estate loans, fair values were estimated using quoted
prices for equivalent yielding loans as adjusted for interest rates, margin
differences and other factors. For non-mortgage loans, fair values were
estimated at carrying amounts due to their short-term maturity and portfolio
interest rates that are equivalent to present market interest rates.
Loans held for sale: The fair value of loans held for sale is based on
current pricing of whole loan transactions that a purchaser unrelated to the
seller would demand for a similar loan.
Federal Home Loan Bank Stock: Since no secondary market exists for FHLB
stock and the stock is bought and sold at par by the FHLB, fair value of these
financial instruments approximates the carrying value.
Accrued interest: The carrying amounts of accrued interest approximate their
fair values.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For
fixed maturity deposits, the fair value was estimated by discounting expected
cash flows by the current offering rates of deposits with similar terms and
maturities.
Federal Home Loan Bank advances: The fair value of FHLB advances are valued
at their carrying amounts included in the consolidated statements of financial
condition, which are reasonable estimates of fair value due to the relatively
short period to maturity of the advances.
Notes payable: The fair value of notes payable is considered to approximate
carrying value as their note rates are consistent with present market rates.
Warehouse line of credit: The fair value of the warehouse line of credit is
considered to approximate carrying value as the note rate is consistent with
present market rates.
Financial Instruments With Off-Balance Sheet Risk: No fair value is ascribed
to the Company's outstanding commitments to fund loans since commitment fees
are not significant and predominantly all such commitments are variable-rate
loan commitments. There were no significant unrealized gains and losses on
commitments to sell loans.
F-22
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. HOLDING COMPANY FINANCIAL INFORMATION
Following are the financial statements of United PanAm Financial Corp.
(holding company only):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1997
- ---------------------- ------------ ------------
<S> <C> <C>
STATEMENTS OF FINANCIAL CONDITION
Cash........................................ $ 32 $ 290
Other assets................................ 29 297
Investment in subsidiary.................... 6,700 14,696
------ -------
Total assets............................... $6,761 $15,283
====== =======
Notes payable............................... -- $ 2,000
Other liabilities........................... -- 274
------ -------
Total liabilities.......................... -- 2,274
Stockholders' equity........................ 6,761 13,009
------ -------
Total liabilities and stockholders'
equity.................................... $6,761 $15,283
====== =======
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------
1995 1996 1997
------------ ------------ -------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Equity in income of subsidiary.............. $ 470 $ 952 $ 6,294
Interest income............................. 1 1 11
------ ------- -------
Total income............................... 471 953 6,305
------ ------- -------
Interest expense............................ -- -- 74
Other expense............................... 22 4 25
------ ------- -------
Total expense.............................. 22 4 99
------ ------- -------
Income before income taxes.................. 449 949 6,206
Income tax benefit.......................... 9 1 42
------ ------- -------
Net income................................. $ 458 $ 950 $ 6,248
====== ======= =======
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income................................. $ 458 $ 950 $ 6,248
Equity in earnings of subsidiary........... (470) (952) (6,294)
(Increase) decrease in other assets........ (35) 7 (268)
Increase in other liabilities.............. -- -- 274
------ ------- -------
Net cash provided by (used in) operating
activities............................... (47) 5 (40)
------ ------- -------
Cash flows from financing activities:
Capital contributed to subsidiary.......... -- -- (1,702)
Increase in notes payable from
shareholders.............................. -- -- 2,000
------ ------- -------
Net cash provided by financing activities.. -- -- 298
------ ------- -------
Net increase (decrease) in cash and cash
equivalents............................... (47) 5 258
Cash and cash equivalents at beginning of
period.................................... 74 27 32
------ ------- -------
Cash and cash equivalents at end of
period.................................... $ 27 $ 32 $ 290
====== ======= =======
</TABLE>
F-23
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to given any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made in this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company or any of the Underwriters. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy any secu-
rities other than the shares of Common Stock to which it relates or an offer
to, or a solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
the information contained herein is correct as of any time subsequent to the
date hereof.
-------------------------
TABLE OF CONTENTS
-------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 24
Dilution................................................................. 24
Capitalization........................................................... 25
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 51
Management............................................................... 85
Principal Shareholders................................................... 96
Description of Capital Stock............................................. 98
Underwriting............................................................. 101
Legal Matters............................................................ 102
Experts.................................................................. 103
Additional Information................................................... 103
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRIT-
ERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
5,500,000 SHARES
UNITED PANAM
[LOGO OF FINANCIAL CORP.
PanAm FINANCIAL
CORP.] COMMON STOCK
----------------
PROSPECTUS
----------------
NationsBanc MontgomerySecurities LLC
Piper Jaffray Inc.
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the Offering are as follows:
<TABLE>
<S> <C>
SEC registration fee............................................... $ 24,394
NASD filing fee.................................................... 8,550
Nasdaq National Market filing fee.................................. 58,641
Blue Sky filing fees and expenses.................................. 15,000
Printing and engraving expenses.................................... 200,000
Legal fees and expenses............................................ 325,000
Accounting fees and expenses....................................... 200,000
Registrar and transfer agent fees.................................. 15,000
Miscellaneous...................................................... 103,415
--------
Total............................................................ $950,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The California General Corporations Law provides that California
corporations may include provisions in their Articles of Incorporation
relieving directors of monetary liability for breach of their fiduciary duty
as directors, except for the liability of a director resulting from (i) any
transaction from which the director derives an improper personal benefit, (ii)
acts or omissions involving intentional misconduct or a knowing and culpable
violation of law, (iii) acts or omissions that a director believes to be
contrary to the best interest of the corporation or its shareholders or that
involve the absence of good faith on the part of the director, (iv) acts or
omissions constituting an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders, (v)
acts or omissions showing a reckless disregard for the director's duty to the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders, (vi) any improper transaction between a director and the
corporation in which the director has a material financial interest, or (vii)
the making of an illegal distribution to shareholders or any illegal loan or
guaranty. The Registrant's Articles of Incorporation contain such a provision.
The Underwriting Agreement, a proposed form of which is filed as Exhibit 1.1
hereto, provides for the indemnification of directors, officers, employees,
agents and controlling persons of the Registrant by the Underwriters under
certain circumstances.
The Bylaws of the Registrant, in the form attached as Exhibit 3.2, and the
proposed form of Bylaws of United PanAm Financial Corp., a California
corporation, in the form attached as Exhibit 3.2.1, require the Registrant to
indemnify its directors, and permit the Registrant to indemnity its officers,
to the fullest extent permitted by applicable law.
The Registrant has entered into indemnification agreements with its
directors and executive officers that require the Registrant to indemnify the
directors and executive officers to the fullest extent permitted by applicable
law.
The Registrant maintains a standard policy of officers' and directors'
liability insurance.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since November 1, 1994, the Registrant has issued and sold (without payment
of any selling commission to any person) the following securities, which were
not registered under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) of the Securities Act as not involving a
public offering.
On October 18, 1994, the Registrant granted Lawrence J. Grill an option, as
partial consideration for his employment by the Registrant, to purchase
375,000 shares of Common Stock at $0.80 per share pursuant to the Stock
Incentive Plan. On October 15, 1997, Lawrence J. Grill exercised the option to
purchase 281,250 shares of Common Stock for an aggregate purchase price of
$225,000. The balance of the option will vest on May 1, 1998 and will expire
on October 18, 2004.
On June 1, 1996, the Registrant granted Ron R. Duncanson an option, as
partial consideration for his services as a director of the Registrant, to
purchase 18,750 shares of Common Stock at $0.80 per share pursuant to the
Stock Incentive Plan. Fifty percent of the option vested on June 1, 1996 and
25% on May 1, 1997, and 25% will vest on May 1, 1998. The option expires on
April 30, 2006.
On June 1, 1996, the Registrant granted Daniel L. Villanueva an option, as
partial consideration for his services as a director of the Registrant, to
purchase 18,750 shares of Common Stock at $0.80 per share pursuant to the
Stock Incentive Plan. Fifty percent of the option vested on June 1, 1996 and
25% on May 1, 1997, and 25% will vest on May 1, 1998. The option expires on
April 30, 2006.
On June 1, 1996, the Registrant granted Carol M. Bucci an option, as partial
consideration for her services as an officer of the Registrant, to purchase
56,250 shares of Common Stock at $0.80 per share pursuant to the Stock
Incentive Plan. Twenty-five percent of the option vested on each of June 1,
1996, March 1, 1997 and March 1, 1998, and 25% will vest on March 1, 1999. The
option expires on April 30, 2006.
On August 1, 1996, the Registrant granted Edmund M. Kaufman an option, as
partial consideration for his services as a director of the Registrant, to
purchase 18,750 shares of Common Stock at $0.80 per share pursuant to the
Stock Incentive Plan. Twenty-five percent of the option vested on August 1,
1996 and 25% on October 16, 1997, and 25% will vest on October 16, 1998 and
25% on October 16, 1999. The option expires on April 30, 2006.
On October 1, 1996, the Registrant granted John T. French an option, as
partial consideration for his services as a consultant to the Registrant, to
purchase 131,250 shares of Common Stock at $0.80 per share pursuant to the
Stock Incentive Plan. Twenty-five percent of the option vested on October 1,
1996 and 25% on October 1, 1997, and 25% will vest on October 1, 1998 and 25%
on October 1, 1999. The option expires on April 30, 2006.
On March 5, 1997, the Registrant granted Robert Wilson an option, in
connection with the termination of his employment by the Registrant, to
purchase 112,500 shares of Common Stock at $1.33 per share pursuant to the
Stock Incentive Plan. This option vested on the date of grant and will expire
on the third anniversary of the date of grant.
On October 15, 1997, the Registrant granted John T. French an option, as
partial consideration for his services as a director of the Registrant, to
purchase 60,000 shares of Common Stock at $10.50 per share. Twenty-five
percent of the option vested on the date of grant, and 25% will vest on the
first three anniversaries of the date of grant. The option expires on the
tenth anniversary of the date of grant.
Concurrently with the sale of the shares of Common Stock offered hereby, the
Registrant will grant Luis Maizel an option, as partial consideration for his
services as a director of the Registrant, to purchase 20,000 shares of Common
Stock at $10.50 per share. This option will become exercisable in four equal
annual installments commencing on the first anniversary of the date of grant
and will expire on the tenth anniversary of the date of grant.
II-2
<PAGE>
Concurrently with the sale of the shares of Common Stock offered hereby, the
Registrant will grant Lawrence J. Grill an option, as partial consideration
for his services as a director of the Registrant, to purchase 60,000 shares of
Common Stock at an exercise price equal to the initial offering price. This
option will become exercisable in four equal annual installments commencing on
the first anniversary of the date of grant and will expire on the tenth
anniversary of the date of grant.
Concurrently with the sale of the shares of Common Stock offered hereby, the
Registrant will grant Guillermo Bron an option, as partial consideration for
his services as a director of the Registrant, to purchase 60,000 shares of
Common Stock at an exercise price equal to 110% of the initial offering price.
This option will become exercisable in four equal annual installments
commencing on the first anniversary of the date of grant and will expire on
the tenth anniversary of the date of grant.
On October 15, 1997, the Registrant granted Carol Bucci an option, as
partial consideration for her services as an officer of the Registrant, to
purchase 40,000 shares of Common Stock at $10.50 per share. This option will
become exercisable in four equal annual installments commencing on the first
anniversary of the date of grant and will expire on the tenth anniversary of
the date of grant.
On October 15, 1997, the Registrant granted Stephen W. Haley an option, as
partial consideration for his services as an officer of the Registrant, to
purchase 60,000 shares of Common Stock at $10.50 per share. Twenty-five
percent of the option vested on the date of grant, and 25% will vest on the
first three anniversaries of the date of grant. The option will expire on the
tenth anniversary of the date of the grant.
On October 15, 1997, the Registrant granted 17 current employees options, as
partial consideration for their employment with the Registrant, to purchase up
to an aggregate of 445,000 shares of Common Stock at $10.50 per share. These
options will become exercisable in installments before October 15, 2001 and
will expire on the tenth anniversary of the date of grant.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant.
3.1.1 Form of Articles of Incorporation of United PanAm Financial Corp., a
California corporation.
3.2* Bylaws of the Registrant.
3.2.1 Form of Bylaws of United PanAm Financial Corp., a California
corporation.
4.1*** Form of stock certificate.
4.2 Form of Agreement of Merger of the Registrant into United PanAm
Financial Corp., a California corporation.
5.1*** Opinion of Manatt, Phelps & Phillips, LLP.
10.1* Insurance Premium Financing Management Agreement dated May 17, 1995,
between Pan American Bank, FSB and BPN Corporation.
10.2* First Amendment to Insurance Premium Financing Management Agreement
and Guaranties dated October , 1995, between Pan American Bank, FSB
and BPN Corporation.
10.3* Second Amendment to Insurance Premium Financing Management Agreement
and Guaranties dated February 28, 1996, among Pan American Bank, FSB,
BPN Corporation, Cornelius J. O'Shea, Peter Walski and Barbara Walski.
10.4* Guaranty dated May 17, 1995 by Peter Walski and Barbara Walski to Pan
American Bank, FSB.
10.5* Guaranty dated May 17, 1995 by Cornelius J. O'Shea to Pan American
Bank, FSB.
10.6* Stock Option Agreement dated May 17, 1995, among BPN Corporation, Pan
American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J.
O'Shea and The Walski Family Trust.
10.7* First Amendment to Stock Option Agreement dated October 1, 1997, among
BPN Corporation, Pan American Group, Inc., Peter A. Walski, Barbara R.
Walski, Cornelius J. O'Shea and The Walski Family Trust.
10.8* Interim Capital Assistance Agreement dated September 9, 1994, among
Pan American Financial, Inc., Pan American Bank, FSB and the
Resolution Trust Corporation.
10.9* Amendment No. 1 to Interim Capital Assistance Agreement dated May 1,
1997, among Pan American Financial, Inc., Pan American Bank, FSB and
the Federal Deposit Insurance Corporation.
10.10* Interim Capital Assistance Agreement dated April 29, 1994, among Pan
American Financial, Inc., Pan American Bank, FSB and the Resolution
Trust Corporation.
10.11* Letter agreement dated March 2, 1995, between Pan American Bank, FSB
and the Resolution Trust Corporation.
10.12* Promissory Note dated September 9, 1994 in the amount of $4 million by
Pan American Financial, Inc. to the Resolution Trust Corporation.
10.13* Stock Pledge Agreement dated September 9, 1994, between Pan American
Financial, Inc. and the Resolution Trust Corporation.
10.14** Limited Branch Purchase and Assumption Agreement dated September 9,
1994, between the Resolution Trust Corporation as receiver of Western
Federal Savings Bank and Pan American Bank, FSB.
10.15** Lead Acquiror Waiver and Reimbursement Agreement dated September 9,
1994, between Home Savings of America, FSB and Pan American Bank, FSB.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.16** Indemnity Agreement dated September 9, 1994, between the Resolution
Trust Corporation and Pan American Bank, FSB.
10.17** Whole Purchase and Assumption Agreement dated April 29, 1994, between
the Resolution Trust Corporation and Pan American Bank, FSB.
10.18** Indemnity Agreement dated April 29, 1994, between the Resolution Trust
Corporation and Pan American Bank, FSB.
10.19* Promissory Note dated April 29, 1994 in the amount of $6,930,000 by
Pan American Financial, Inc. to the Resolution Trust Corporation.
10.20* Stock Pledge Agreement dated April 29, 1994, between Pan American
Financial, Inc. and the Resolution Trust Corporation.
10.21** Advances and Security Agreement dated January 29, 1996, between the
Federal Home Loan Bank of San Francisco and Pan American Bank, FSB.
10.22** Retail CD Brokerage Agreement dated April 30, 1996, between Pan
American Bank, FSB and Merrill Lynch, Pierce, Fenner & Smith,
Incorporated.
10.23** Fixed Rate Interest bearing--3 Months and Longer Retail Certificate of
Deposit of Pan American, FSB, Master Certificate No. 2 dated May 12,
1997.
10.24** Fixed Rate Interest bearing--3 Months and Longer Retail Certificate of
Deposit of Pan American Bank, FSB, Master Certificate No. 3 dated May
12, 1997.
10.25** License, Services, and Purchase Agreement dated December 1996, between
Associated Software Consultants, Inc. and Pan American, FSB and all
addendums thereto.
10.26** Agreement for Remote Computing Services dated April 4, 1995, between
Pan American Bank, FSB and Fiserv Fresno, Inc.
10.27** Amendment to Computer Operating Agreement between Pan American Bank,
FSB and Fiserv Fresno, Inc.
10.28** Addendum No. 2 to Agreement for Remote Computing Services effective as
of April 1, 1996, between Pan American Bank, FSB and Fiserv Fresno,
Inc.
10.29** Item Processing Agreement dated April 26, 1993, between Systematics
Financial Services, Inc. and Pan American Savings Bank, FSB.
10.30** Support Services Agreement dated October 31, 1995, between Alan King
and Company, Inc. and Pan American Savings Bank, FSB.
10.31** Technical Support Services Agreement dated May 1, 1995, between Alan
King and Company, Inc. and Pan American Savings Bank, FSB.
10.32** License Agreement dated May 1, 1995, between Alan King and Company,
Inc. and Pan American Savings Bank, FSB.
10.33** Subservicing Agreement dated March 2, 1995, between Pan American Bank,
FSB and Dovenmuehle Mortgage, Inc.
10.34* Interim Operating Agreement dated July 1, 1997, between United PanAm
Mortgage Corporation and Pan American Bank, FSB.
10.34.1 Amended and Restated Interim Operating Agreement dated as of December
31, 1997, between United PanAm Mortgage Corporation and Pan American
Bank, FSB.
10.35** Inter-Company Agreement dated May 1, 1994, between Pan American
Financial, Inc. and Pan American Bank, FSB.
10.36** Inter-Company Agreement dated August 1, 1994, between Pan American
Group, Inc. and Pan American Bank, FSB.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -----------
<C> <S>
10.37* Employment Agreement dated May 7, 1996, between Pan American Bank,
FSB and Ray C. Thousand.
10.38** Employment Agreement dated May 1, 1994, between Pan American Bank,
FSB and Lawrence J. Grill.
10.39* Employment Agreement dated October 1, 1997, among the Registrant,
Pan American Bank, FSB and Lawrence J. Grill.
10.39.1 Amendment No. 1 to Employment Agreement dated November 1, 1997,
among the Registrant, Pan American Bank, FSB and Lawrence J. Grill.
10.40* Employment Agreement dated October 1, 1997, between the Registrant
and Guillermo Bron.
10.40.1 Amendment No. 1 to Employment Agreement dated November 1, 1997,
between the Registrant and Guillermo Bron.
10.41* Employment Agreement dated October 1, 1997, between United PanAm
Mortgage Corporation and John T. French.
10.41.1** First Amendment to Employment Agreement dated November 14, 1997
between United PanAm Mortgage Corporation and John T. French.
10.42* Salary Continuation Agreement dated October 1, 1997, between Pan
American Bank, FSB and Lawrence J. Grill.
10.43* Salary Continuation Agreement dated October 1, 1997, between Pan
American Bank, FSB and Guillermo Bron.
10.44* Form of Indemnification Agreement between the Registrant and Ms.
Bucci and each of Messrs. Bron, French, Grill, Haley, Kaufman,
Maizel, Thousand and Villanueva.
10.45** Agreement and Mutual General Release dated March 5, 1997, between
Pan American Bank, FSB and Robert Wilson.
10.46*** Pan American Group, Inc. 1994 Stock Option Plan, together with forms
of incentive stock option and non-qualified stock option agreements.
10.47* Pan American Group, Inc. 1997 Stock Incentive Plan, together with
forms of incentive stock option, non-qualified stock option and
restricted stock agreements.
10.48** Pan American Bank, FSB Management Incentive Plan.
10.48.1 Pan American Bank, FSB Retail Bank Management Incentive Plan.
10.48.2 Pan American Bank, FSB Corporate Management Incentive Plan.
10.49 Pan American Bank, FSB 401(k) Profit Sharing Plan, as amended.
10.50** Income Tax Allocation Agreement dated October 19, 1994, between Pan
American Bank, FSB, Pan American Financial, Inc. and the Registrant.
10.51** Lease Agreement dated September 26, 1994, between the Resolution
Trust Corporation and Old Stone Bank of California and Pan American
Bank, FSB.
10.52** First Amendment to Lease Agreement dated November 19, 1995, between
the Resolution Trust Corporation and Old Stone Bank of California
and Pan American Bank, FSB.
10.53** Office Lease dated March 4, 1997, between Spieker Properties, L.P.
and Pan American Bank, FSB.
10.54** Office Space Lease dated January 18, 1996, between The Irvine
Company and Pan American Bank, FSB.
10.55** First Amendment to Office Space Lease dated July 2, 1996, between
The Irvine Company and Pan American Bank, FSB.
10.56** Standard Office Lease dated April 25, 1997, between CAL Portfolio
VI, L.L.C. and Pan American Bank, FSB.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.57** Office Lease Agreement dated February 28, 1997, between P.R.A.
Biltmore Investments, L.L.C. and Pan American Bank, FSB.
10.58** Office Lease dated December 9, 1996, between Bernal Corporate Park and
Pan American Bank, FSB.
10.59** Bernal Corporate Park Lease First Amendment to Lease dated January 27,
1997.
10.60** Shopping Center Sublease dated September 22, 1995, between Panorama
Towne Center, L.P. and Pan American Bank, FSB.
10.61** Promissory Note in the principal amount of $225,000 dated October 15,
1997 by Lawrence J. Grill to the Registrant.
10.62** Loan and Stock Pledge Agreement dated October 15, 1997, between
Lawrence J. Grill and the Registrant.
10.63* Promissory Note in the principal amount of $1,628,000 dated July 1,
1997 by the Registrant to Pan American Financial, L.P.
10.63.1 Amended and Restated Promissory Note in the principal amount of
$1,628,000 dated January 15, 1998 by the Registrant to Pan American
Financial, L.P.
10.64* Promissory Note in the principal amount of $258,000 dated July 1, 1997
by the Registrant to BVG West Corporation.
10.64.1 Amended and Restated Promissory Note in the principal amount of
$258,000 dated January 15, 1998 by the Registrant to BVG West
Corporation.
10.65* Promissory Note in the principal amount of $52,500 dated July 1, 1997
by the Registrant to Lawrence J. Grill.
10.65.1 Amended and Restated Promissory Note in the principal amount of
$52,500 dated January 15, 1998 by the Registant to Lawrence J. Grill.
10.66* Promissory Note in the principal amount of $33,000 dated July 1, 1997
by the Registrant to Robert Wilson.
10.66.1 Amended and Restated Promissory Note in the principal amount of
$33,000 dated January 15, 1998 by the Registrant to Robert Wilson.
10.67* Promissory Note in the principal amount of $28,500 dated July 1, 1997
by the Registrant to Villanueva Management, Inc.
10.67.1 Amended and Restated Promissory Note in the principal amount of
$28,500 dated January 15, 1998 by the Registrant to Villanueva
Management, Inc.
10.68*+ Master Repurchase Agreement Governing Purchases and Sales of Mortgage
Loans dated as of October 31, 1997, between Lehman Commercial Paper
Inc. and Pan American Bank, FSB.
10.69* Custodial Agreement dated November 6, 1997, among Lehman Commercial
Paper Inc., Pan American Bank, FSB and Bankers Trust Company of
California, N.A.
10.70* Loan Purchase and Sale Agreement dated April 1, 1997, among Aames
Capital Corporation, Aames Funding Corporation and Pan American Bank,
FSB.
10.71* Continuing Loan Purchase Agreement dated February 27, 1997, between
AMRESCO Residential Capital Markets, Inc. and Pan American Bank, FSB.
10.72* Mortgage Loan Purchase Agreement dated May 28, 1997, between Saxon
Mortgage, Inc. and Pan American Bank, FSB.
10.73 Letter Agreement dated as of January 6, 1998, by and among the
Registrant, NIPF Holding Company and Providian National Bank.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.74 Master Assignment Agreement dated as of January 21, 1998 by and
between Pan American Bank, FSB d/b/a "Classic Plan" and Providian
National Bank d/b/a "Commonwealth," and National IPF Company.
10.75 Pooling and Servicing Agreement dated as of December 1, 1997, by and
among United PanAm Mortgage Corporation, Lehman ABS Corporation, Pan
American Bank, FSB and Bankers Trust Company of California, N.A.
10.76 Mortgage Loan Purchase and Sale Agreement dated as of December 1,
1997, by and among United PanAm Mortgage Corporation, Pan American
Bank, FSB and Lehman ABS Corporation.
10.77 Insurance and Indemnity Agreement dated as of December 1, 1997, by and
among United PanAm Mortgage Corporation, Lehman ABS Corporation, Pan
American Bank, FSB and Financial Security Assurance Inc.
10.78 Indemnification Agreement dated as of December 22, 1997, by and among
United PanAm Mortgage Corporation, Financial Security Assurance Inc.,
Pan American Bank, FSB, Lehman ABS Corporation and Lehman Brothers
Inc.
10.79+ Subservicing Agreement dated as of December 1, 1997, by and between
Pan American Bank, FSB and Ocwen Federal Bank, FSB.
10.80 Premium Letter by and among United PanAm Mortgage Corporation, Lehman
ABS Corporation and Financial Security Assurance Inc.
10.81 Indemnification Agreement dated as of December 30, 1997 among United
PanAm Mortgage Corporation, Pan American Bank, FSB and Lehman Brothers
Inc.
10.82 Certificate and Prepayment Fee Purchase Agreement dated March 25, 1998
between Pan American Bank, FSB and Ocwen Partnership, L.P.
10.83 Residential Flow Servicing Agreement dated effective as of the
November 10, 1997, by and between Ocwen Federal Bank FSB, Servicer,
and Pan American Bank, FSB and United PanAm Mortgage Corporation.
10.84 United PanAm Mortgage Corporation 1998 Management Incentive Plan.
10.85 United Auto Credit Corporation 1998 Management Incentive Plan.
21.1* Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
23.2*** Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(File No. 333-39941) filed with the Commission on November 12, 1997 (the
"Registration Statement").
** Filed as an exhibit to Amendment No. 1 to the Registration Statement filed
with the Commission on December 22, 1997.
*** To be filed by amendment.
+ Confidential treatment requested.
b. Financial Statement Schedules.
The schedules are omitted because they are not applicable or the required
information is shown in the Registrant's financial statements or the related
notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit
II-8
<PAGE>
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(i) That for the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(ii) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified n the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF SAN MATEO, STATE OF CALIFORNIA, ON MARCH 30, 1998.
United PanAm Financial Corp.
/s/ Lawrence J. Grill
By __________________________________
LAWRENCE J. GRILL, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND
SECRETARY
PURSUANT TO THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 2 TO THE
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
Chairman of the
/s/ Guillermo Bron Board March 30, 1998
- -------------------------------------
GUILLERMO BRON
/s/ Lawrence J. Grill President, Chief
- ------------------------------------- Executive Officer, March 30, 1998
LAWRENCE J. GRILL Secretary and
Director (Principal
Executive Officer)
/s/ Carol Bucci Senior Vice
- ------------------------------------- President, March 30, 1998
CAROL BUCCI Chief Financial
Officer and
Treasurer
(Principal
Financial and
Accounting Officer)
/s/ Stephen W. Haley Senior Vice
- ------------------------------------- President-- March 30, 1998
STEPHEN W. HALEY Compliance and Risk
Management
* Director
- ------------------------------------- March 30, 1998
JOHN T. FRENCH
* Director
- ------------------------------------- March 30, 1998
EDMUND M. KAUFMAN
* Director
- ------------------------------------- March 30, 1998
DANIEL L. VILLANUEVA
* Director
- ------------------------------------- March 30, 1998
LUIS MAIZEL
*By: /s/ Lawrence J. Grill
---------------------------------
Lawrence J. Grill,
Attorney-in-fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.1.1 Form of Articles of Incorporation of United PanAm Financial Corp.,
a California corporation.
3.2* Bylaws of the Registrant.
3.2.1 Form of Bylaws of United PanAm Financial Corp., a California
corporation.
4.1*** Form of stock certificate.
4.2 Form of Agreement of Merger of the Registrant into United PanAm
Financial Corp., a California corporation.
5.1*** Opinion of Manatt, Phelps & Phillips, LLP.
10.1* Insurance Premium Financing Management Agreement dated May 17,
1995, between Pan American Bank, FSB and BPN Corporation.
10.2* First Amendment to Insurance Premium Financing Management
Agreement and Guaranties dated October , 1995, between Pan
American Bank, FSB and BPN Corporation.
10.3* Second Amendment to Insurance Premium Financing Management
Agreement and Guaranties dated February 28, 1996, among Pan
American Bank, FSB, BPN Corporation, Cornelius J. O'Shea,
Peter Walski and Barbara Walski.
10.4* Guaranty dated May 17, 1995 by Peter Walski and Barbara Walski to
Pan American Bank, FSB.
10.5* Guaranty dated May 17, 1995 by Cornelius J. O'Shea to Pan American
Bank, FSB.
10.6* Stock Option Agreement dated May 17, 1995, among BPN Corporation,
Pan American Group, Inc., Peter A. Walski, Barbara R. Walski,
Cornelius J. O'Shea and The Walski Family Trust.
10.7* First Amendment to Stock Option Agreement dated October 1, 1997,
among BPN Corporation, Pan American Group, Inc., Peter A. Walski,
Barbara R. Walski, Cornelius J. O'Shea and The Walski Family
Trust.
10.8* Interim Capital Assistance Agreement dated September 9, 1994,
among Pan American Financial, Inc., Pan American Bank, FSB and the
Resolution Trust Corporation.
10.9* Amendment No. 1 to Interim Capital Assistance Agreement dated May
1, 1997, among Pan American Financial, Inc., Pan American Bank,
FSB and the Federal Deposit Insurance Corporation.
10.10* Interim Capital Assistance Agreement dated April 29, 1994, among
Pan American Financial, Inc., Pan American Bank, FSB and the
Resolution Trust Corporation.
10.11* Letter agreement dated March 2, 1995, between Pan American Bank,
FSB and the Resolution Trust Corporation.
10.12* Promissory Note dated September 9, 1994 in the amount of $4
million by Pan American Financial, Inc. to the Resolution Trust
Corporation.
10.13* Stock Pledge Agreement dated September 9, 1994, between Pan
American Financial, Inc. and the Resolution Trust Corporation.
10.14** Limited Branch Purchase and Assumption Agreement dated September
9, 1994, between the Resolution Trust Corporation as receiver of
Western Federal Savings Bank and Pan American Bank, FSB.
10.15** Lead Acquiror Waiver and Reimbursement Agreement dated September
9, 1994, between Home Savings of America, FSB and Pan American
Bank, FSB.
10.16** Indemnity Agreement dated September 9, 1994, between the
Resolution Trust Corporation and Pan American Bank, FSB.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.17** Whole Purchase and Assumption Agreement dated April 29, 1994,
between the Resolution Trust Corporation and Pan American Bank,
FSB.
10.18** Indemnity Agreement dated April 29, 1994, between the Resolution
Trust Corporation and Pan American Bank, FSB.
10.19* Promissory Note dated April 29, 1994 in the amount of $6,930,000
by Pan American Financial, Inc. to the Resolution Trust
Corporation.
10.20* Stock Pledge Agreement dated April 29, 1994, between Pan American
Financial, Inc. and the Resolution Trust Corporation.
10.21** Advances and Security Agreement dated January 29, 1996, between
the Federal Home Loan Bank of San Francisco and Pan American Bank,
FSB.
10.22** Retail CD Brokerage Agreement dated April 30, 1996, between Pan
American Bank, FSB and Merrill Lynch, Pierce, Fenner & Smith,
Incorporated.
10.23** Fixed Rate Interest bearing--3 Months and Longer Retail
Certificate of Deposit of Pan American, FSB, Master Certificate
No. 2 dated May 12, 1997.
10.24** Fixed Rate Interest bearing--3 Months and Longer Retail
Certificate of Deposit of Pan American Bank, FSB, Master
Certificate No. 3 dated May 12, 1997.
10.25** License, Services, and Purchase Agreement dated December 1996,
between Associated Software Consultants, Inc. and Pan American,
FSB and all addendums thereto.
10.26** Agreement for Remote Computing Services dated April 4, 1995,
between Pan American Bank, FSB and Fiserv Fresno, Inc.
10.27** Amendment to Computer Operating Agreement between Pan American
Bank, FSB and Fiserv Fresno, Inc.
10.28** Addendum No. 2 to Agreement for Remote Computing Services
effective as of April 1, 1996, between Pan American Bank, FSB and
Fiserv Fresno, Inc.
10.29** Item Processing Agreement dated April 26, 1993, between
Systematics Financial Services, Inc. and Pan American Savings
Bank, FSB.
10.30** Support Services Agreement dated October 31, 1995, between Alan
King and Company, Inc. and Pan American Savings Bank, FSB.
10.31** Technical Support Services Agreement dated May 1, 1995, between
Alan King and Company, Inc. and Pan American Savings Bank, FSB.
10.32** License Agreement dated May 1, 1995, between Alan King and
Company, Inc. and Pan American Savings Bank, FSB.
10.33** Subservicing Agreement dated March 2, 1995, between Pan American
Bank, FSB and Dovenmuehle Mortgage, Inc.
10.34* Interim Operating Agreement dated July 1, 1997, between United
PanAm Mortgage Corporation and Pan American Bank, FSB.
10.34.1 Amended and Restated Interim Operating Agreement dated as of
December 31, 1997, between United PanAm Mortgage Corporation and
Pan American Bank, FSB.
10.35** Inter-Company Agreement dated May 1, 1994, between Pan American
Financial, Inc. and Pan American Bank, FSB.
10.36** Inter-Company Agreement dated August 1, 1994, between Pan American
Group, Inc. and Pan American Bank, FSB.
10.37* Employment Agreement dated May 7, 1996, between Pan American Bank,
FSB and Ray C. Thousand.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -----------
<C> <S>
10.38** Employment Agreement dated May 1, 1994, between Pan American Bank,
FSB and Lawrence J. Grill.
10.39* Employment Agreement dated October 1, 1997, among the Registrant,
Pan American Bank, FSB and Lawrence J. Grill.
10.39.1 Amendment No. 1 to Employment Agreement dated November 1, 1997,
among the Registrant, Pan American Bank, FSB and Lawrence J. Grill.
10.40* Employment Agreement dated October 1, 1997, between the Registrant
and Guillermo Bron.
10.40.1 Amendment No. 1 to Employment Agreement dated November 1, 1997,
between the Registrant and Guillermo Bron.
10.41* Employment Agreement dated October 1, 1997, between United PanAm
Mortgage Corporation and John T. French.
10.41.1** First Amendment to Employment Agreement dated November 14, 1997
between United PanAm Mortgage Corporation and John T. French.
10.42* Salary Continuation Agreement dated October 1, 1997, between Pan
American Bank, FSB and Lawrence J. Grill.
10.43* Salary Continuation Agreement dated October 1, 1997, between Pan
American Bank, FSB and Guillermo Bron.
10.44* Form of Indemnification Agreement between the Registrant and Ms.
Bucci and each of Messrs. Bron, French, Grill, Haley, Kaufman,
Maizel, Thousand and Villanueva.
10.45** Agreement and Mutual General Release dated March 5, 1997, between
Pan American Bank, FSB and Robert Wilson.
10.46*** Pan American Group, Inc. 1994 Stock Option Plan, together with forms
of incentive stock option and non-qualified stock option agreements.
10.47* Pan American Group, Inc. 1997 Stock Incentive Plan, together with
forms of incentive stock option, non-qualified stock option and
restricted stock agreements.
10.48** Pan American Bank, FSB Management Incentive Plan.
10.48.1 Pan American Bank, FSB Retail Bank Management Incentive Plan.
10.48.2 Pan American Bank, FSB Corporate Management Incentive Plan.
10.49 Pan American Bank, FSB 401(k) Profit Sharing Plan, as amended.
10.50** Income Tax Allocation Agreement dated October 19, 1994, between Pan
American Bank, FSB, Pan American Financial, Inc. and the Registrant.
10.51** Lease Agreement dated September 26, 1994, between the Resolution
Trust Corporation and Old Stone Bank of California and Pan American
Bank, FSB.
10.52** First Amendment to Lease Agreement dated November 19, 1995, between
the Resolution Trust Corporation and Old Stone Bank of California
and Pan American Bank, FSB.
10.53** Office Lease dated March 4, 1997, between Spieker Properties, L.P.
and Pan American Bank, FSB.
10.54** Office Space Lease dated January 18, 1996, between The Irvine
Company and Pan American Bank, FSB.
10.55** First Amendment to Office Space Lease dated July 2, 1996, between
The Irvine Company and Pan American Bank, FSB.
10.56** Standard Office Lease dated April 25, 1997, between CAL Portfolio
VI, L.L.C. and Pan American Bank, FSB.
10.57** Office Lease Agreement dated February 28, 1997, between P.R.A.
Biltmore Investments, L.L.C. and Pan American Bank, FSB.
10.58** Office Lease dated December 9, 1996, between Bernal Corporate Park
and Pan American Bank, FSB.
10.59** Bernal Corporate Park Lease First Amendment to Lease dated January
27, 1997.
10.60** Shopping Center Sublease dated September 22, 1995, between Panorama
Towne Center, L.P. and Pan American Bank, FSB.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.61** Promissory Note in the principal amount of $225,000 dated October
15, 1997 by Lawrence J. Grill to the Registrant.
10.62** Loan and Stock Pledge Agreement dated October 15, 1997, between
Lawrence J. Grill and the Registrant.
10.63* Promissory Note in the principal amount of $1,628,000 dated July
1, 1997 by the Registrant to Pan American Financial, L.P.
10.63.1 Amended and Restated Promissory Note in the principal amount of
$1,628,000 dated January 15, 1998 by the Registrant to Pan
American Financial, L.P.
10.64* Promissory Note in the principal amount of $258,000 dated July 1,
1997 by the Registrant to BVG West Corporation.
10.64.1 Amended and Restated Promissory Note in the principal amount of
$258,000 dated January 15, 1998 by the Registrant to BVG West
Corporation.
10.65* Promissory Note in the principal amount of $52,500 dated July 1,
1997 by the Registrant to Lawrence J. Grill.
10.65.1 Amended and Restated Promissory Note in the principal amount of
$52,500 dated January 15, 1998 by the Registrant to Lawrence J.
Grill.
10.66* Promissory Note in the principal amount of $33,000 dated July 1,
1997 by the Registrant to Robert Wilson.
10.66.1 Amended and Restated Promissory Note in the principal amount of
$33,000 dated January 15, 1998 by the Registrant to Robert Wilson.
10.67* Promissory Note in the principal amount of $28,500 dated July 1,
1997 by the Registrant to Villanueva Management, Inc.
10.67.1 Amended and Restated Promissory Note in the principal amount of
$28,500 dated January 15, 1998 by the Registrant to Villanueva
Management, Inc.
10.68*+ Master Repurchase Agreement Governing Purchases and Sales of
Mortgage Loans dated as of October 31, 1997, between Lehman
Commercial Paper Inc. and Pan American Bank, FSB.
10.69* Custodial Agreement dated November 6, 1997, among Lehman
Commercial Paper Inc., Pan American Bank, FSB and Bankers Trust
Company of California, N.A.
10.70* Loan Purchase and Sale Agreement dated April 1, 1997, among Aames
Capital Corporation, Aames Funding Corporation and Pan American
Bank, FSB.
10.71* Continuing Loan Purchase Agreement dated February 27, 1997,
between AMRESCO Residential Capital Markets, Inc. and Pan American
Bank, FSB.
10.72* Mortgage Loan Purchase Agreement dated May 28, 1997, between Saxon
Mortgage, Inc. and Pan American Bank, FSB.
10.73 Letter Agreement dated as of January 6, 1998, by and among the
Registrant, NIPF Holding Company and Providian National Bank.
10.74 Master Assignment Agreement dated as of January 21, 1998 by and
between Pan American Bank, FSB d/b/a "Classic Plan" and Providian
National Bank d/b/a "Commonwealth," and National IPF Company.
10.75 Pooling and Servicing Agreement dated as of December 1, 1997, by
and among United PanAm Mortgage Corporation, Lehman ABS
Corporation, Pan American Bank, FSB and Bankers Trust Company of
California, N.A.
10.76 Mortgage Loan Purchase and Sale Agreement dated as of December 1,
1997, by and among United PanAm Mortgage Corporation, Pan American
Bank, FSB and Lehman ABS Corporation.
10.77 Insurance and Indemnity Agreement dated as of December 1, 1997, by
and among United PanAm Mortgage Corporation, Lehman ABS
Corporation, Pan American Bank, FSB and Financial Security
Assurance Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.78 Indemnification Agreement dated as of December 22, 1997, by and
among United PanAm Mortgage Corporation, Financial Security
Assurance Inc., Pan American Bank, FSB, Lehman ABS Corporation and
Lehman Brothers Inc.
10.79+ Subservicing Agreement dated as of December 1, 1997, by and
between Pan American Bank, FSB and Ocwen Federal Bank, FSB.
10.80 Premium Letter by and among United PanAm Mortgage Corporation,
Lehman ABS Corporation and Financial Security Assurance Inc.
10.81 Indemnification Agreement dated as of December 30, 1997 among
United PanAm Mortgage Corporation, Pan American Bank, FSB and
Lehman Brothers Inc.
10.82 Certificate and Prepayment Fee Purchase Agreement dated March 25,
1998 between Pan American Bank, FSB and Ocwen Partnership, L.P.
10.83 Residential Flow Servicing Agreement dated effective as of
November 10, 1997, by and between Ocwen Federal Bank FSB,
Servicer, and Pan American Bank, FSB and United PanAm Mortgage
Corporation.
10.84 United PanAm Mortgage Corporation 1998 Management Incentive Plan.
10.85 United Auto Credit Corporation 1998 Management Incentive Plan.
21.1* Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
23.2*** Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(File No. 333-39941) filed with the Commission on November 12, 1997 (the
"Registration Statement").
** Filed as an exhibit to Amendment No. 1 to the Registration Statement filed
with the Commission on December 22, 1997.
*** To be filed by amendment.
+ Confidential treatment requested.
<PAGE>
Exhibit 3.1.1
ARTICLES OF INCORPORATION
OF
UNITED PANAM FINANCIAL CORP.
ONE: The name of this corporation is United PanAm Financial Corp.
---
TWO: The purpose of this corporation is to engage in any lawful act or
---
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
THREE: The name and address in the State of California of this
-----
corporation's initial agent of service of process in accordance with subdivision
(b) of Section 1502 of the California General Corporation Law (the "California
Law") is:
AmeriSearch Corporate Services, Inc.
[Address]
FOUR: This corporation is authorized to issue two classes of shares of
----
stock designated "Common Stock" and "Preferred Stock," respectively. The total
number of shares of stock which this corporation shall have authority to issue
is 22,000,000 shares, consisting of 20,000,000 shares of Common Stock and
2,000,000 shares of Preferred Stock.
A description of the different classes and series (if any) of this
corporation's capital stock and a statement of the designations, and the
relative rights, preferences, privileges and restrictions of the shares of each
class of and series (if any) of stock are as follows:
A. Common Stock
------------
1. Except where otherwise provided by law, by these
Articles of Incorporation, or by resolution of the Board of Directors pursuant
to this Article FOUR, the holders of the Common Stock issued and outstanding
shall have and possess the exclusive right to notice of shareholders' meetings
and the exclusive voting rights and powers.
2. Subject to all of the rights of the Preferred Stock,
dividends may be paid on the Common Stock, as and when declared by the Board of
Directors, out of any funds of the corporation legally available for the payment
of such dividends.
B. Preferred Stock
---------------
The Preferred Stock may be divided into such number of series as the
Board of Directors may determine. The Board of Directors is authorized to
determine and alter the rights,
1
<PAGE>
preferences, privileges and restrictions, or any of them, granted to or imposed
upon any wholly unissued series of Preferred Stock and to fix the number of
shares of any series of Preferred Stock and the designation of any such series
of Preferred Stock. The Board of Directors, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, may increase or decrease
(but not below the number of shares of such series then outstanding) the number
of shares of any series subsequent to the issue of shares of that series.
FIVE: A. This Article FIVE shall become effective only when this
----
corporation becomes a listed corporation within the meaning of Section 301.5 of
the California Law, which section provides that a listed corporation means a
corporation with outstanding shares listed on the New York Stock Exchange or the
American Stock Exchange, or a corporation with outstanding securities designated
as qualified for trading as a national market system security on the National
Association of Securities Dealers Automatic Quotation System (or any successor
national market system) if the corporation has at least 800 holders of its
equity securities as of the record date of the corporation's most recent annual
meeting of shareholders.
B. Upon the effectiveness of this Article FIVE, the Board of
Directors shall be classified into two classes, as nearly equal in numbers as
the then total number of directors constituting the entire Board of Directors
permits, the members of each class to serve for a term of two years. If the
number of directors is not divisible by two, the first extra director shall be
assigned to the first class of directors and any additional director shall be
assigned to the second class of directors.
C. Upon the effectiveness of this Article FIVE, the election of
directors by the shareholders shall not be by cumulative voting. At each
election of directors, each shareholder entitled to vote may vote all the shares
held by that shareholder for each of several nominees for director up to the
number of directors to be elected. The shareholder may not cast more votes for
any single nominee than the number of shares held by the shareholder.
D. At the first annual meeting of shareholders held after the
effectiveness of this Article FIVE, directors of the first class shall be
elected to hold office for a term expiring at the next succeeding annual meeting
of shareholders and directors of the second class shall be elected to hold
office for a term expiring at the second succeeding annual meeting of
shareholders. At each subsequent annual meeting of shareholders, the successors
to the class of directors whose term shall then expire shall be elected to hold
office for a term expiring at the second succeeding annual meeting of
shareholders.
E. If at any time this corporation ceases to be a listed
corporation as defined in Section 301.5 of the California Law, at each
succeeding annual meeting of shareholders where the existing term of a class of
directors is expiring, the directors of each such class shall then be elected
for a term expiring in one year until all directors are elected for one year
terms. The election of all directors at the annual meeting of shareholders for
a term of one year shall continue
2
<PAGE>
until the corporation once again qualifies as a listed corporation within the
meaning of Section 301.5 of the California Law, and the foregoing provisions of
this Article FIVE shall be reinstated.
SIX: The following provisions are inserted for the management of the
---
business and for the conduct of the affairs of the corporation and for defining
and regulating the powers of the corporation and its directors and shareholders
and are in furtherance and not in limitation of the powers conferred upon the
corporation by statute:
(a) Unless otherwise expressly provided in the California Law,
approval by the holders of at least two-thirds of the outstanding shares of the
capital stock of this corporation entitled to vote (including the affirmative
vote of at least two-thirds of the outstanding shares of any class or series of
the capital stock entitled to vote separately) shall be required with respect to
each of the following actions:
A. Any amendment to or the elimination of Articles FIVE, SIX,
---- ----
SEVEN or EIGHT of these Articles of Incorporation.
- ----- -----
B. Any amendment to or the elimination of any provision of the
Bylaws of this corporation which requires approval by the shareholders to become
effective.
(b) Unless otherwise expressly provided in the California Law,
notwithstanding anything to the contrary in these Articles of Incorporation or
the Bylaws of this corporation, vacancies in the Board of Directors, except for
a vacancy created by the removal of a director, may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director, and each director so elected shall hold office until his successor is
elected at an annual or a special meeting of shareholders. If the Board of
Directors accepts the resignation of a director tendered to take effect at a
future time, the Board of Directors (or the shareholders) may elect a successor
to take office when the resignation becomes effective.
(c) Unless otherwise expressly provided in the California Law,
notwithstanding anything to the contrary in these Articles of Incorporation or
the Bylaws of this corporation, the shareholders may elect a director or
directors at any time to fill any vacancy or vacancies not filled by the
directors. Except for an election to fill a vacancy created by the removal of a
director, any such election by written consent shall require the consent of
holders of a majority of the outstanding shares entitled to vote for the
election of directors. A vacancy in the Board of Directors created by the
removal of a director may only be filled by the vote of a majority of the shares
entitled to vote for the election of directors represented at a duly held
meeting at which a quorum is present, or by the unanimous written consent of the
holders of all of the outstanding shares entitled to vote for the election of
directors.
SEVEN: Except as set forth in Section 603(d) of the California Law, no
-----
action required to be taken or which may be taken at any annual or special
meeting of shareholders of the corporation may be taken by written consent of
shareholders, unless a consent or consents in writing, setting forth the action
so taken, is or are signed by the holders of at least two-thirds of the
outstanding shares of the capital stock of the corporation entitled to vote
thereon.
3
<PAGE>
EIGHT: The liability of the directors of this corporation for monetary
-----
damages shall be eliminated to the fullest extent permissible under California
law. This corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Law) through bylaw provisions,
agreements with agents, vote of shareholders or disinterested directors or
otherwise, in excess of the indemnification otherwise permitted by Section 317
of the California Law, subject only to the applicable limits set forth in
Section 204 of the California Law with respect to actions for breach of duty to
the corporation and its shareholders. This corporation is authorized to
purchase and maintain insurance on behalf of its agents against any liability
asserted against or incurred by the agent in such capacity or arising out of the
agent's status as such from a company, the shares of which are owned in whole or
in part by this corporation, provided that any policy issued by such company is
limited to the extent required by applicable law. Any repeal or modification of
the foregoing provisions of this Article EIGHT by the shareholders of this
corporation shall not adversely affect any right or protection of an agent of
this corporation existing at the time of that repeal or modification.
NINE: This corporation elects to be governed by all of the
----
provisions of the General Corporation Law of 1977 not otherwise applicable to it
under Chapter 23 thereof.
IN WITNESS WHEREOF, the undersigned Incorporator has executed the foregoing
Articles of Incorporation on April ___, 1998.
__________________________________
Guillermo Bron, Incorporator
4
<PAGE>
Exhibit 3.2.1
BYLAWS
OF
UNITED PANAM FINANCIAL CORP.,
a California corporation
Adopted on April ___, 1998
ARTICLE I
OFFICES
Section 1.1 PRINCIPAL EXECUTIVE OFFICE. The principal executive
--------------------------
office of the corporation is hereby fixed and located at 1300 South El Camino
Real, San Mateo, California 94402. The Board of Directors is hereby granted
full power and authority to change said principal executive office from one
location to another.
Section 1.2 OTHER OFFICES. Other business offices may at any time be
-------------
established by the Board of Directors at any place or places where the
corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.1 PLACE OF MEETINGS. All meetings of shareholders shall be
-----------------
held at the principal executive office of the corporation or at any other place
within or outside the State of California as may be designated by the Board of
Directors.
Section 2.2 ANNUAL MEETINGS.
---------------
(a) Time and Place. The annual meeting of shareholders shall be held
--------------
each year on a date and at a time designated by the Board of Directors. The
date so designated for the initial meeting shall be within fifteen (15) months
after the organization of the corporation, and the date so designated for each
subsequent meeting shall be within fifteen (15) months after the last annual
meeting.
(b) Business to be Transacted. At the annual meetings, directors
-------------------------
shall be elected, reports of the affairs of the corporation shall be considered,
and any other business may be transacted which is within the powers of the
shareholders.
(c) Notice, Means. Written notice of each annual meeting shall be
-------------
given to each shareholder entitled to vote, either personally or by mail or
other means of written
1
<PAGE>
communication, charges prepaid, addressed to such shareholder at his address
appearing on the books of the corporation or given by him to the corporation
for the purpose of notice. If any notice or report addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation is returned to the corporation by the United States Postal Service
marked to indicate that the United States Postal Service is unable to deliver
the notice or report to the shareholder at such address, all future notices or
reports shall be deemed to have been duly given without further mailing if the
same shall be available for the shareholder upon written demand of the
shareholder at the principal executive office of the corporation for a period
of one year from the date of the giving of the notice or report to all other
shareholders. If a shareholder gives no address, notice shall be deemed to
have been given him if sent by mail or other means of written communication
addressed to the place where the principal executive office of the corporation
is situated, or if published at least once in some newspaper of general
circulation in the county in which said principal executive office is located.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the Secretary, any Assistant
Secretary or any transfer agent of the corporation giving the notice, and shall
be filed and maintained in the minute book of the corporation. Such affidavit
shall be prima facie evidence of the giving of such notice.
(d) Notice, Time and Content. All such notices shall be given to
------------------------
each shareholder entitled thereto not less than ten (10) days nor more than
sixty (60) days before each annual meeting. Any such notice shall be deemed to
have been given at the time when delivered personally or deposited in the mail
or sent by other means of written communication.
Such notices shall specify:
(i) the place, the date, and the hour of such meeting;
(ii) those matters which the Board of Directors, at the time of the
mailing of the notice, intends to present for action by the shareholders;
(iii) if directors are to be elected, the names of nominees
intended at the time of the notice to be presented by management for election;
(iv) the general nature of a proposal, if any, to take action with
respect to approval of, (a) a contract or other transaction with an interested
director, (b) amendment of the articles of incorporation, (c) a reorganization
of the corporation as defined in Section 181 of the General Corporation Law of
California, (d) voluntary dissolution of the corporation, or (e) a distribution
in dissolution other than in accordance with the rights of outstanding preferred
shares, if any; and,
(v) such other matters, if any, as may be expressly required by
statute.
2
<PAGE>
Section 2.3 SPECIAL MEETINGS.
----------------
(a) Calling of. Special meetings of the shareholders, for the purpose
----------
of taking any action permitted by the shareholders under the General Corporation
Law of California and the Articles of Incorporation of this corporation, may be
called at any time by the Board of Directors, the Chairman of the Board, the
Chief Executive Officer or by one or more shareholders holding not less than ten
percent (10%) of the votes at the meeting. A shareholder entitled to call a
special meeting of shareholders for any proper purpose shall submit a request
therefor in writing either personally or by first class mail, postage prepaid,
or other means of written communication to the Chairman of the Board, the Chief
Executive Officer, any Vice President or the Secretary.
(b) Time and Notice of. Upon receipt of such request, the corporation
------------------
forthwith shall cause notice to be given to shareholders entitled to vote that a
meeting will be held at a time requested by the person or persons calling the
meeting, which time shall be not less than thirty-five (35) nor more than sixty
(60) days after receipt of the request. If such notice is not given within
twenty (20) days after receipt of such request, the persons calling for the
meeting may give notice thereof in the manner provided by these Bylaws. Except
in special cases where other express provision is made by statute, notice of
such special meetings shall be given in the same manner as for annual meetings
of shareholders. In addition to the matters required by items (i) and, if
applicable (iii) of Section 2.2(d), notice of any special meeting shall specify
the general nature of the business to be transacted, and no other business may
be transacted at such meeting.
Section 2.4 QUORUM. A majority of the shares entitled to vote,
------
represented in person or by proxy, shall constitute a quorum for the transaction
of business at a meeting of share holders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
Section 2.5 ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders'
------------------------------------
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of a majority of the shares, the holders of which
are either present in person or represented by proxy thereat. When any meeting
of shareholders is adjourned to another time or place, written notice need not
be given of the adjourned meeting if the time and place are announced at a
meeting at which the adjournment is taken, unless a new record date for the
adjourned meeting is fixed, or unless the adjournment is for more than forty-
five (45) days in which case the Board of Directors shall set a new record date.
For any adjourned meeting requiring notice, such notice shall be given to each
shareholder of record entitled to vote at the adjourned meeting in accordance
with the provisions of Sections 2.2 and 2.3. At any adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
3
<PAGE>
Section 2.6 VOTING.
------
(a) Record Date. Unless a record date for voting purposes be fixed as
-----------
provided in Section 5.1 of Article V of these Bylaws then, subject to the
provisions of Sections 702 and 704 of the General Corporation Law of California
(relating to voting of shares held by a fiduciary, in the name of a corporation,
or in joint ownership), only persons in whose names shares entitled to vote
standing on the stock records of the corporation at the close of business on the
business day next preceding the day on which notice of the meeting is given or
if such notice is waived, at the close of business on the business day next
preceding the day on which the meeting of shareholders is held, shall be
entitled to vote at such meeting, and such day shall be the record date for such
meeting.
(b) Ballot. The shareholders' vote may be oral or by ballot;
------
provided, however, all elections for directors must be by ballot if demand for
election by ballot is made by a shareholder at the meeting and before the voting
begins. If a quorum is present, except with respect to election of directors,
the affirmative vote of the majority of the shares represented at the meeting
and entitled to vote on any matter shall be the act of the shareholders, unless
the vote of a greater number or voting by classes is required by the General
Corporation Law of California or the Articles of Incorporation or Bylaws of the
corporation.
(c) Voting. Except as otherwise provided in the Articles of
------
Incorporation or as set forth in this paragraph (c), each outstanding share of
the capital stock of the corporation, regardless of class, shall be entitled to
one vote on each matter submitted to a vote of shareholders. Except as
otherwise provided in Article FIVE of the Articles of Incorporation and Article
III, Section 3.4, below, at any election of directors, every shareholder
complying with this paragraph (c) and entitled to vote may cumulate his or her
votes and give one candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which the shareholder's
shares are entitled, or distribute the shareholder's votes on the same principal
among as many candidates as the shareholder thinks fit. No shareholder shall be
entitled to cumulate votes (i.e., cast for any one or more candidates a number
----
of votes greater than the number of the shareholder's shares) unless the
candidates' names have been properly placed in nomination prior to commencement
of the voting and a shareholder has given notice prior to commencement of the
voting of the shareholder's intention to cumulate votes. If any shareholder has
given such a notice, then every shareholder entitled to vote may cumulate votes
for candidates in nomination. The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected.
Section 2.7 VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS.
----------------------------------- ----------------
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though had
at a meeting duly held after regular call and notice, if a quorum be present
either in person or by proxy, and if, either before or after the meeting, each
of the persons entitled to vote, who was not present in person or by proxy,
signs a written waiver of notice or a consent to a holding of the meeting, or an
approval of the minutes. The waiver of notice or consent need not specify
either
4
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the business to be transacted or the purpose of any annual or special meeting
of shareholders, except that if action is taken or proposed to be taken for
approval of any of those matters specified in Section 2.2(d)(iv) of Article
II, the waiver of notice or consent shall state the general nature of the
proposal. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the General
Corporation Law of California to be included in the notice but not so included,
if such objection is expressly made at the meeting.
Section 2.8 ACTION WITHOUT MEETING.
----------------------
(a) Action by Written Consent and Notice Thereof. Any action which
--------------------------------------------
may be taken at any annual or special meeting of shareholders, including the
election of directors, may be taken without a meeting and without prior notice
if a consent in writing, setting forth the action so taken, is signed by the
holders of at least two-thirds of the outstanding shares entitled to vote on
that action. If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consents of all shareholders
have not been obtained, notice shall be given as provided herein.
(i) Notice shall be given of any proposed shareholder approval of,
(a) a contract or other transaction with an interested director, (b)
indemnification of an agent of the corporation as authorized by Section 3.16 of
Article III of these Bylaws, (c) a reorganization of the corporation as defined
in Section 181 of the General Corporation Law of California, or (d) a
distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, if any. The notice referred to herein shall be
given at least ten (10) days before the consummation of the action authorized by
such approval.
(ii) Prompt notice of the taking of any other corporate action shall
be given to those shareholders entitled to vote who have not consented in
writing. Such notices shall be given in the manner and shall be deemed to have
been given as provided in Section 2.2 of Article II of these Bylaws.
(b) Election to Fill Vacancy. In the case of an election to fill a
------------------------
vacancy on the Board of Directors which vacancy (1) was not created by removal
or (2) has not been filled by the Board of Directors in accordance with Section
3.5(b) of Article III of these Bylaws, a director may be elected to fill such
vacancy by the written consent of the holders of a majority of the outstanding
shares entitled to vote for the election of directors. An election by the
written consent of the shareholders to fill a vacancy created by removal may be
made only by the unanimous written consent of the holders of all outstanding
shares entitled to vote for the election of directors.
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(c) Filing of Consents; Record Date. All written consents of the
-------------------------------
shareholders shall be filed with the Secretary of the corporation. Unless, as
provided in Sec tion 5.1 of Article V of these Bylaws, the Board of Directors
has fixed a record date for the determination of shareholders entitled to notice
of and to give such written consent, the record date for such determination
shall be the day on which the first written consent is given.
(d) Revocation of Consent. Any shareholder giving a written consent,
---------------------
or the shareholder's proxyholders, or a transferee of the shares of a personal
representative of the shareholder or his respective proxyholders, may revoke the
consent by a writing received by the corporation prior to the time that written
consents of the number of shares required to authorize the proposed action have
been filed with the Secretary of the corporation, but may not do so thereafter.
Such revocation shall be effective upon its receipt by the Secretary of the
corporation.
Any action by the shareholders with respect to any amendment to or the
elimination of this Article II, Section 2.8, shall require approval by the
holders of two-thirds of the outstanding shares of the corporation.
Section 2.9 PROXIES. Every person entitled to vote or execute
-------
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or his duly authorized
agent and filed with the Secretary of the corporation. Any proxy duly executed
is not revoked and continues in full force and effect until (i) an instrument
revoking it or a duly executed proxy bearing a later date is filed with the
Secretary of the corporation prior to the vote pursuant thereto, (ii) the person
executing the proxy attends the meeting and votes in person, or (iii) written
notice of the death or incapacity of the maker of such proxy is received by the
corporation before said proxy is voted and counted. In the determination of the
validity and effect of proxies, the dates contained on the forms of proxy shall
presumptively determine the order of execution of the proxies, regardless of the
postmark dates on the envelopes in which they are mailed. Unless otherwise
provided in the proxy, no proxy shall be valid after the expiration of eleven
(11) months from the date of such proxy.
Section 2.10 INSPECTORS OF ELECTION.
----------------------
(a) Appointment and Number. In advance of any meeting of
----------------------
shareholders, the Board of Directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. If inspectors of election are not so appointed, or if any
person so appointed fails to appear or refuses to act, the chairman of any such
meeting may, and on the request of any shareholder or his proxy shall, appoint
inspectors of election (or persons to replace those who so fail or refuse) at
the meeting. The number of inspectors shall be either one (1) or three (3). If
appointed at a meeting on the request of one or more shareholders or proxies,
the majority of shares represented in person or by proxy shall determine whether
one (1) or three (3) inspectors are to be appointed.
(b) Duties. The duties of such inspectors shall be as prescribed by
------
Section 707 of the General Corporation Law of California and shall include:
determining the
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number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies; receiving votes, ballots or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes or consents;
determining when the polls shall close; determining the result; and such acts
as may be proper to conduct the election or vote with fairness to all
shareholders. The inspectors of election shall perform their duties
impartially, in good faith, to the best of their ability and as expeditiously
as is practical. If there are three (3) inspectors of election, the decision,
act or certificate of a majority is effective in all respects as the decision,
act or certificate of all. Any report or certificate made by the inspectors of
election is prima facie evidence of the facts stated therein.
Section 2.11 NOMINATIONS FOR DIRECTOR; SHAREHOLDER PROPOSALS.
-----------------------------------------------
(a) Nomination of Directors. Nominations for election of members of
-----------------------
the Board of Directors may be made by the Board of Directors or by any
shareholder of any outstanding class of voting stock of the corporation entitled
to vote for the election of directors in accordance with this Section 2.11.
(b) Other Proposals. Any shareholder of the corporation entitled to
---------------
vote at any annual or special meeting of shareholders may make nominations for
the election of directors and other proposals for inclusion on the agenda of any
such meeting provided such shareholder complies with the timely notice
provisions set forth in this Section 2.11 (as well as any additional
requirements under any applicable law or regulation).
(c) Timely Notice by Shareholders. A shareholder's notice shall be
-----------------------------
delivered to or mailed and received at the principal executive offices of the
corporation (i) in the case of any special meeting and of the first annual
meeting held after the effective date of these Bylaws, not less than thirty (30)
days nor more than sixty (60) days prior to the meeting date specified in the
notice of such meeting; provided, however, that if less than forty (40) days'
--------
notice or prior public disclosure of the date of such meeting is given or made
to shareholders, notice by shareholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of such meeting was mailed or such public disclosure was
made, and (ii) in the case of any subsequent annual meeting, not less than one
hundred twenty (120) days prior to the day and month on which, in the
immediately preceding year, the corporation's proxy statement was released to
shareholders or if the date of the annual meeting has been changed by more than
thirty (30) days from the date contemplated at the time of the previous year's
proxy statement, no later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed. Such shareholder's notice shall set forth (A) as to each person whom
the shareholder proposes to nominate for election or re-election as a director,
(i) the name, age, business address and residence address of such person and
(ii) the principal occupation or employment of such person and the class and
number of shares of the corporation which are beneficially owned by such person
that are required to be disclosed in solicitations of the proxies with respect
to nominees for election
7
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as directors, pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including, without limitation, such person's written consent
to being named in the proxy statement as a nominee and to serving as a
directors, if elected); (B) as to each action item required to be included on
the agenda, a description, in sufficient detail, of the purpose and effect of
the proposal to the extent necessary to properly inform all shareholders
entitled to vote thereon prior to any such vote; and (C) as to the shareholder
giving the notice, (i) the name and address, as they appear on the
corporation's books, of such shareholder and the class and (ii) number of
shares of the corporation which are beneficially owned by such shareholder.
(d) Failure to Provide Timely Notice, Etc.. No person nominated by a
--------------------------------------
shareholder shall be elected as a director of the corporation unless nominated
in accordance with the procedures set forth in this Section 2.11. The chairman
of the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination or other proposal by a shareholder was not properly brought
before the meeting, and, if the chairman shall so determine, he shall so declare
to the meeting and such nomination or other proposal shall be disregarded.
ARTICLE III
DIRECTORS
Section 3.1 POWERS. Subject to any limitations of the Articles of
------
Incorporation and of these Bylaws and of the General Corporation Law of
California requiring shareholder authorization or approval for a particular
action, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors. The Board of Directors may delegate the management of the day-to-day
operation of the business of the corporation to a management company or other
person, provided that the business and affairs of the corporation shall be
managed and all corporate powers shall be exer cised, under the ultimate
direction of the Board of Directors.
Section 3.2 COMMITTEES. By resolution adopted by a majority of the
----------
authorized number of directors, the Board of Directors may designate an
executive and other committees, each consisting of two (2) or more directors, to
serve at the pleasure of the Board of Directors. The provisions of this
Article apply to committees of the Board of Directors and action by such
committees, with such changes in the language of those provisions as are
necessary to substitute the committee and its members for the Board of Directors
and its members. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent member at any
meeting of the committee. The appointment of members or alternate members of a
committee shall be made by the vote of a majority of the authorized number of
directors. Unless the Board of Directors shall otherwise prescribe the manner
of proceedings of any such committee, meetings of such committee may be
regularly scheduled in advance and may be called at any time by any two (2)
members thereof; otherwise, the provisions of these Bylaws with respect to
notice and conduct of meetings of the Board of Directors shall govern. Any such
committee, to the extent provided in a resolution of the Board of Directors,
shall have all of the authority of the Board of Directors, except with respect
to:
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(i) the approval of any action for which the General Corporation
Law of California or the Articles of Incorporation also require shareholder
approval;
(ii) the filling of vacancies on the Board of Directors or in any
committee;
(iii) the fixing of compensation of the directors for serving on
the Board of Directors or on any committee;
(iv) amendment or repeal of these Bylaws or the adoption of new
bylaws;
(v) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable;
(vi) any distribution to the shareholders, except at a rate or in a
periodic amount or within a price range determined by the Board of Directors;
and
(vii) the appointment of other committees of the Board of Directors
or the members thereof.
Section 3.3 NUMBER OF DIRECTORS.
-------------------
(a) The authorized number of directors shall be not less than
five (5) nor more than nine (9). The exact number of directors shall be fixed
from time to time, within the limits specified in this subsection, by an
amendment of subsection (b) of this section adopted by the Board of Directors.
(b) The exact number of directors shall be six (6) until changed
as provided in subsection (a) of this section.
(c) The maximum or minimum authorized number of directors may
only be changed by an amendment of this section approved by the vote or
written consent of a majority of the outstanding shares entitled to vote;
provided, however, that an amendment reducing the minimum number to a number
less than five (5) shall not be adopted if the votes cast against its adoption
at a meeting (or the shares not consenting in the case of action by written
consent) exceed 16-2/3% of such outstanding shares; and provided further, that
in no case shall the stated maximum authorized number of directors exceed two
times the stated minimum number of authorized directors minus one.
Section 3.4 ELECTION AND TERM OF OFFICE.
---------------------------
(a) Except as expressly set forth in this Section 3.4, (i) the
directors shall be elected at each annual meeting of shareholders but, if any
such annual meeting is not held
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<PAGE>
or the directors are not elected thereat, the directors may be elected at any
special meeting of shareholders held for that purpose and (ii) each director,
including a director elected to fill a vacancy, shall hold office until the
next annual meeting of the shareholders and until his successor is elected and
qualified.
(b) Upon the effectiveness of Article FIVE of the corporation's
Articles of Incorporation, the Board of Directors shall be classified into two
classes as nearly equal in numbers as the then total number of directors
constituting the entire Board of Directors permits, the members of each class to
serve for a term of two years. If the number of directors is not divisible by
two the first extra director shall be assigned one to the first class of
directors and any additional director shall be assigned to the second class of
directors.
(c) Upon the effectiveness of Article FIVE of the Articles of
Incorporation, the election of directors by the shareholders shall not be by
cumulative voting. At each election of directors, each shareholder entitled to
vote may vote all the shares held by that shareholder for each of several
nominees for director up to the number of directors to be elected. The
shareholder may not cast more votes for any single nominee than the number of
shares held by that shareholder.
(d) At the first annual meeting of shareholders held after the
effectiveness of Article FIVE of the Articles of Incorporation, directors of the
first class shall be elected to hold office for a term expiring at the next
succeeding annual meeting of shareholders and directors of the second class
shall be elected to hold office for a term expiring at the second succeeding
annual meeting of shareholders. At each subsequent annual meeting of
shareholders, the successors to the class of directors whose term shall then
expire shall be elected to hold office for a term expiring at the second
succeeding annual meeting of shareholders.
(e) If at any time the corporation ceases to be a listed corporation
as defined in Section 301.5 of the General Corporation Law of California, at
each succeeding annual meeting of shareholders where the existing term of a
class of directors is expiring, the directors of each such class shall then be
elected for a term expiring in one year until all directors are elected for one
year terms. The election of all directors at the annual meeting of shareholders
for a term of one year shall continue until the corporation once again qualifies
as a listed corporation within the meaning of Section 301.5 of the General
Corporation Law of California, and the foregoing provisions of Article FIVE of
the Articles of Incorporation can be reinstated.
(f) Any action by the shareholders with respect to any amendment to or
the elimination of all or any part of this Article III, Section 3.4, shall
require approval by the holders of at least two-thirds of the outstanding shares
of the corporation.
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Section 3.5 VACANCIES.
---------
(a) When a Vacancy Exists. A vacancy in the Board of Directors exists
---------------------
whenever any authorized position of director is not then filled by a duly
elected director, whether caused by death, resignation, removal, change in the
authorized number of directors or otherwise.
(b) Filling of Vacancies by Directors. Vacancies in the Board of
---------------------------------
Directors, except for a vacancy created by the removal of a director, may be
filled by a majority of the remaining directors, though less than a quorum, or
by a sole remaining director, and each director so elected shall hold office
until his successor is elected at an annual or a special meeting of
shareholders. If the Board of Directors accepts the resignation of a director
tendered to take effect at a future time, the Board of Directors (or the
shareholders) may elect a successor to take office when the resignation becomes
effective.
(c) Filling of Vacancies by Shareholders. The shareholders may elect
------------------------------------
a director or directors at any time to fill any vacancy or vacancies not filled
by the directors. Except for an election to fill a vacancy created by the
removal of a director, any such election by written consent shall require the
consent of holders of a majority of the outstanding shares entitled to vote for
the election of directors. A vacancy in the Board of Directors created by the
removal of a director may only be filled by the vote of a majority of the shares
entitled to vote for the election of directors represented at a duly held
meeting at which a quorum is present, or by the unanimous written consent of the
holders of all of the outstanding shares entitled to vote for the election of
directors.
(d) Removal for Cause. The Board of Directors may declare vacant the
-----------------
office of a director who has been declared of unsound mind by an order of court
or convicted of a felony.
(e) Removal without Cause. Any or all of the directors may be removed
---------------------
without cause if such removal is approved by a majority of the outstanding
shares entitled to vote; provided, however, that no director may be removed
(unless the entire Board of Directors is removed) whenever the votes cast
against removal, or not consenting in writing to such removal, would be
sufficient to elect such director if voted cumulatively at an election at which
the same total number of votes were cast (or, if such action is taken by written
consent, all shares entitled to vote were voted) and the entire number of
directors authorized at the time of his most recent election were then being
elected.
(f) Resignation. Any director may resign effective upon giving
-----------
written notice to the Chairman of the Board, the Chief Executive Officer, the
Secretary or the Board of Directors of the corporation, unless the notice
specifies a later time for the effectiveness of such resignation. If the
resignation is effective at a future time, a successor may be elected to take
office when the resignation becomes effective.
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(g) When Reduction in Number Effective. No reduction of the
----------------------------------
authorized number of directors shall have the effect of removing any director
prior to the expiration of his term of office.
Any action by the shareholders with respect to any amendment to or the
elimination of this Article III, Section 3.5 shall require approval by the
holders of at least two-thirds of the outstanding shares of the corporation.
Section 3.6 PLACE OF MEETING. Regular meetings of the Board of
----------------
Directors shall be held at any place within or without the State of California
which has been designated from time to time by resolution of the Board of
Directors. In the absence of such designation, regular meetings shall be held
at the principal executive office of the corporation. Special meetings of the
Board of Directors may be held either at a place so designated or at the
principal executive office.
Section 3.7 ORGANIZATION MEETING. Immediately following each annual
--------------------
meeting of shareholders the Board of Directors shall hold a regular meeting at
the place of said annual meeting or at such other place as shall be fixed by the
Board of Directors, for the purpose of organization, election of officers, and
the transaction of other business. Call and notice of such meetings are hereby
dispensed with.
Section 3.8 OTHER REGULAR MEETINGS. Other regular meetings of the
----------------------
Board of Directors shall be held at such day and hour as shall be fixed from
time to time by the Board of Directors by resolution or in the Bylaws. If such
day falls upon a legal holiday, then said meeting shall be held at the same time
on the next day thereafter ensuing which is a full business day. Notice of all
such regular meetings of the Board of Directors is hereby dispensed with.
Section 3.9 SPECIAL MEETINGS. Special meetings of the Board of
----------------
Directors for any purpose or purposes shall be called at any time by the
Chairman of the Board, the Chief Executive Officer, any Vice President, the
Secretary or by any two directors. Written notice of the time and place of
special meetings shall be delivered personally to each director or communicated
to each director by telephone, or by telegraph or mail or facsimile
transmission, charges prepaid, addressed to him at his address as it is shown
upon the records of the corporation or, if it is not so shown on such records or
if not readily ascertainable, at the place at which the meetings of the
directors are regularly held. In case such notice is mailed or telegraphed, it
shall be deposited in the United States mail or delivered to the telegraph
company in the place in which the principal executive offices of the corporation
are located at least four (4) days prior to the time of the holding of the
meeting. In case such notice is delivered, personally or by telephone, as above
provided, it shall be so delivered at least forty-eight (48) hours prior to the
time of the holding of the meeting. Such mailing, telegraphing or delivery,
personally or by telephone, as above provided, shall be due, legal and personal
notice to such director. Any notice shall state the date, place and hour of the
meeting.
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Section 3.10 ACTION WITHOUT MEETING. Any action by the Board of
----------------------
Directors may be taken without a meeting if all members of the Board of
Directors shall individually or collectively consent in writing to such action.
Such written consent or consents shall be filed with the minutes of the
proceedings of the Board of Directors and shall have the same force and effect
as a unanimous vote of such directors.
Section 3.11 ACTION AT A MEETING; QUORUM AND REQUIRED VOTE. Presence
---------------------------------------------
of a majority of the authorized number of directors at a meeting of the Board of
Directors constitutes a quorum for the transaction of business. Members of the
Board of Directors may participate in a meeting through use of conference
telephone or similar communications equipment, so long as all members
participating in such meeting can hear one another. Participation in a meeting
as permitted in the preceding sentence constitutes presence in person at such
meeting. Every act or decision done or made by a majority of the directors
present at a meeting duly held at which a quorum is present shall be regarded as
the act of the Board of Directors, unless a greater number, or the same number
after disqualifying one or more directors from voting, is required by law, by
the Articles of Incorporation, or by these Bylaws. A meeting at which a quorum
is initially present may continue to transact business notwithstanding the
withdrawal of a director, provided that any action taken is approved by at least
a majority of the required quorum for such meeting.
Section 3.12 VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS.
-------------------------------- -------------------
The transactions of any meeting of the Board of Directors, however called and
noticed or wherever held, shall be as valid as though had at a meeting duly held
after regular call and notice, if a quorum is present and if, either before or
after the meeting, each of the directors who was not present signs a written
waiver of notice or a consent to holding such meeting or an approval of the
minutes thereof. All such waivers, consents or approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
Section 3.13 WAIVER OF NOTICE BY ATTENDANCE. Attendance of a
------------------------------
director at any meeting shall constitute a waiver of notice of such meeting,
unless a director attends for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called, noticed,
or convened.
Section 3.14 ADJOURNMENT. A majority of the directors present,
-----------
whether or not a quorum is present, may adjourn any meeting to another time and
place. If the meeting is adjourned for more than 24 hours, written notice of
any adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.
Section 3.15 FEES AND COMPENSATION. Directors and members of
---------------------
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by resolution of the
Board of Directors. No such payments shall preclude any director from serving
the corporation in any other capacity and receiving compensation in any manner
therefor.
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Section 3.16 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND
------------------------------------------------------
OTHER AGENTS.
- ------------
(a) The corporation shall, to the maximum extent and in the manner
permitted by the California Corporations Code ("Code"), indemnify each of its
directors against expenses (as defined in Section 317(a) of the Code),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Section 3.16, a "director" of the corporation
includes any person (i) who is or was a director of the corporation, (ii) who is
or was serving at the request of the corporation as a director of another
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was a director of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
(b) The corporation shall have the power, to the extent and in the
manner permitted by the Code, to indemnify each of its officers, employees and
agents against expenses (as defined in Section 317(a) of the Code), judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with any proceeding (as defined in Section 317(a) of the Code),
arising by reason of the fact that such person is or was an officer, employee or
agent of the corporation. For purposes of this Section 3.16, an "officer,"
"employee" or "agent" of the corporation includes any person (i) who is or was
an officer, employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was an officer, employee or agent of the corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
(c) Expenses incurred in defending any civil or criminal action or
proceeding for which indemnification is required pursuant to Section 3.16(a)
shall be paid by the corporation in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by or on behalf of the
indemnified party to repay such amount if it shall ultimately be determined that
the indemnified party is not entitled to be indemnified as authorized in this
Section 3.16. Expenses incurred in defending any civil or criminal action or
proceeding for which indemnification is permitted pursuant to Section 3.16(b)
may be paid by the corporation in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by or on behalf of the
indemnified party to repay such amount if it shall ultimately be determined that
the indemnified party is not entitled to be indemnified as authorized in this
Section 3.16.
(d) The indemnification provided by this Section 3.16 shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
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(e) The corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was an agent of the corporation
against any liability asserted against or incurred by such person in such
capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Section 3.16.
(f) No indemnification or advance shall be made under this Section
3.16, except where such indemnification or advance is mandated by law or the
order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(1) That it would be inconsistent with a provision of the Articles of
Incorporation, these Bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 3.17 TRANSACTIONS BETWEEN CORPORATIONS AND DIRECTORS.
-----------------------------------------------
(a) No contract or other transaction between the corporation and one
or more of its directors, or between the corporation and any corporation, firm
or association in which one or more of its directors has a material financial
interest, is either void or voidable because such director or directors or such
other corporation, firm or association are parties or because such director or
directors are present at the meeting of the Board of Directors or a committee
thereof which authorizes, approves or ratifies the contract or transaction, if:
(1) the material facts as to the transaction and as to such director's
interest are fully disclosed or known to the shareholders and such contract or
transaction is approved in good faith by the affirmative vote of a majority of
the shares entitled to vote represented at a duly held meeting at which a quorum
is present or by the written consent of shareholders, with the shares owned by
the interested director or directors not being entitled to vote thereon;
(2) the material facts as to the transaction and as to such director's
interest are fully disclosed or known to the Board of Directors or committee,
and the Board of Directors or committee authorizes, approves or ratifies the
contract or transaction in good faith by a vote sufficient without counting the
vote of the interested director or directors and the contract or transaction is
just and reasonable as to the corporation at the time it is authorized, approved
or ratified; or
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(3) as to contracts or transactions not approved as provided in
paragraph (1) or (2) of this subdivision, the person asserting the validity of
the contract or transaction sustains the burden of proving that the contract or
transaction was just and reasonable as to the corporation at the time it was
authorized, approved or ratified.
(b) No contract or other transaction between a corporation and any
corporation or association of which one or more of its directors are directors
is either void or voidable because such director or directors are present at the
meeting of the Board of Directors or a committee thereof which authorizes,
approves or ratifies the contract or transaction, if:
(1) The material facts as to the transaction and as to such director's
other directorship are fully disclosed or known to the Board of Directors or
committee, and the Board of Directors or committee authorizes, approves or
ratifies the contract or transaction in good faith by a vote sufficient without
counting the vote of the common director or directors or the contract or
transaction is approved by the shareholders (Section 153) of the General Corpo
ration Law of California in good faith; or
(2) As to contracts or other transactions not approved as provided in
paragraph (1) of this subdivision, the contract or transaction is just and
reasonable as to the corporation at the time it is authorized, approved or
ratified.
This subsection (b) does not apply to contracts or transactions
covered by subsection (a).
(c) A mere common directorship does not constitute a material
financial interest within the meaning of subsection (a) of this Section 3.17. A
director is not interested within the meaning of subsection (a) of this Section
3.17 in a resolution fixing the compensation of another director as a director,
officer or employee of the corporation, notwithstanding the fact that the first
director is also receiving compensation from the corporation.
(d) Interested or common directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes, approves or ratifies a contract or transaction.
ARTICLE IV
OFFICERS
Section 4.1 OFFICERS. The officers of the corporation shall be a
--------
Chief Executive Officer, a Secretary and a Chief Financial Officer. The
corporation may also have, at the discre tion of the Board of Directors, a
Chairman of the Board, a President, one or more Vice Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers and such other officers
as may be appointed in accordance with the provisions of Section 4.3 of this
article. Any number of offices may be held by the same person.
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Section 4.2 ELECTION. The officers of the corporation, except such
--------
officers as may be appointed in accordance with the provisions of Section 4.3 or
Section 4.5 of this article, shall be chosen annually by the Board of Directors,
and each shall hold his office until he shall resign or shall be removed or
otherwise disqualified to serve, or his successor shall be elected and
qualified.
Section 4.3 SUBORDINATE OFFICERS, ETC. The Board of Directors may
--------------------------
appoint, and may empower the Chairman of the Board, if there be such an officer,
or the Chief Executive Officer, to appoint such other officers as the business
of the corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in the Bylaws or as
the Board of Directors may from time to time determine by resolution. Any
appointment of an officer shall be evidenced by a written instrument filed with
the Secretary of the corporation and maintained with the corporate records.
Section 4.4 REMOVAL AND RESIGNATION. Subject, in each case, to the
-----------------------
rights, if any, of an officer under any contract of employment, any officer may
be removed, either with or without cause, by the Board of Directors at any
regular or special meeting thereof, or, except in case of an officer chosen by
the Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
Board of Directors or to the Chairman of the Board or to the Chief Executive
Officer or to the Secretary of the corporation, without prejudice, however, to
the rights, if any, of the corporation under any contract to which such officer
is a party. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 4.5 VACANCIES. A vacancy in any office because of death,
---------
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws.
Section 4.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if
---------------------
there shall be such an officer, shall, if present, preside at all meetings of
the Board of Directors and exercise and perform such other powers and duties as
may be from time to time assigned to him by the Board of Directors or prescribed
by these Bylaws.
Section 4.7 CHIEF EXECUTIVE OFFICER. Subject to such supervisory
-----------------------
powers, if any, as may be given by the Board of Directors to the Chairman of the
Board, if there be such an officer, the Chief Executive Officer shall be the
Chief Executive Officer and chief operating officer of the corporation and
shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the officers and business of the
corporation. He shall preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall have the general powers and duties of
management usually vested in the offices of the Chief Executive Officer and
chief operating
17
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officer of a corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or the Bylaws.
Section 4.8 VICE PRESIDENT. In the absence or disability of the
--------------
Chief Executive Officer, the Vice Presidents, if any, in order of their rank as
fixed by the Board of Directors or, if not ranked, the Vice President designated
by the Board of Directors, shall perform all the duties of the Chief Executive
Officer, and when so acting shall have all the powers of, and be subject to all
the restrictions upon, the Chief Executive Officer. The Vice Presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors or these Bylaws, or
as the Chief Executive Officer may from time to time delegate.
Section 4.9 SECRETARY.
---------
(a) Corporate Records. The Secretary shall keep or cause to be kept,
-----------------
at the principal executive office and such other place as the Board of Directors
may direct, the seal of the corporation, copies of the Articles of Incorporation
and Bylaws of the corporation, a book of minutes of actions taken at all
meetings of shareholders, the Board of Directors and committees of the Board of
Directors with the time and place of holding, whether regular or special, and,
if special, how authorized, the notice given, the names of those present at
directors' meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.
(b) Share Register. The Secretary shall keep, or cause to be kept, at
--------------
the principal executive office or at the office of the corporation's transfer
agent, a share register, or a duplicate share register, showing the names of the
shareholders and their addresses, the number and classes of shares held by each,
the number and date of certificates issued for the same, and the number and date
of cancellation of every certificate surrendered for cancellation.
(c) Other Duties. The Secretary shall give, or cause to be given,
------------
notice of all the meetings of the shareholders and of the Board of Directors
required by the Bylaws or by law to be given, and he shall keep the seal of the
corporation in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or by the Bylaws.
Section 4.10 CHIEF FINANCIAL OFFICER.
-----------------------
(a) Books of Account. The Chief Financial Officer of the corporation
----------------
shall keep and maintain, or cause to be kept and maintained, adequate and
correct accounts of the properties and business transactions of the corporation,
and shall send or cause to be sent to the shareholders of the corporation such
financial statements and reports as are by law or these Bylaws required to be
sent to them. The books of account shall at all reasonable times be open to
inspection by any director.
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(b) Other Duties. The Chief Financial Officer shall deposit all
------------
monies and other valuables in the name and to the credit of the corporation with
such depositaries as may be designated by the Board of Directors. The Chief
Financial Officer shall disburse the funds of the corporation as may be ordered
by the Board of Directors, shall render to the Chief Executive Officer and
directors, whenever they request it, an account of all of his transactions as
chief financial officer and of the financial condition of the corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the Board of Directors or the Bylaws.
ARTICLE V
GENERAL CORPORATE MATTERS
Section 5.1 RECORD DATE.
-----------
(a) When Fixed by Board of Directors. The Board of Directors may fix
--------------------------------
a time in the future as a record date for the determination of the shareholders
entitled to notice of and to vote at any meeting of shareholders or entitled to
give consent to corporate action in writing without a meeting, to receive any
report, to receive any dividend or distribution, or any allotment of rights, or
to exercise rights in respect of any other lawful action. The record date so
fixed shall be not more than sixty (60) days nor less than ten (10) days prior
to the date of any meeting, nor more than sixty (60) days prior to any other
event for the purposes of which it is fixed. When a record date is so fixed,
only shareholders of record at the close of business on that date are entitled
to notice of and to vote at any such meeting, to give consent without a meeting,
to receive any report, to receive a dividend, distribution, or allotment of
rights, or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date,
except as otherwise provided in the Articles of Incorporation or these Bylaws.
(b) When Not Fixed by Board of Directors. In the event no record
------------------------------------
date is fixed by the Board of Directors:
(1) The record date for determining the shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(2) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors has been taken, shall be the day on which the first
written consent is given.
(3) The record date for determining shareholders for any other purpose
shall be at the close of business on the date on which the Board of Directors
adopts the resolution relating thereto, or the sixtieth (60th) day prior to the
date of such other action, whichever is later.
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Section 5.2 INSPECTION OF CORPORATE RECORDS.
-------------------------------
(a) By Shareholders. The accounting books and records, the record of
---------------
shareholders, and minutes of proceedings of the shareholders and the Board of
Directors and committees of the Board of Directors of this corporation and any
subsidiary of this corporation shall be open to inspection upon the written
demand on the corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours, for a purpose
reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate. Such inspection by a shareholder or holder of
a voting trust certificate may be made in person or by agent or attorney, and
the right of inspection includes the right to copy and make extracts.
(b) By Directors. Every director shall have the absolute right at any
------------
reasonable time to inspect and copy all books, records and documents of every
kind and to inspect the physical properties of the corporation. Such inspection
by a director may be made in person or by agent or attorney and the right of
inspection includes the right to copy and make extracts.
Section 5.3 MAINTENANCE AND INSPECTION OF BYLAWS. The corporation
------------------------------------
shall keep at its principal executive office, or if its principal executive
office is not in the State of California, at its principal business office in
this state, the original or a copy of the Bylaws as amended to date, which shall
be open to inspection by the shareholders at all reasonable times during office
hours. If the principal executive office of the corporation is outside the
State of California and the corporation has no principal business office in this
state, the Secretary shall, upon the written request of any shareholder, furnish
to that shareholder a copy of the Bylaws as amended to date.
Section 5.4 ANNUAL AND OTHER REPORTS. The Board of Directors of the
------------------------
corporation shall cause an annual report to be sent to the shareholders at least
fifteen (15) days prior to the annual meeting of shareholders but not later than
one hundred twenty (120) days after the close of the fiscal year in accordance
with the provisions of the General Corporation Law of California.
Section 5.5 CHECKS, DRAFTS, ETC. All checks, drafts or other orders
--------------------
for payment of money, notes or other evidences of indebtedness, and any
assignment or endorsement thereof, issued in the name of or payable to the
corporation, shall be signed or endorsed by such person or persons and in such
manner as, from time to time, shall be determined by resolution of the Board of
Directors.
Section 5.6 CONTRACTS, ETC., HOW EXECUTED. The Board of Directors,
-----------------------------
except as in the Bylaws otherwise provided, may authorize any officer or
officers, agent or agents, to enter into any contract or execute any instrument
in the name of and on behalf of the corporation, and such authority may be
general or confined to specific instances; and, unless so authorized or ratified
by the Board of Directors or within the agency power of an officer, no officer,
agent or employee shall have any power or authority to bind the corporation by
any
20
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contract or engagement or to pledge its credit or to render it liable for any
purpose or to any amount.
Section 5.7 CERTIFICATE FOR SHARES. Every holder of shares in the
----------------------
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman of the Board or the Chief Executive Officer or a
Vice President and by the Chief Financial Officer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if such person were an officer, transfer agent or registrar at
the date of issue.
Section 5.8 LOST, STOLEN OR DESTROYED CERTIFICATES. No new
--------------------------------------
certificates for shares shall be issued to replace an old certificate unless the
latter is surrendered and canceled at the same time; provided, however, that the
Board of Directors or the Chief Executive Officer and any Vice President may,
however, in case any certificate for shares is lost, stolen, mutilated or
destroyed, authorize the issuance of a new certificate in lieu thereof, upon
such terms and conditions, including reasonable indemnification of the
corporation, as the Board of Directors or the Chief Executive Officer or any
Vice President shall determine. In the event of the issuance of a new
certificate, the rights and liabilities of the corporation, and of the holders
of the old and new certificates, shall be governed by the relevant provisions of
the California Commercial Code.
Section 5.9 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
----------------------------------------------
Chairman of the Board, the Chief Executive Officer or any Vice President, or any
other person authorized by resolution of the Board of Directors or by any of the
foregoing designated officers, are authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of any
other corporation or corporations standing in the name of this corporation. The
authority herein granted to said officers to vote or represent on behalf of this
corporation any and all shares held by this corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
other person authorized so to do by proxy or power of attorney duly executed by
these officers.
Section 5.10 CONSTRUCTION AND DEFINITIONS. Unless the context
----------------------------
otherwise requires, the general provisions, rules of construction and
definitions contained in the General Corporation Law of California shall govern
the construction of these Bylaws. Without limiting the generality of the
foregoing, the masculine gender includes the feminine and neuter, the singular
number includes the plural and the plural number includes the singular, and the
term "person" includes a corporation as well as a natural person.
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ARTICLE VI
AMENDMENTS
Section 6.1 POWER OF SHAREHOLDERS. New bylaws may be adopted or
---------------------
these Bylaws may be amended or repealed by the affirmative vote or written
consent of at least two-thirds of the outstanding shares entitled to vote
thereon, except as otherwise provided by law or by the Articles of
Incorporation.
Section 6.2 POWER OF DIRECTORS. Subject to the right of shareholders
------------------
as provided in Section 6.1 of this Article VI to adopt, amend or repeal bylaws,
bylaws may be adopted, amended or repealed by the Board of Directors; provided,
however, that any alteration, amendment, supplement or repeal of the bylaws
contained in Sections 2.3, 2.8, 2.11, 3.3, 6.1 or 6.2 shall require the
affirmative vote of at least two-thirds of the outstanding shares of the capital
stock of the corporation entitled to vote (including the affirmative vote of at
least two-thirds of the outstanding shares of any class or series of capital
stock of the corporation entitled to vote separately).
22
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of United PanAm
Financial Corp., a California corporation; and
2. That the foregoing Bylaws, comprising ___ pages, including this
page, (i) constitute the Bylaws of said corporation as duly adopted by action of
the Board of Directors and the shareholders of the corporation duly taken on
April ___, 1998, and (ii) are in full force and effect and have not been
modified or rescinded at the date hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of said corporation this _____ day of April, 1998.
__________________________________
Lawrence J. Grill
23
<PAGE>
EXHIBIT 4.2
AGREEMENT OF MERGER
This Agreement of Merger is entered into as of the ____ of April,
1998, between United PanAm Financial Corp., a California corporation (the
"Surviving Corporation"), and United PanAm Financial Corp., a Delaware
corporation (the "Merging Corporation").
RECITALS
WHEREAS, the stockholders of the Merging Corporation and the
shareholder of the Surviving Corporation desire to merge the Merging Corporation
with and into the Surviving Corporation (the "Merger"); and
WHEREAS, the Boards of Directors of the Merging Corporation and the
Surviving Corporation believe the Merger to be in the best interests of the
respective corporations;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein set forth and for the purpose of prescribing the
terms and conditions of the Merger, the parties hereto agree as follows:
ARTICLE I
THE MERGER
----------
At the Effective Time (as defined in Article IX hereof) of the Merger,
the Merging Corporation shall be merged with and into the Surviving Corporation
which shall thereupon be the surviving corporation, and the separate corporate
existence of the Merging Corporation shall cease.
ARTICLE II
NAME
----
The name of the surviving corporation shall be "United PanAm Financial
Corp."
ARTICLE III
ARTICLES OF INCORPORATION
-------------------------
The Articles of Incorporation of the Surviving Corporation as in
effect immediately prior to the Effective Time shall, at and after the Effective
Time, continue to be the Articles of Incorporation of the surviving corporation.
1
<PAGE>
ARTICLE IV
BYLAWS
------
The Bylaws of the Surviving Corporation as in effect immediately prior
to the Effective Time shall, at and after the Effective Time, continue to be the
Bylaws of the surviving corporation.
ARTICLE V
DIRECTORS
---------
The directors of the Merging Corporation immediately prior to the
Effective Time, shall, at and after the Effective Time, serve as the directors
of the surviving corporation until its next annual meeting of shareholders or
until such time as their successors have been elected and qualified.
ARTICLE VI
RIGHTS AND DUTIES OF SURVIVING CORPORATION
------------------------------------------
At and after the Effective Time, all rights, privileges, powers and
franchises and all property and assets of every kind and description of the
Surviving Corporation and the Merging Corporation shall be vested in and be held
and enjoyed by the surviving corporation, without further act or deed, and all
the estates and interests of every kind of the Surviving Corporation and the
Merging Corporation, including all debts due to any of them, shall be as
effectively the property of the surviving corporation as, prior to the Effective
Time, they were the property of the Surviving Corporation and the Merging
Corporation, and the title to any real estate vested by deed or otherwise in
either the Surviving Corporation or the Merging Corporation shall not revert or
be in any way impaired by reason of the Merger; and all rights of creditors and
liens upon any property of the Surviving Corporation and the Merging Corporation
shall be preserved unimpaired and all debts, liabilities and duties of the
Surviving Corporation and the Merging Corporation shall be debts, liabilities
and duties of the surviving corporation and may be enforced against it to the
same extent as if said debts, liabilities and duties had been incurred or
contracted by it.
2
<PAGE>
ARTICLE VII
CONVERSION OF SHARES
--------------------
In and by virtue of the Merger and at the Effective Time, pursuant to
this Merger Agreement, the shares of the Surviving Corporation's common stock
(the "Surviving Corporation Stock") and the shares of the Merging Corporation's
common stock (the "Merging Corporation Stock") outstanding at the Effective Time
shall be converted as follows:
(a) Effect on Surviving Corporation Stock Each share of the Surviving
-------------------------------------
Corporation Stock issued and outstanding immediately prior to the Effective Time
shall be automatically canceled and cease to be an issued and outstanding share
of the Surviving Corporation.
(b) Effect on Merging Corporation Stock Each share of the Merging
-----------------------------------
Corporation Stock issued and outstanding immediately prior to the Effective Time
shall be automatically converted into one share of Surviving Corporation Stock.
ARTICLE VII
FURTHER ACTION
--------------
The parties hereto shall execute and deliver, or cause to be executed
and delivered, all such deeds and other instruments, and shall take or cause to
be taken all further or other action as they may deem necessary or desirable, in
order to vest in and confirm to the Surviving Corporation title to and
possession of all of Merging Corporation's property, rights, privileges,
licenses, powers and franchises, and otherwise to carry out the intent and
purposes of this Merger Agreement.
ARTICLE IX
EFFECTIVE TIME
--------------
The Merger shall become effective upon the filing, in accordance with
Section 1103 of the California General Corporation Law, of a copy of this Merger
Agreement and all other requisite accompanying certificates in the office of the
Secretary of State of the State of California (the "Secretary of State"). The
date and time of such filing with the Secretary of State is referred to herein
as to the "Effective Time."
ARTICLE X
SUCCESSORS AND ASSIGNS
----------------------
This Merger Agreement shall be binding upon and enforceable by the
parties hereto and their respective successors, assigns and transferees, but
this Merger Agreement may not be assigned by any party hereto without the
written consent of the other.
3
<PAGE>
ARTICLE XI
GOVERNING LAW
-------------
This Merger Agreement has been executed in the State of California,
and the laws of the State of California shall govern the validity and
interpretation hereof and the performance by the parties hereto.
ARTICLE XII
TERMINATION
-----------
This Merger Agreement may, by the mutual consent and action of the
respective Boards of Directors of the Surviving Corporation and the Merging
Corporation, be abandoned at any time, but not later than the filing of this
Merger Agreement with the Secretary of State of the State of California pursuant
to Section 1103 of the California General Corporation Law.
IN WITNESS WHEREOF, the Surviving Corporation and the Merging
Corporation, pursuant to the approval and authority duly given by resolution of
their respective Boards of Directors, have caused this Merger Agreement to be
signed by their respective presidents and secretaries on the day and year first
above written.
UNITED PANAM FINANCIAL CORP.,
a California corporation
By:_______________________________________
Lawrence J. Grill, President
By: _______________________________________
Lawrence J. Grill, Secretary
[Signatures continued on next page]
4
<PAGE>
UNITED PANAM FINANCIAL CORP.,
a Delaware corporation
By:_______________________________________
Lawrence J. Grill, President
By: _______________________________________
Lawrence J. Grill, Secretary
5
<PAGE>
Exhibit 10.34.1
AMENDED AND RESTATED
INTERIM OPERATING AGREEMENT
This Amended and Restated Interim Operating Agreement ("Agreement") is made
effective as of December 31, 1997, by and between UNITED PANAM MORTGAGE CORP., a
California corporation formerly known as PAB Mortgage Corporation ("Mortgage
Company"), and PAN AMERICAN BANK, FSB, a federal savings bank ("Bank") with
reference to the following:
R E C I T A L S
A. Effective July 1, 1997, Bank distributed, by way of dividend to its
parent, all of the issued and outstanding shares of capital stock of the
Mortgage Company, as contemplated by that certain letter of January 28, 1997
submitted to the Office of Thrift Supervision ("OTS"), in connection with the
Bank's letter application, dated January 27, 1997, to establish the Mortgage
Company as an operating subsidiary on an interim basis (the "OTS Application").
The organization of the Mortgage Company and the transfer of its shares by
dividend were the subject of no objection or approval letters issued by the OTS
on February 20, 1997 and April 2, 1997. The Mortgage Company had been
incorporated by the Bank on January 10, 1997, to acquire certain lending
business currently conducted by the Bank at the offices listed on Schedule "A"
("Mortgage Company Offices") and to conduct such operations on an interim basis
pending the transfer of the Mortgage Company to its parent. Effective July 1,
1997, it commenced such operation pursuant to an Interim Operating Agreement,
dated as of July 1, 1997, as amended by a First Amendment to Operating Agreement
dated as of December 12, 1997 (the "Original Agreement").
B. The foregoing transactions were undertaken as part of the transfer
from the Bank of its entire existing subprime single-family mortgage loan
origination and mortgage banking business (the "Subprime Business") to the
Mortgage Company. In addition to the Mortgage Company assets described above,
following the expiration of the Term of this Agreement (as defined below), such
transfer will include the assumption by the Mortgage Company of all obligations
of the Bank under office leases for the Mortgage Company Offices and the
assignment of such leases to the Mortgage Company, the transfer of all employees
conducting the Subprime Business and the assumption of certain maintenance and
other service contracts in so far as such service contracts relate to the
Subprime Business.
C. Following completion of the transfer of the entire Subprime Business,
it is anticipated that the Bank will continue to underwrite loans originated by
the Mortgage Company for a fee and to purchase loans from the Mortgage Company
in the manner generally described in the OTS Application, on such terms and
procedures as are provided therein or as such terms and procedures may be
modified from time-to-time.
-1-
<PAGE>
D. In order to complete the transfer of the Subprime Business by the Bank
to the Mortgage Company, the Mortgage Company and certain of its employees and
agents involved in the origination, production and/or servicing of mortgage
loans are required to be licensed or to obtain or confirm exemptions from
licensing under various laws in effect in the states in which the Mortgage
Company maintains Mortgage Company Offices or otherwise originates or acquires
mortgage loans ("State Licensing Requirements"). The Bank, as a federally-
chartered savings bank, and its employees, are generally exempt from State
Licensing Requirements and can originate, produce and service mortgage loans
without the necessity of obtaining licenses or permits in the states in which
Subprime Business is currently conducted.
E. The Mortgage Company and the Bank wish to provide for the continued
origination and production of mortgage loans in connection with the Subprime
Business by the Bank and its employees and agents on an interim basis, pending
receipt by the Mortgage Company of all licenses, permits, authorizations and
exemptions required to satisfy State Licensing Requirements, in order to assure
the effective transition of the Subprime Business from the Bank to the Mortgage
Company, and completion by United PanAm Financial Corp. ("Holding Company"), the
parent of the Bank and the Mortgage Company, of an initial public offering of
its common stock, the proceeds of which will be used, in part, to provide
capital to the Bank and the Mortgage Company.
F. The parties have evaluated the ongoing relationship between the Bank
and the Mortgage Company and desire to amend and restate the Original Agreement
in its entirety to reallocate the benefits and burdens of the Subprime Business
as provided in this Agreement.
NOW, THEREFORE, the Mortgage Company and the Bank agree as follows:
I. Term. This Agreement shall remain in effect from December 31, 1997 until
----
the later of (a) the end of the month following the month in which the initial
public offering of the Holding Company is concluded; and the end of the month in
which the Mortgage Company satisfies all State Licensing Requirements (the
"Term"). The terms hereof shall also apply to all Subprime Business conducted
during the fourth quarter of 1997.
1. Production Employees. During the Term the Bank shall retain all loan
--------------------
origination and production employees and agents engaged in the Subprime Business
("Production Employees") under its direct employ. Production Employees shall be
transferred to the Mortgage Company upon the expiration of the Term. During the
Term, the Bank shall remain responsible for the payment of all wages and other
benefits due such employees.
2. Eligible Loans. During the Term, the Bank shall continue to originate
--------------
and fund through the Production Employees subprime mortgage loans meeting its
underwriting guidelines and other requirements ("Eligible Loans"), which loan
programs and underwriting guidelines shall be specified jointly by the Mortgage
Company and the Bank. Such
-2-
<PAGE>
requirements shall include, among other things, requirements relating to owner
occupancy; loan-to-value ratios; lien priority; title, hazard, flood and
mortgage insurance; appraisal; borrower financial and credit history; loan
documentation, and compliance with state and federal laws and regulations.
3. Mortgage Company Offices. The parties recognize that certain State
------------------------
Licensing Requirements apply to the Mortgage Company Offices. To that end,
during the Term, the Bank shall continue to lease and remain obligated to
landlords under the office leases relating to the Mortgage Company Offices, and
shall pay all rent, utilities, insurance and other costs related to the
operation and maintenance of such offices, as well as to the loan production and
origination functions conducted at the Mortgage Company Offices, including all
personnel costs, telephones, and other Operating Expenses ("Office Expenses").
Such Office Expenses shall be paid during the Term by the Bank, and following
expiration of the Term by the Mortgage Company. To the extent the Bank retains
any liability to landlords for periods following the expiration of the Term
respecting the leases of the Mortgage Company Offices, the Mortgage Company
shall indemnify and hold the Bank harmless from any such liabilities. The
Mortgage Company shall not charge the Bank for use of the Mortgage Company
Office assets, which have been sold to the Mortgage Company and the Bank may
after July 1 acquire the assets necessary to originate and fund subprime
mortgage loans. Such assets acquired by the Bank after July 1 shall be sold to
the Mortgage Company at net book value upon satisfaction of State Licensing
Requirements.
4. Administrative Services. During the Term, Mortgage Company shall
-----------------------
administer and supervise all Subprime Business conducted at the Mortgage Company
Offices to the extent consistent with applicable law and regulations. Such
services shall be provided as part of the Secondary Marketing Services described
below.
5. Secondary Marketing. During the Term, the Mortgage Company shall be
-------------------
responsible for all activities and related overhead and other expenses related
to administration of the Subprime Business, and the marketing and sale of
Eligible Loans originated and funded by the Bank during the Term, including the
securitization or other sale of loans, solicitation of bids for loans, advising
the Bank regarding sales pricing and related matters ("Secondary Marketing
Services"). This Agreement shall constitute the written authorization of the
Bank to the Mortgage Company to act as the Bank's agent for such purposes,
subject to applicable OTS regulations. For such Secondary Marketing Services
during the Term, the Mortgage Company shall be entitled to receive reimbursement
of its operating expenses and a Marketing Fee as described in Section 6 below.
6. Compensation of Mortgage Company. For Secondary Marketing Services
--------------------------------
performed by the Mortgage Company, it shall be entitled to reimbursement by the
Bank for all marketing, personnel, administrative and other costs and expenses
incurred by the Mortgage Company in connection with the performance of such
services, plus a marketing fee equal to 20% of such costs and expenses.
-3-
<PAGE>
7. Amendments to Agreement. The parties agree to negotiate in good
-----------------------
faith respecting the reallocation of expenses and income should it appear that
the allocation of expenses and income in Section 6 did not fairly reflect the
terms of the economic relationship contemplated by the parties.
8. Indemnity. The Mortgage Company shall indemnify and hold harmless
---------
the Bank from and against any obligations or liabilities that the Bank may have
arising out of (a) any claim by any investor who purchased Eligible Loans sold
by the Bank during the Term, respecting indemnification for losses or the
repurchase of loans from such investor; (b) the leases, sums due Production
Employees or other expenses connected with the operation of the Mortgage Company
Offices or the conduct of the Subprime Business following the Term; and (c) any
assets transferred to or liabilities assumed by the Mortgage Company in
connection with the Subprime Business.
Executed effective as of December 31, 1997.
"Mortgage Company"
UNITED PANAM MORTGAGE CORP.
By: /s/ Lawrence J. Grill
-----------------------------
Title: Vice President
-------------------------
"Bank"
PAN AMERICAN BANK, FSB
By: /s/ Lawrence J. Grill
-----------------------------
Title: President
-------------------------
-4-
<PAGE>
Exhibit 10.39.1
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement is entered into as of
March 25, 1998 by and between United PanAm Financial Corp, formerly known as Pan
American Group, Inc. ("PAGI"), Pan American Bank, FSB (the "Bank"; the Bank and
PAGI are individually and collectively referred to as "Employer") and Lawrence
J. Grill ("Employee") and is intended to amend that certain Employment Agreement
between Employer and Employee dated as of October 1, 1997 (the "Employment
Agreement").
The parties agree as follows:
1. The provisions to Schedule 4(c) to the Employment Agreement respecting
stock option plan benefits is hereby amended in its entirety to provide as
follows:
"Concurrently with the initial public offering of PAGI, PAGI shall
grant to Employee a ten-year option to purchase 60,000 shares of the
Common Stock of PAGI at a price per share equal to 100% of the initial
public offering price of such shares. Such Option shall vest as to 25%
of the shares covered thereby on October 15, 1998, with an additional
25% vesting on each of October 15, 1999, 2000 and 2001. The other
terms and conditions of such option shall be as provided in a standard
form of Stock Option Agreement under the 1997 Employee Stock Incentive
Plan of PAGI."
2. All other terms of the Employment Agreement will remain in full
force and effect without further amendment.
1
<PAGE>
Executed effective as of March 25, 1998.
UNITED PANAM FINANCIAL CORP.
By: /s/ Guillermo Bron
-----------------------------
Its: Chairman
-----------------------------
EMPLOYEE
/s/ Lawrence J. Grill
-----------------------------
Lawrence J. Grill
2
<PAGE>
Exhibit 10.40.1
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement is entered into as of
March 25, 1998 by and between United PanAm Financial Corp, formerly known as Pan
American Group, Inc. ("PAGI"), Pan American Bank, FSB (the "Bank"; the Bank and
PAGI are individually and collectively referred to as "Employer") and Guillermo
Bron ("Employee") and is intended to amend that certain Employment Agreement
between Employer and Employee dated as of October 1, 1997 (the "Employment
Agreement").
The parties agree as follows:
1. The provisions to Schedule 4(c) to the Employment Agreement respecting
stock option plan benefits is hereby amended in its entirety to provide as
follows:
"Concurrently with the intial public offering of PAGI, PAGI shall
grant to Employee a ten-year option to purchase 60,000 shares of the
Common Stock of PAGI at a price per share equal to 110% of the initial
public offering price of such shares. Such Option shall vest as to 25%
of the shares covered thereby on October 15, 1998, with an additional
25% vesting on each of October 15, 1999, 2000 and 2001. The other
terms and conditions of such option shall be as provided in a standard
form of Stock Option Agreement under the 1997 Employee Stock Incentive
Plan of PAGI."
2. All other terms of the Employment Agreement will remain in full
force and effect without further amendment.
1
<PAGE>
Executed effective as of March 25, 1998.
UNITED PANAM FINANCIAL CORP.
By: /s/ Lawrence J. Grill
-----------------------------
Its: President
-----------------------------
EMPLOYEE
By: /s/ Guillermo Bron
-----------------------------
Guillermo Bron
2
<PAGE>
EXHIBIT 10.48.1
PAN AMERICAN BANK, FSB
RETAIL BANK MANAGEMENT INCENTIVE PLAN
As Amended Effective July 1, 1997
The purpose of the Pan American Bank, FSB ("PAB") Retail Bank Management
Incentive Plan described herein is as follows:
. To provide an annual incentive for those key management associates
within the Retail Bank Division who have the ability to make an impact
on the financial results of the organization.
. To reinforce the Bank's annual financial objectives.
. To provide competitive rewards to key management associates
commensurate with the Bank's financial success.
Effective Date
- --------------
The original effective date of the Plan is June 30, 1996 and covered the fiscal
year 1997 (July 1, 1996 to June 30, 1997). The Plan will have a special "stub
year" for the period of July 1, 1997 through December 31, 1997. The next full
year of the Plan shall be January 1, 1998 through December 31, 1998. The Plan
has no termination date, but the Company reserves the right to change the
provisions of the Plan at any time.
Administration
- --------------
The Plan shall be administered by the President and the SVP/Controller, subject
to the concurrence of the Chairman of the Board. The Board of Directors will
approve the Plan and any changes to the Plan. Approval of all awards, other
than his own, shall be made by the President subject to first being submitted to
the Board of Directors for final approval.
Eligibility
- -----------
Eligibility for the Plan is to include the PAB Retail Bank management
associates, who by the nature of their responsibilities have the ability to make
a significant impact on profitability and are selected for participation in the
Plan by the President and the SVP/Controller and approved by the Board.
Participants must be employed and in good standing by PAB at the time the
bonuses are payable (generally within 60 days following the year end) to be
eligible.
1
<PAGE>
OVERVIEW OF THE PLAN
The Plan works essentially as follows:
. Each year, plan participants will be assigned a Target Bonus represented
as a percentage of salary and based on full achievement of approved
financial and management objectives.
. Financial and management objectives will be established that reflect goals
critical to the success of the Bank. Income Before Taxes will always be a
primary goal, but other financial goals and management objectives may vary
from year to year. A weighting is established for each of these goals
dependent on the importance to the Bank. Financial objectives may or may
not be the same as the approve budget.
. Entry level and maximum financial performance targets will be established
as well.
. The total of the Target Bonus values for all participants in the program
will constitute the Target Bonus Pool for the Bank.
. The Attainment Percent, represented as a percentage of target shall be
calculated based upon the actual results compared to entry level, target
and maximum values described in the Plan schedule for the year. The
Attainment Percent will be the extrapolated results, rounded to the nearest
tenth of a percent, using either the entry level and target values or
target level and maximum values.
. Actual Bonus Earned for participants is calculated based on the Attainment
Percent for each of the established goals, the Weighting of the goal, and
the Target bonus for each of the participants.
. No bonus is payable on management and other financial objectives if the
entry level is not attained for Income Before Taxes. This means that even
if objectives are met for other established goals, no bonus will be payable
on these objectives, and no bonus will be payable under the Plan, until at
least the entry level goal for Income Before Taxes is attained.
. Bonuses will generally be awarded within sixty (60) days following the
year end. At the discretion of the President or the Chairman of the Board,
bonus awards may be delayed subsequent to the certified audit of the year
during which the bonus was earned.
2
<PAGE>
SIZE OF TARGET BONUS
A Target Bonus will be assigned to each position according to competitive market
conditions, salary surveys and internal relationships of jobs with the Bank.
Base salary used in calculating the Target Bonus is typically defined as the
current annual salary in effect subsequent to salary reviews for officers each
year, but that may be modified given a promotion of a participant and the
approval of both the President and the Board. In the event that an individual's
Target Bonus Level changes during the course. of the year, the assigned Target
Bonus will be recalculated on a pro-rata basis according to the amount of time
spent at each bonus level.
ENTRY INTO THE PLAN, CHANGE OF ASSIGNMENT --TRANSFER
If an employee enters the Plan mid-year, he/she will participate in the Plan on
a pro-rata basis dependent on the number of months, rounded to the nearest half
month, in the Plan. In the event of a change of assignment which would result
in a change of Target Bonus during the course of the year, the assigned Target
Bonus(es) will be computed on the base salary figure received at each position.
TERMINATION PROVISIONS
Release, Reduction in Work Force, or Resignation
- ------------------------------------------------
If a participant in the Plan is not on the payroll at the end of the Plan year,
and at the time the bonuses are awarded, a bonus will not be paid regardless of
- ---
length of service or reason for termination or resignation, except as provided
for under the next section.
Termination Due to Death or Retirement, and Employees on Total and Permanent
- ----------------------------------------------------------------------------
Disability or Approved Leaves of Absence
- ----------------------------------------
A pro-rata bonus based on active employment is payable under these circumstances
and will be based upon the assigned Target Bonus and corresponding base salary
received while covered under the Plan.
Discharge by the Company for Willful and Deliberate or Gross Misconduct
- -----------------------------------------------------------------------
Any right of the employee to a bonus under the Plan shall be forfeited.
3
<PAGE>
DEFINITIONS
GOALS
- -----
Income Before Tax
- -----------------
Income before tax is defined as the dollar amount shown on the PAB Certified
Financials in each year. This amount should include a provision for the accrual
of bonus at the targeted amounts.
PLAN TERMS
Entry Level
- -----------
This is defined as the minimum performance, as approved by the Board of
Directors, expected to be achieved for any bonus to be awarded.
Target Level
- ------------
This is the level against which a maximum award would be paid if the amount or
greater is achieved.
Target Percentage of Salary
- ---------------------------
This is the target amount, represented as a percentage of salary that will be
awarded the participant if the Bank is to meet all of its financial and
management objectives at the target level.
Attainment Percent
- ------------------
This shall be calculated based upon the actual results compared to entry level,
target and maximum values described in the Plan schedule for the year. The
Attainment Percent will be the extrapolated results, rounded to the nearest
tenth of a percent, using either the entry level and target values of target
level and maximum values.
Weighting of Goals
- ------------------
Shall be the weighting as represented in a whole percent that has been
established for each of the financial and management goals.
Total Bonus Percent Earned
- --------------------------
This represents the sum of PAB's performance against goals and is to be
calculated for each goal by multiplying the Attainment Percent by the Weighting
that has been established for each goal. This should be expressed to the
nearest tenth of a percent. The result for each of the goals is then totaled to
represent the Total Bonus Percent Earned.
4
<PAGE>
Total Bonus Earned
- ------------------
Total Bonus Percent Earned represents the bonus due a participant and is to be
calculated by multiplying the Total Bonus Percent Earned by the Participants'
Target Percentage. The result is then multiplied by the salary of the
participant and may be further reduced by the percentage of the year that the
participant was not employed if he/she was not with the Bank at the beginning of
the year.
5
<PAGE>
PAN AMERICAN BANK, FSB
RETAIL BANK MANAGEMENT INCENTIVE PLAN
Attachment
Special Stub Year
Period July 1, 1997 through December 31, 1997
Eligible Participants
- ---------------------
Key PAB Retail Bank management associates for the period stated above shall be
the following positions:
. VP/Retail Markets and Operations
. Retail Sales and Training Manager
. Marketing Director
. Branch Sales Manager, Mission Branch
. Branch Sales Manager, San Mateo Branch
. Branch Sales Manager, Burlingame Branch
. Branch Sales Manager, San Carlos Branch
. Branch Sales Manager, Panorama City Branch
All incumbents must meet the eligibility requirements as stated in the Plan.
Determination of Bonus Awards
- -----------------------------
Due to the change from fiscal to calendar year, this "stub year" has been
established. Bonuses will be determined based on individual and corporate
performance. The bonuses awarded for this period will be at the discretion of
the SVP/Controller, the President and the Chairman of the Board following review
of performance.
6
<PAGE>
PAN AMERICAN BANK, FSB
RETAIL BANK MANAGEMENT INCENTIVE PLAN
Attachment
Calendar Year Beginning January 1, 1998
In January, the SVP/Controller, the President and the Board of Directors will
determine the eligible positions for the current Retail Bank Management
Incentive Plan. At that time, goals as described in the Plan will be
determined, and Target incentives will be selected as described within the Plan.
7
<PAGE>
Retail Markets and Operations Bonus Program
<TABLE>
<CAPTION>
SAMPLE
Eligible Participants
- ------------------------------------------------------------------------------------------------------------------------------------
Salary Salary TARGET BONUS Minimum Bonus Maximum Bonus
Name Title Monthly Annual % $ Total Comp. % $ % $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Each Incumbent Position Title $ $ As Determined $ $ 50% of Target 15% of Target
- ------------------------------------------------------------------------------------------------------------------------------------
Totals $0 $0
</TABLE>
<TABLE>
<CAPTION>
Measurements
- ----------------------------------------------------------------------------------------------------------------------------------
Goals(1) Weighting Target Minimum Maximum Actual %Earned
<S> <C> <C> <C> <C> <C> <C>
Deposit Level 30% TBD 85% of Target 115% of Target
Fee Income 30% TBD 85% of Target 115% of Target
Operating Expenses 10% TBD 85% of Target 115% of Target
Individual Objectives 30% TBD 85% of Target 115% of Target
1) Goals to be established for each branch, cumulative goals, non-branch management associates.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Consolidated bank minimum pretax income goal and minimum ROE goal must be met to
qualify for any bonus award.
8
<PAGE>
Exhibit 10.48.2
PAN AMERICAN BANK, FSB
CORPORATE MANAGEMENT INCENTIVE PLAN
As Amended Effective July 1, 1997
The purpose of the Pan American Bank, FSB ("PAB") Management Incentive Plan
(MICP) described herein is as follows:
. To provide an annual incentive for those key executives who have the
ability to make an impact on the financial results of the organization.
. To reinforce the Bank's annual financial objectives.
. To provide competitive rewards to key executives commensurate with the
Bank's financial success.
Effective Date
- --------------
The original effective date of the Plan is June 30, 1996 and covered the fiscal
year 1997 (July 1, 1996 to June 30, 1997). The Plan will have a special "stub
year" for the period of July 1, 1997 through December 31, 1997. The next full
year of the Plan shall be January 1, 1998 through December 31, 1998. The Plan
has no termination date, but the Company reserves the right to change the
provisions of the Plan at any time.
Administration
- --------------
The Plan shall be administered by the President, subject to the concurrence of
the Chairman of the Board. The Board of Directors will approve the Plan and any
changes to the Plan. Approval of all awards, other than his own, shall be made
by the President subject to first being submitted to the Board of Directors for
final approval.
Eligibility
- -----------
Eligibility for the Plan is to include the PAB corporate executives, who by the
nature of their responsibilities have the ability to make a significant impact
on profitability and are selected for participation in the Plan by the President
and approved by the Board. Participants must be employed and in good standing
by PAB at the time the bonuses are payable (generally within 60 days following
the year end) to be eligible.
1
<PAGE>
OVERVIEW OF THE PLAN
The Plan works essentially as follows:
. Each year, plan participants will be assigned a Target Bonus represented
as a percentage of salary and based on full achievement of approved
financial and management objectives.
. Financial and management objectives will be established that reflect goals
critical to the success of the Bank. Income Before Taxes will always be a
primary goal, but other financial goals and management objectives may vary
from year to year. A weighting is established for each of these goals
dependent on the importance to the Bank. Financial objectives may or may
not be the same as the approve budget.
. Entry level and maximum financial performance targets will be established
as well.
. The total of the Target Bonus values for all participants in the program
will constitute the Target Bonus Pool for the Bank.
. The Attainment Percent, represented as a percentage of target shall be
calculated based upon the actual results compared to entry level, target
and maximum values described in the Plan schedule for the year. The
Attainment Percent will be the extrapolated results, rounded to the nearest
tenth of a percent, using either the entry level and target values or
target level and maximum values.
. Actual Bonus Earned for participants is calculated based on the Attainment
Percent for each of the established goals, the Weighting of the goal, and
the Target bonus for each of the participants.
. No bonus is payable on management and other financial objectives if the
entry level is not attained for Income Before Taxes. This means that even
if objectives are met for other established goals, no bonus will be payable
on these objectives, and no bonus will be payable under the Plan, until at
least the entry level goal for Income Before Taxes is attained.
. Bonuses will generally be awarded within sixty (60) days following the
year end. At the discretion of the President or the Chairman of the Board,
bonus awards may be delayed subsequent to the certified audit of the year
during which the bonus was earned.
2
<PAGE>
SIZE OF TARGET BONUS
A Target Bonus will be assigned to each position according to competitive market
conditions, salary surveys and internal relationships of jobs with the Bank.
Base salary used in calculating the Target Bonus is typically defined as the
current annual salary in effect subsequent to salary reviews for officers each
year, but that may be modified given a promotion of a participant and the
approval of both the President and the Board. In the event that an individual's
Target Bonus Level changes during the course of the year, the assigned Target
Bonus will be recalculated on a pro-rata basis according to the amount of time
spent at each bonus level.
ENTRY INTO THE PLAN, CHANGE OF ASSIGNMENT--TRANSFER
If an employee enters the Plan mid-year, he/she will participate in the Plan on
a pro-rata basis dependent on the number of months, rounded to the nearest half
month, in the Plan. In the event of a change of assignment which would result
in a change of Target Bonus during the course of the year, the assigned Target
Bonus(es) will be computed on the base salary figure received at each position.
TERMINATION PROVISIONS
Release, Reduction in Work Force, or Resignation
- ------------------------------------------------
If a participant in the Plan is not on the payroll at the end of the Plan year,
and at the time the bonuses are awarded, a bonus will not be paid regardless of
- ---
length of service or reason for termination or resignation, except as provided
for under the next section.
Termination Due to Death or Retirement, and Employees on Total and Permanent
- ----------------------------------------------------------------------------
Disability or Approved Leaves of Absence
- ----------------------------------------
A pro-rata bonus based on active employment is payable under these circumstances
and will be based upon the assigned Target Bonus and corresponding base salary
received while covered under the Plan.
Discharge by the Company for Willful and Deliberate or Gross Misconduct
- -----------------------------------------------------------------------
Any right of the employee to a bonus under the Plan shall be forfeited.
3
<PAGE>
DEFINITIONS
GOALS
- -----
Income Before Tax
- -----------------
Income before tax is defined as the dollar amount shown on the PAB Certified
Financials in each year. This amount should include a provision for the accrual
of bonus at the targeted amounts.
PLAN TERMS
Entry Level
- -----------
This is defined as the minimum performance, as approved by the Board of
Directors, expected to be achieved for any bonus to be awarded.
Target Level
- ------------
This is the level against which a maximum award would be paid if the amount or
greater is achieved.
Target Percentage of Salary
- ---------------------------
This is the target amount, represented as a percentage of salary that will be
awarded the participant if the Bank is to meet all of its financial and
management objectives at the target level.
Attainment Percent
- ------------------
This shall be calculated based upon the actual results compared to entry level,
target and maximum values described in the Plan schedule for the year. The
Attainment Percent will be the extrapolated results, rounded to the nearest
tenth of a percent, using either the entry level and target values of target
level and maximum values.
Weighting of Goals
- ------------------
Shall be the weighting as represented in a whole percent that has been
established for each of the financial and management goals.
Total Bonus Percent Earned
- --------------------------
This represents the sum of PAB's performance against goals and is to be
calculated for each goal by multiplying the Attainment Percent by the Weighting
that has been established for each goal. This should be expressed to the
nearest tenth of a percent. The result for each of the goals is then totaled to
represent the Total Bonus Percent Earned.
4
<PAGE>
Total Bonus Earned
- ------------------
Total Bonus Percent Earned represents the bonus due a participant and is to be
calculated by multiplying the Total Bonus Percent Earned by the Participants'
Target Percentage. The result is then multiplied by the salary of the
participant and may be further reduced by the percentage of the year that the
participant was not employed if he/she was not with the Bank at the beginning of
the year.
5
<PAGE>
PAN AMERICAN BANK, FSB
CORPORATE MANAGEMENT INCENTIVE PLAN
Attachment
Special Stub Year
Period July 1, 1997 through December 31, 1997
Eligible Participants
- ---------------------
Key PAB executives for the period stated above shall be the following positions:
. President/CEO
. SVP/Controller
. SVP/Finance & Risk Management
. VP/Human Resources Director
. VP/Corporate Compliance
. VP/lPF Administrator
. Director of General Services
. Assistant Controller/Accounting Manager
All incumbents must meet the eligibility requirements as stated in the Plan.
Determination of Bonus Awards
- -----------------------------
Due to the change from fiscal to calendar year, this "stub year" has been
established. Bonuses will be determined based on individual and corporate
performance. The bonuses awarded for this period will be at the discretion of
the President and the Chairman of the Board following review of performance.
6
<PAGE>
PAN AMERICAN BANK, FSB
MANAGEMENT INCENTIVE PLAN
Attachment
Calendar Year Beginning January 1, 1998
In January, the President and the Board of Directors will determine the eligible
positions for the current Management Incentive Plan. At that time, goals as
described in the Plan will be determined, and Target incentives will be selected
as described within the Plan.
7
<PAGE>
Corporate Bonus Program
<TABLE>
<CAPTION>
SAMPLE
Eligible Participants
- ----------------------------------------------------------------------------------------------------------------------------------
Salary Salary TARGET BONUS Minimum Bonus Maximum Bonus
Name Title Monthly Annual % $ Total Comp. % $ % $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Each Incumbent Title $ $ As Determined $ $ 50% of Target 150% of Target
- ---------------------------------------------------------------------------------------------------------------------------------
Totals $0 $0
</TABLE>
<TABLE>
<CAPTION>
Measurement (Sample)
- ----------------------------------------------------------------------------------------------------------------------------------
Goals (1) Weighting Target Minimum Actual % Earned
<S> <C> <C> <C> <C> <C>
Pretax Income (1) 50% TBD 85% if Target 115% of Target
ROE (2) 20% TBD 85% if Target 115% of Target
Individual Objectives (3) 30% As defined As defined As defined
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pretax income, pre ICA interest expense (excluding SAFI premium assessment)
(2) Based on ICA debt treated as debt and average capital during the year
(excluding SAFI premium assessment)
(3) Discretionary judgment based on performance against personal goals.
Consolidated bank minimum pretax income goal and ROE goal (85% of Target) must
be met to qualify for any bonus award.
Actual bonus may be prorated based on total base compensation paid for the
fiscal year.
8
<PAGE>
Exhibit 10.49
AMENDMENT TO
PAN AMERICAN BANK, FSB
401(K) PLAN
------------------------------------------
(EFFECTIVE GENERALLY AS OF JANUARY 1, 1998)
<PAGE>
AMENDMENT TO
PAN AMERICAN BANK, FSB
401(K) PLAN
------------------------------------------
(EFFECTIVE GENERALLY AS OF JANUARY 1, 1998)
Pan American Bank, FSB (the "Employer") has previously established the
Pan American Bank 401(k) Profit Sharing Plan (the "Plan") for the benefit of its
eligible employees and their beneficiaries, and for the benefit of the eligible
employees and beneficiaries of its affiliates which become "Covered Employers"
as the term is defined in Section 1.2 of the Adoption Agreement the Plan with
the consent of the Employer.
Pursuant to resolutions adopted by the Board of Directors of the
Employer, the Adoption Agreement for the Plan is hereby amended, generally
effective as of January 1, 1998, unless otherwise provided, as follows:
1. SECTION 1.2 - COVERED EMPLOYERS. Section 1.2 of the Adoption
Agreement for the Plan is hereby amended to read as follows:
1.2 Covered Employers. The Plan shall cover the employees of
-----------------
the following Covered Employers in addition to the Adopting Employer:
TAX IDENTIFICATION EMPLOYER EFFECTIVE DATE
NAME OF EMPLOYER NUMBER OF COVERAGE
- --------------------------------------------------------------------------------
United PanAm Mortgage Corporation July 1, 1997
- --------------------------------------------------------------------------------
Date on which UACC
United Auto Credit Corporation became subsidiary of
(UACC) Adopting Employer
- --------------------------------------------------------------------------------
2. SECTION 4.2(B) - EMPLOYER MATCHING CONTRIBUTIONS. Section 4.2(b)
of the Adoption Agreement for the Plan is hereby amended by deleting the
reference to "not applicable" and by providing as follows, effective January 1,
1998:
"(b) Employer Matching Contributions. Discretionary Employer
-------------------------------
Matching Contributions, which are based on cash or deferred contributions
by employees pursuant to Section 4.2(b) above may be any percentage of the
cash or deferred contribution designated by the Employer each year
(including contributions in excess of 100% of the cash or deferred
contributions). Matching Contributions (including fixed matching
contributions if elected below) shall be allocated based upon cash of
1
<PAGE>
deferred contributions made to the extent they do not exceed 6% of
compensation."
3. SECTION 5.2 - VESTING SCHEDULE. Section 5.2 of the Adoption
Agreement for the Plan is hereby amended in its entirety to read as follows,
effective January 1, 1998:
5.2(b)(iii) [x] Years of Service Vested Percentage
---------------- -----------------
1 20% (not less than 0)
2 40% (not less than 20)
3 60% (not less than 40)
4 80% (not less than 60)
5 or more 100% (not less than 80)
5.2(c)(iii) [x] Years of Service Vested Percentage
---------------- -----------------
1 20% (not less than 0)
2 40% (not less than 20)
3 60% (not less than 40)
4 80% (not less than 60)
5 or more 100% (not less than 80)
5.2(d)(iii) [x] Years of Service Vested Percentage
---------------- -----------------
1 20% (not less than 0)
2 40% (not less than 20)
3 60% (not less than 40)
4 80% (not less than 60)
5 or more 100% (not less than 80)
2
<PAGE>
IN WITNESS WHEREOF, the Employer has caused the foregoing amendments
to be executed on this 1st day of January, 1998.
EMPLOYER: PAN AMERICAN BANK, FSB
By /s/ Lawrence J. Grill
-----------------
, President and
Chief Executive Officer
By /s/ Andree B. Moore
-----------------
Assistant, Corporate Secretary
COVERED EMPLOYERS: UNITED AUTO CREDIT CORPORATION
By /s/ Ray Thousand
-----------------
, President and
Chief Executive Officer
By /s/ Lou Ross
-----------------
, Corporate Secretary
UNITED PANAM MORTGAGE CORPORATION
By /s/ John T. French
-----------------
, President and
Chief Executive Officer
By /s/ Andree B. Moore
-----------------
, Corporate Secretary
3
<PAGE>
REBER & ASSOCIATES, LTD.
------------------------
PROFIT-SHARING PLAN
-------------------
ADOPTION AGREEMENT #002
-----------------------
By this Agreement, the Employer adapts a profit-sharing plan pursuant
to the Reber & Associates, Ltd. Defined Contribution Plan and Trust and the
Trustee accepts its appointment as Trustee of the Trust created hereunder.
The Name of this Plan is:
PAN AMERICAN BANK 401K PROFIT SHARING PLAN
------------------------------------------
The Plan Number is: 001
---
(Three digit number beginning with 0)
I. EMPLOYER INFORMATION.
--------------------
1.1 Adopting Employer:
-----------------
(a) The name of the Adopting Employer is:
PAN AMERICAN BANK, FSB
----------------------
(b) The address of the Adopting Employer is:
1300 S. EL CAMINO REAL, SUITE 320
----------------------------------
SAN MATEO, CA 94402
-------------------
(c) Employer tax identification number:
94-3201867
----------
(d) The Adopting Employer is a:
[x] Corporation [ ] S Corporation
(other than S)
[ ] Partnership [ ] Proprietorship
[x] Other FEDERALLY CHARTERED SAVINGS ASSOCIATION
---------------------------------------
1.2 Covered Employers: The Plan shall cover the employees of the
-----------------
following Covered Employers in addition to the Adopting Employer designated
in Section 1.1:
4
<PAGE>
Employer
Tax Effective
Identification Date of
Name of Employer Number Coverage
- ------------------------------ ------------------ -----------------
Not Applicable
- ------------------------------ ------------------ -----------------
- ------------------------------ ------------------ -----------------
- ------------------------------ ------------------ -----------------
II. PLAN INFORMATION.
----------------
2.1 Plan Adoption: This Plan is adopted as a [select one):
-------------
[x] New Plan
[ ] Amended or Restated Plan
If amended or restated, name of plan prior to this amendment or
restatement:
--------------------------------------------------------------------
2.2 Plan Administrator: The Plan Administrator shall be [select one]:
------------------
[x] The Employer
[ ]
-----------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
[list name or names]
or such other person or persons selected by the Employer. Note:
----
The Plan Administrator may be changed by action of the Employer
without execution of a new Adoption Agreement.
2.3 Trustee: The Trustee of the Trust created pursuant to the Plan at the
-------
time of adoption of this Agreement is:
Advisors Trust Company
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
2
<PAGE>
Note: The Trustee may be changed by action of the Employer without
----
the execution of a new Adoption Agreement.
2.4 Agent for Service of Process. The agent for service of process for
----------------------------
the Plan is (insert name and address [if different from that of the
Employer] of one or more individuals):
Pan American Bank, FSB
--------------------------------------------------------------------
1300 S. 21 Camino Real
--------------------------------------------------------------------
San Mateo, CA 94402
--------------------------------------------------------------------
Note: Service of process may also be made on any other individual
----
serving as Administrator or Trustee of the Plan.
2.5 Anniversary Date: The Anniversary Date is the last day of the Plan
----------------
Year which is December 31 .
-----------
2.6 Plan Year: The Plan Year is the 12 consecutive month period beginning
---------
on January 1 and ending on December 31 . The Limitation Year for the
------------- ------------
limits on benefits and contributions under Code Section 415 shall be the
Plan Year unless a different Limitation Year is designated as follows: The
12 consecutive month period beginning on and ending on and ending
on .
Change in Plan Year: If this is a change in Plan Year or a new plan
-------------------
beginning on a date other than the first day of the year, the first
Plan Year under this agreement shall be a short Plan Year which begins
on ____________, 19____ and ends on the next Anniversary Date.
2.7 Effective Date. The Effective Date of this Plan or amendment is
-------------- -
April 1,1995 .
-------------
Note: Certain effective dates for basic plan provisions predate this
----
effective date if this is an amended or restated plan. If this is an
amended or restated plan, the original effective date is: .
2.8 Frozen Plan (check it applicable and do not complete Articles III, IV
-----------
and V below other than Section 5.1):
[ ] The Plan was frozen by action of the Employer on or before the
Effective Date designated in Section 2.7 or effective on the
following date, if later:
3
<PAGE>
. No additional employees shall become eligible to
---------------------------------------------------
participate and no contributions shall be made to the Plan. The interests
--------------------------------------------------------------------------
of all current Participants shall be 100% vested at all times.
--------------------------------------------------------------
III ELIGIBILITY.
-----------
NO AGE REQUIREMENTS.
3.1 Age. Minimum Age shall be 0 years (not to exceed 21).
--- ---
3.2 Service.
-------
IF HIRED ON 4/1/95, IMMEDIATE PARTICIPATION, THEREAFTER
(a) The service requirement for participation in Cash or Deferred
Contributions shall be one year or 6 months (not to exceed 12),
----
providing the employee has signed the Company's At-will/Employment
Statement.
(b) The service requirement for participation in Employer Matching
Contributions shall be N/A years (not to exceed 2) or N/A months (not
------ -----
to exceed 24). Note: If a vesting schedule other than full vesting is
----
elected under Section 5.2, the eligibility requirement shall not exceed 1
year.
(c) The service requirement for participation in Employer Profit-
Sharing Contributions shall be N/A year (not to exceed 2) or N/A months
----- -----
(not to exceed 24). Note: If a vesting schedule other than full vesting is
----
elected under Section 5.2, the eligibility requirement shall not exceed 1
year.
(d) In order to complete a year of service for eligibility purposes,
an employee must complete 1,000 hours of service in the eligibility
computation period unless a lower number of hours is designated: 6 MONTHS
--------
OF SERVICE WITHOUT REGARD TO NUMBER OF HOURS WORKED.
---------------------------------------------------
3.3 Entry Dates [select one].
-----------
[ ] The first day of the Plan Year: ___________________________
and the date six months later: ____________________________
[ ] The last day of the Plan Year: ____________________________
and the date six months earlier: __________________________
[x] The first day of each calendar month.
4
<PAGE>
[ ] Other: ____________________________________________________
(Note: Entry dates may not be more than six months apart.)
3.4 Service for Eligibility. Service for eligibility purposes shall
-----------------------
include service with the following Employers during periods in which
service is not otherwise required to be counted [designate date after which
service is counted, if limited]. Note: This section does not have to be
----
completed if the only service counted is with Employers which are required
to be aggregated under Code (S) 414(b), (c), (m), (n) or (o).
Date After Which
Name of Employer Service is Counted
- ---------------- ------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Service may only be counted if the Employer continues all or a portion of
the business of the Employer designated in this Section.)
NOT APPLICABLE
3.5 Excluded Employees. The following employees shall be excluded from
------------------
participation in the Plan (check applicable exclusions):
[ ] (a) Employees included in a unit of employees covered by a
collective bargaining agreement.
[ ] (b) Other (specify):
-------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
Caution: If other exclusions are elected under 3.5(b), the plan is
-------
still subject to the participation requirements of Code (S)401(a)(26)
and the coverage requirements of Code (S)410(b).
IV. CONTRIBUTIONS.
-------------
4.1 Employer Profit-Sharing Contribution. Any Employer contribution which
------------------------------------
is not a matching contribution provided in Section 4.2(b) or a designated
cash or deferred or matching contribution (as defined in the
5
<PAGE>
Plan) shall be made as a general Profit-Sharing contribution and shall be
allocated on the following basis (select one):
[x] Non-Integrated Formula. The contribution shall be expressed as a
----------------------
percentage of the compensation of all Participants eligible to share in the
contribution (the "contribution percentage") and each such Participant
shall receive an allocation of the Employer contribution equal to his
compensation for the year (determined under Section 4.4) multiplied by the
contribution percentage.
[ ] Integrated Formula [select (a) or (b) below]. Note: An
-------------------------------------------- ----
integrated formula may not be elected if the Adopting Employer maintains
another defined contribution plan integrated with Social Security under
Code (S)401(l). The integration level in each case shall be the taxable
wage base in effect for F.I.C.A. tax purposes on the first day of the Plan
Year.
[ ] (a) Fixed Integration Rates. (Note: This option should be
-----------------------
selected if it is expected that the Excess Rate will equal or exceed
-----------
5.7%.) The contribution shall be allocated in the following order:
(1) Each Participant's compensation shall be multiplied by the
Base Rate and such amount shall be allocated to that Participant's Employer
Contributions Account. If the contribution is less than the elected Base
----
Rate, the contribution shall be expressed as a percentage of compensation,
----
which percentage shall be used as the Base Rate and the entire contribution
shall be allocated under this subparagraph (1).
(2) Each Participant's compensation in excess of the integration
level shall be multiplied by the Excess Rate and such amount shall be
-----------
allocated to that Participant's Employer Contributions Account. If the
contribution in excess of the amount allocated in (1) above is less than
the amount needed to allocate the full amount of the elected Excess Rate
-----------
under this subparagraph (2), then
6
<PAGE>
the Excess Rate shall be the sum of compensation of each Participant in
-----------
excess of the integration level divided by the contribution to be allocated
under this subparagraph.
(3) The balance, if any, of the contribution remaining after the
allocations in (1) and (2) above shall be expressed as a percentage of the
compensation of all Participants eligible to share in the contribution and
each such Participant shall receive an allocation of the Employer
contribution equal to his compensation for the year multiplied by such
percentage.
The Base Rate and Excess Rate shall be the following:
--------- -----------
Base Rate (select one).
---------
[ ] (1) 5.7%.
[ ] (2) 5.7% (or, if greater, the old age
insurance rate under Code (S) 3111(a) in effect
on the first day of the Plan Year).
[ ] (3) ______% (cannot exceed 10%).
Excess Rate (select one). In no event may the excess rate
-----------
exceed the Base Rate selected above.
[ ] (1) 5.7%.
[ ] (2) 5.7% (or, if greater, the old age insurance
rate under Code Section 3111(a) in effect on the
first day of the Plan Year).
[ ] (3) __________% (cannot exceed the percentage
determined under (2) above).
[ ] (b) Flexible Integration Rate. (Note: this option should be
------------------------- ----
selected if maximum allocation to
7
<PAGE>
excess compensation is desired and the Base Rate is expected to be
---------
less than 5.7% in any year.) The contribution shall be allocated among
Participants by allocating to each Participant an amount equal to his
compensation multiplied by the Base Rate. In addition, an amount equal
---------
to the compensation of each Participant in excess of the integration
level, multiplied by the Excess Rate, shall be allocated to each
-----------
Participant who has compensation in excess of the integration level.
The integration level shall be the taxable wage base in affect for
F.I.C.A. tax purposes on the first day of the Plan Year. The Base Rate
---------
and the Excess Rate shall be computed as follows:
-----------
(1) Base Rate of 5.7% or Less. The contribution to be allocated
-------------------------
shall be divided by the sum of the total compensation of all Participants
eligible to share in the contribution and the total of the compensation in
excess of the integration level of all the Participants. If the resulting
number is less than .057 (or, the old age insurance rate under Section
3111(a) of the Code in effect on the first day of the Plan Year, if
greater), that number, when expressed as a percentage will be the Base
----
Rate. The Excess Rate shall be equal to the Base Rate.
----------- ---------
(2) Base Rate Greater than 5.7%. If the rate determined under (a)
---------------------------
above is greater than .057 (or if greater, the old age insurance rate under
Code (S)3111(a) in effect on the first day of the Plan Year), then the
Excess Rate shall be 5.7% (or, if greater, the old age insurance rate under
-----------
Code (S)3111(a) in effect on the first day of the Plan Year) and the Base
----
Rate shall be determined by the following procedure:
----
(a) The total compensation in excess of the integration level for
each Participant shall be multiplied by the Excess Rate which shall be 5.7%
-----------
(or the old age insurance rate. Under Section 3111(a) of the Code in
effect on the first day of the Plan Year, if greater).
(b) The amount determined under (a) above shall be subtracted
from the total
8
<PAGE>
contribution to be allocated and the difference shall be divided by the
compensation of the Participants eligible to share in the contribution and
the result, when expressed as a percentage, shall be the Base Rate.
---------
4.2 Cash or Deterred Contributions Under Code (S)401(k).
---------------------------------------------------
Cash or Deferred Contributions shall be permitted:
[x] Yes [ ] No
(a) and (b) below apply only if cash or deferred contributions are
permitted.
(a) Cash or Deferred Contributions. Each Participant shall be
------------------------------
permitted to make cash or deferred contributions pursuant to Code
(S)401(k). Such contributions shall be limited to the maximum annual
contribution permitted under Section 4.3(g) of the Plan ($7,000, as
adjusted by the Internal Revenue Service). In addition, the cash or
deferred contributions shall be limited to 15% of compensation.
-----
NOT APPLICABLE
(b) Employer Matching Contributions. Discretionary Employer Matching
-------------------------------
Contributions, which are based on cash or deferred contributions by
employees pursuant to Section 4.2(a) above may be any percentage of the
cash or deferred contribution designated by the Employer each year
(including contributions in excess of 100% of the cash or deferred
contributions). Matching contributions (including fixed matching
contributions if elected below) shall be allocated based upon cash or
deferred contributions made to the extent they do not exceed 0% of
----
compensation (specify percentage limit on which Employer matching
contributions are based. The Employer may make Fixed Matching
Contributions by completing the election below.
NOT APPLICABLE
[ ] Fixed Matching Contribution. The Employer shall make a matching
---------------------------
contribution each year in the amount of ______% of the cash or deferred
contribution made pursuant to Section 4.2(a).
9
<PAGE>
Note: Matching contributions are subject to the requirements of
----
Section 4.3 below.
4.3 Contribution Limitations and Requirements.
-----------------------------------------
(a) Annual Limitation on Contributions. In no event shall the total
----------------------------------
allocation of contributions to any Participant in any Plan Year under
Sections 4.1 and 4.2 above and 4.6 below and under any other plans
maintained by the Employer exceed 25% of such Participant's compensation
for such year or, if less, $30,000 (as adjusted pursuant to Article VI of
the Plan).
(b) Top-Heavy Minimum Contribution. The contribution of the Employer
------------------------------
(not including cash or deferred contributions) allocated to each
Participant who is a non-key employee (as defined in the Plan) must be at
least 3% of such Participant's compensation (determined without regard to
the exclusions in Section 4.4) or, if less, the percentage of compensation
allocated to the key employee receiving the highest percentage allocation,
unless the Top-Heavy Minimum Contribution is provided under another plan
maintained by the Employer.
4.4 Compensation Considered. Compensation for the purpose of allocating
-----------------------
the Employer contribution (other than the Top-Heavy Minimum Contribution)
shall include all compensation subject to the following exclusions (check
the excluded types of compensation):
[x] Compensation prior to the Entry Date on which an Employee becomes
a Participant in the Plan.
[ ] Bonuses.
[ ] Overtime. (Caution: Exclusion of overtime in a profit-sharing
-------
plan may cause recomputation of base compensation to determine overtime
premium under Federal Wage Hour Laws.)
[ ] Commissions. If commissions are partially excluded, check
applicable exclusion:
[ ] ___________% of commissions.
[ ] Commissions in excess of $___________.
10
<PAGE>
[ ] Other (specify):
-------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
Compensation shall include only compensation paid unless the following
election is completed:
[ ] Compensation shall mean compensation accrued during a year.
4.5 Participation in Employer Matching and Profit-Sharing contributions.
-------------------------------------------------------------------
In order for a Participant to share in the allocation of the Employer's
matching and profit-sharing contributions for a Plan Year, the Participant
must meet the following requirements [check applicable requirements]:
(a) [ ] Hours of Service. The employee must complete 1,000 hours of
----------------
service during the Plan Year or the following number of hours, if
less: _____. Note: This requirement does not apply to the Top-Heavy
----
minimum Allocation.
(b) [x] Last Day of Year. The employee must be employed on the last
----------------
day of the Plan Year.
(c) [ ] Waiver of Above Requirements for Death, Disability or Normal
------------------------------------------------------------
Retirement. The hours requirement in (a) and the last day of the Plan
----------
Year requirement in (b) (if elected) shall be waived if the
Participant's termination of employment is after the normal retirement
date or results from death or disability.
(d) [ ] Waiver of Above Requirements for Matching Con tributions.
--------------------------------------------------------
The hours requirement in (a) and the last day of the Plan Year
requirement in (b) (if elected) shall be waived with respect to
Employer matching contributions.
4.6 Employee Contributions. Voluntary non-deductible contributions by
----------------------
Employees
[ ] are permitted.
11
<PAGE>
[x] are not permitted.
---
V. VESTING AND ACCOUNTING.
----------------------
5.1 Valuation.
---------
(a) Regular valuation dates shall be (select one):
[ ] annual
[ ] semi-annual
[ ] quarterly
[x] monthly
(b) Adjustments to valuation for a distribution or segregation of
accounts between valuation dates:
[ ] Use value as of last regular valuation date without
adjustment.
[ ] Use special valuation date at end of month prior to payment
or segregation.
[ ] Use value as of last valuation date with interest to end of
month prior to payment or segregation at the rate of 6% per annum or
specify other rate:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
[x] Other: Daily
-----------------------------------------------------
---------------------------------------------------------------------------
5.2 Vesting Schedule. A Participant's interest attributable to Employer
----------------
contributions shall be vested as follows [select (a), (b) or (c) and (d) if
applicable. Note: Cash or Deferred Contributions are not subject to the
----
vesting schedule selected and shall be look vested at all times.]
12
<PAGE>
(a) [ ] 100% at all times (must be selected if eligibility is longer
than one year).
(b) [ ] Top-Heavy Plans: A Participant's vested interest shall be
determined pursuant to the elected vesting schedule (Note: a vesting
schedule may be used only if the service requirement in Section 3.2
does not exceed one year):
(i) [ ] 100% vested upon the crediting of years of
service (not to exceed 3).
(ii) [x] Years of Service Vested Percentage
---------------- -----------------
1 0%
2 20%
3 40%
4 60%
5 80%
6 100%
(iii) [ ] Years of
Service Vested Percentage
-------- -----------------
1 ___% (not less than 0)
2 ___% (not less than 20)
3 ___% (not less than 40)
4 ___% (not less than 60)
5 ___% (not less than 80)
6 ___%(not less than 100)
(c) [ ] Non Top-Heavy Plans. A Participant's vested interest
-------------------
shall be determined pursuant to the elected vesting schedule (Note: a
----
vesting schedule may be used only it the service requirement in
Section 3.2 does not exceed one year):
---
(i) [ ] 100% vested upon the crediting of _____ years of
service (not to exceed 5). If the Plan becomes top-heavy, the elected
number of years shall become 3 if a greater number is designated.
(ii) [ ] Years of Service Vested Percentage
---------------- -----------------
13
<PAGE>
1 0%
2 0%
3 20%
4 40%
5 60%
6 80%
7 100%
If the Plan becomes top-heavy, the schedule set forth in (b)(ii)
above shall be used.
(iii) [ ] Years of
Service Vested Percentage
-------- -----------------
1 ___% (not less than 0)
2 ___% (not less than 0)
3 ___% (not less than 20)
4 ___% (not less than 40)
5 ___% (not less than 60)
6 ___% (not less than 80)
7 ___%(not less than 100)
If the Plan becomes top-heavy, the schedule shall be
modified to the extent necessary to comply with the limits set forth
in (b)(iii) above.
(d) [ ] Matching Contributions. A Participant's interest
----------------------
attributable to Employer Matching Contributions shall be subject to
the following vesting schedule (if different from the schedule elected
in (a), (b) or (c) of this Section:
(i) [ ] 100% at all times.
(ii) [x] Years of Service Vested Percentage
---------------- -----------------
1 0%
2 20%
3 40%
4 60%
5 80%
6 100%
(iii) [ ] Years of
Service Vested Percentage
-------- -----------------
14
<PAGE>
1 ___% (not less than 0)
2 ___% (not less than 20)
3 ___% (not less than 40)
4 ___% (not less than 60)
5 ___% (not less than 80)
6 ___%(not less than 100)
5.3 Years of Service for Vesting Purposes (complete only if 5.2(b) or (c)
---------------------------------------------------------------------
or 5.4(i) or (ii) is elected):
-----------------------------
(a) Years of Service shall include service prior to the original
effective date of this plan or a predecessor plan:
[x] Yes.
[ ] No, specify original effective date:
_______________________________________.
(b) in order to complete a year of service for vesting purposes, an
employee must complete 1,000 hours of service in the Vesting Computation
Period unless a lower number of hours is designated: N/A . The vesting
-------
computation shall be the 12 month period beginning on the first day of each
Plan Year.
(c) Years of service for vesting purposes shall include service with
the following Employers during periods in which service is not otherwise
required to be counted [designate date after which service is counted, if
limited]. Note: This section does not have to be completed if the only
----
service counted is with Employers which are required to be aggregated under
Code (S)414(b), (c), (m), (n) or (o).
Date After Which
Name of Employer Service is Counter
---------------- ------------------
NOT APPLICABLE
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
(Service may only be counted it the Employer continues all or a
portion of the business of the Employer designated in this Section.)
NOT APPLICABLE
5.4 Change in Vesting Schedule (Restated Plans Only). If above schedule
------------------------------------------------
is a change in a vesting schedule from the
15
<PAGE>
prior plan and 5.2(a) is not selected, the above vesting schedule shall
apply [select one]:
[ ] (a) to all Participants (except as provided in Section 5.7(c) of the
Plan).
[ ] (b) to employees hired after the effective date specified; Schedule
selected below will apply to all others.
[ ] (c) to employees who become Participants after the effective date.
Schedule selected below will apply to all others.
If (b) or (c) is selected, the following schedule shall be used for
employees not subject to new vesting schedule (Note: This schedule may
----
not be longer than vesting schedule in effect immediately prior to the
effective date of this Plan):
[ ] (i) Cliff Vesting
-------------
Service Vested Percentage
------- ---------------------------------------
1 _____%
2 _____%
3 _____% (at least 100% is top-heavy)
4 _____%
5 _____% (at least 100% if not top-heavy)
[ ] (ii) Graduated Vesting
-----------------
Vested Percentage
---------------------------------------------
Minimum Percentages
----------------------------------
Non
Service Top-Heavy Top-Heavy
----------- ----------------- -------------
1 _____% 0% 0%
2 _____% 0% 20%
3 _____% 20% 40%
4 _____% 40% 60%
5 _____% 60% 80%
6 _____% 80% 100%
7 _____% 100%
5.5 Forfeitures of non-vested interests shall be (select one):
16
<PAGE>
[ ] Reallocated to accounts of remaining Participants.
[x] Applied to reduce contributions by the Employer. Specify if
contributions to be reduced are limited to the following:
[x] Employer matching Contributions.
[x] Employer Profit-Sharing Contributions.
VI. LIMITATIONS ON ALLOCATIONS AND BENEFITS.
---------------------------------------
The Employer hereby adopts the following provisions necessary to comply
with the limitations of Code Section 415. (Note: This language will
----
generally only be necessary in the event the Employer has ever maintained a
defined benefit pension plan or a Participant's benefit in a defined
benefit pension plan need be taken into account in determining the
limitation on the Participant's allocation under this Plan.)
NOT APPLICABLE
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
VII DISTRIBUTION PROVISIONS.
-----------------------
7.1 Retirement Dates.
----------------
(a) Normal Retirement Date. The Normal Retirement Date shall be the
----------------------
date on which the Participant attains the age of 65 (not older than 65)
------
and (if applicable) is at least 5 years after his date of employment.
---
(b) Early Retirement Date (complete only if applicable). The Early
---------------------
Retirement Date shall be the date on which the Participant attains the age
of _____ (not older than 64) and (if applicable) is at least years _____
after his date of employment.
7.2 Time of Distribution. Distribution will be permitted to commence at
--------------------
the election of a Participant or Beneficiary (subject to the limitations
set forth in section 7.3 below) as soon as administratively feasible
following [check Earliest Permitted Event]:
17
<PAGE>
[x] (a) Termination of employment.
[ ] (b) The next regular valuation date following the termination
of employment.
[ ] (c) The Anniversary Date following termination of employment.
[ ] (d) _______ years after termination of employment.
[ ] (e) Age _______ (after termination of employment).
[ ] (f) Early Retirement Age (if Participant has terminated
employment).
[ ] (g) Normal Retirement Age.
If (a) is not selected, the foregoing limits shall not apply to a
---
Participant or Beneficiary who has a vested interest which does not
exceed $3,500, or, if greater, $______ (specify if a higher amount is
desired).
[ ] Distribution after, Normal Retirement Age can commence
before termination of employment (check if applicable).
7.3 Restrictions on Distributions (check any applicable restriction):
-----------------------------
[x] (a) installment distributions shall not be permitted (check if
---
applicable).
[ ] (b) Lump sun distributions shall be subject to the following
limitations (check if restrictions are to apply):
[ ] Lump sums are not available.
[ ] Lump sums are not available to Participants with a
vested interest in excess of $_________ unless the Participant's
termination of employment is after or as a result of (Check if
applicable:)
18
<PAGE>
[ ] Normal Retirement Age.
[ ] Early Retirement Age.
[ ] The attainment of Age ________
(specify)
[ ] Death.
[ ] Disability.
[ ] Advance notice of ____________ is required.
[ ] (c) Partial distributions (which are not a part of an
installment distribution) shall be subject to the following limits:
[ ] Partial distributions are not available.
[ ] A partial distribution shall require ___ days prior
written notice from a Participant or Beneficiary.
[ ] (d) Other Restrictions (specify):
----------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
(Any other restriction must not discriminate in favor of highly
compensated with respect to the availability of any form of benefit.)
[ ] (e) Distributions pursuant to Qualified Domestic Relations
orders shall not be subject to the restrictions on distributions made
---
after termination of employment. (Check if applicable).
NOT APPLICABLE
7.4 Annuity Distributions (check if applicable):
---------------------
[ ] All distributions (except for Participants with vested interests
not in excess of $3,500) shall be
19
<PAGE>
subject to the annuity distribution rules which require the election of the
Participant and the consent of the Participant's spouse (if the Participant
is married) for distribution to be made in a form other than a joint and
survivor annuity.
7.5 Withdrawals.
-----------
(a) Employer Contributions. Withdrawal of Employer contributions
----------------------
which were made at least two years prior to the date of withdrawal
[ ] is permitted. Withdrawals shall be limited to (check
applicable limitations if desired):
[ ] Participants who have completed ______ years of service
(specify).
[ ] Participants who have attained the age of ______
(specify).
[ ] Participants who have attained the Early Retirement Age.
[ ] Other:
---------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
[x] is not permitted.
---
(b) Employee Contributions. Withdrawal of employee after tax
----------------------
contributions (but not earnings thereon) N/A
[ ] is permitted. [x] is not permitted.
---
If withdrawal is permitted, it shall be subject to the following
restrictions (specify):
---------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(any restriction must not discriminate in favor of highly compensated
employees with respect to the availability of a withdrawal.)
20
<PAGE>
(c) Cash or Deferred Contributions. Withdrawal of cash or deferred
------------------------------
contributions (but not earnings thereon) on account of hardship
[x] is permitted. [ ] is not permitted.
---
(d) Employer Matching Contributions. Withdrawal of Employer Matching
-------------------------------
contributions on account of hardship (as defined for cash or deferred
contribution withdrawals)
[ ] is permitted. [x] is not permitted.
---
7.6 Loans. Participant loans
-----
[x] are permitted. [ ] are not permitted.
---
If loans are permitted and are limited to any of the following
sources, please check applicable limitations:
[ ] Cash or Deferred Contributions.
[ ] Matching contributions.
[ ] Other Employer Contributions.
[ ] Amounts Rolled to this Plan or Transferred to this Plan.
VII INVESTMENT OF TRUST FUND.
------------------------
8.1 Directed Investment (check if applicable):
-------------------
[ ] Directed investment shall be permitted to the extent determined
by the Trustee and Administrator.
[x] Directed investment shall be permitted in elective investment
funds established by the Trustee and Administrator.
NOT APPLICABLE
8.2 Investment in Employer Securities (check if applicable and specify
---------------------------------
percentage if percentage is greater than 10%):
21
<PAGE>
[ ] Investment in Employer securities is permitted up to _____% of
Trust Fund. If this option is selected, it is a specific purpose of the
Trust Fund to invest in Employer Securities up to the stated percentage of
the Trust Fund's assets.
NOT APPLICABLE
8.3 Investment in Insurance Contracts (check if applicable):
---------------------------------
[ ] Investment in insurance contracts on the lives of Participants
shall be permitted.
8.4 Multiple Trustees. In the event more than one Trustee has been
-----------------
assigned, the responsibility for the investment and custody of an asset of
the Trust Fund, the following number of Trustees must execute any document
of conveyance, purchase or transfer of such asset (check applicable
provision):
[ ] All such Trustees.
[ ] A majority of such Trustees.
[ ] Two or more of such Trustees.
[x] Any one of such Trustees.
IX. TOP-HEAVY PROVISIONS.
--------------------
The Employer hereby adopts the following additional provisions necessary to
comply with the limitations of Code Section 416 if the Plan provisions do
not cover the necessary limitations:
NOT APPLICABLE
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
X. GENERAL PROVISIONS.
------------------
10.1 Plan Sponsor. The Sponsor of this Volume Submitter Plan and Trust is
------------
Colorado Lawyers Pension Association. Colorado Lawyers Pension Association
shall not be responsible for the completion of the adoption agreement or for
any advice given by members of Colorado Lawyers Pension Association. Each
member of
22
<PAGE>
Colorado Lawyers Pension Association shall be solely responsible for the use
of the plan by any client of that member.
10.2 Consent of Sponsor. This Plan may be adopted as a Volume Submitter
------------------
Plan only with the approval of the Sponsor.
10.3 Amendment by Employer. If the Employer modifies the Adoption Agreement
---------------------
by making an amendment or election not permitted in the Adoption Agreement,
the Plan will be considered an individually designed Plan and will not
continue to qualify as a Volume Submitter Plan.
10.4 Reporting to Government Agencies. The Employer shall be responsible
--------------------------------
for all reports concerning the Plan to government agencies including by way of
example but not by way of limitation, annual reports on Form 5500, 5500-C,
5500-R or 5500 EZ and any schedules or attachments thereto. Colorado Lawyers
Pension Association is not responsible for any of such reports, including
Forms 5500, 5500-C, 5500-R or 5500-EZ.
10.5 Reliance on Opinion Letter. The Adopting Employer may not rely on an
--------------------------
opinion letter issued by the Internal Revenue Service to the Plan Sponsor as
evidence that the Plan is qualified under Section 401 of the Internal Revenue
Code. In order to obtain reliance with respect to plan qualification. The
Employer must apply to the appropriate Key District Office for a determination
letter.
23
<PAGE>
IN WITNESS WHEREOF, the Adopting Employer and the Trustee have
executed this Agreement and have accepted its terms this 29th day of
--------
MARCH___ 1995.
- ----- --
ADOPTING EMPLOYER:
PAN AMERICAN BANK, FSB
By /s/ Lawrence J. Grill
---------------------
Title: PRESIDENT & CEO
---------------
TRUSTEE:
(a) If a corporation is designated:
Name: ADVISORS TRUST COMPANY
By /s/ [Signature Illegible]
-------------------------
Title: PRESIDENT
---------
(b) If individuals are designated as Trustee:
NOT APPLICABLE
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
SPONSOR:
The Sponsor approves the Employer's adoption of the
Plan:
REBER & ASSOCIATES, LTD.
By /s/ [Signature Illegible]
-------------------------
<PAGE>
SUMMARY PLAN DESCRIPTION
FOR THE
PAN AMERICAN BANK
401(K) PROFIT SHARING PLAN
28
<PAGE>
WOULD YOU LIKE TO:
PAY LESS INCOME TAX?
BUILD A LONG-TERM SAVINGS ACCOUNT?
HAVE CONTROL OVER INVESTMENT CHOICES?
READ THIS BOOKLET TO LEARN HOW YOU CAN ACHIEVE THESE RESULTS THROUGH A SPECIAL
RETIREMENT PLAN OFFERED BY THE PAN AMERICAN BANK 401(K) PROFIT SHARING PLAN.
<PAGE>
PAN AMERICAN BANK 401(K) PROFIT SHARING PLAN
I. INTRODUCTION
------------
What can you do for a brighter future? You can begin saving for your
retirement now!
We devote a great deal of time and energy to our careers. But as
important as today's success will be what happens when our working years
are over, at retirement.
We all know that it is necessary to plan for our future. Financial
security in the future depends on a sensible and timely approach to
savings. However, it is not always easy to get started on a savings
plan.
Through the Pan American Bank 401(k) Profit Sharing Plan, it is easy to
start saving and to continue saving. The Plan offers the following
special incentives:
. Lower taxes on your income.
. Tax-deferred investment earnings.
. Professionally managed investment choices.
. Automatic payroll deductions.
What Makes a 401(k) Plan Better Than a Regular Savings Account?
---------------------------------------------------------------
Saving on a pre-tax basis in a 401(k) plan means more money in your
pocket! With a regular savings account, you save with after-tax dollars.
In a 401(k) plan, the amount you decide to save is deducted from your pay
before taxes are withheld.
What does this really mean to you? The bottom line is that you pay less
taxes because your taxable income has been lowered. And your take-home
pay is greater than if you saved with a traditional savings account.
The following table will help you see the advantage of saving through a
401(k) plan versus savings with after-tax dollars in a regular savings
account. In this example, the employee has saved $225 in income taxes,
which translates into an increase in take-home pay of $225.
------------------------------------
1
<PAGE>
<TABLE>
<CAPTION>
REGULAR SAVINGS
ACCOUNT 401(K) PLAN
----------------- -------------
<S> <C> <C> <C>
Annual Pay $ 25,000 Annual Pay $ 25,000
6% to 401(k) - 1,500
----------- -------------
Taxable Pay $ 25,000 Taxable Pay $ 23,500
Estimated Tax - 3,750 Estimated Tax - 3,525
6% to Savings - 1,500
Take-Home Pay $ 19,750 Take-Home Pay $ 19,975
=========== =============
=========== =============
Your Savings Acct. $ 1,500 Your 401(k) Acct. $ 1,500
Your Tax Savings + 0 Your Tax Savings + 225
----------- -------------
Your Total Savings $ 1,500 Your Total Savings $ 1,725
=========== =============
</TABLE>
II. ELIGIBILITY
-----------
The 401(k) Plan is open to all employees. To participate in the Plan,
you must be employed with the Company for at least six months.
Your participation begins on the first day of the calendar month after
you meet the eligibility requirements.
For example:
If you start work on April 1, 1996, you would complete six months of
service on September 30, 1996. You would be eligible to join the Plan on
October 1, 1996.
If you terminate your employment after you become a Plan participant and
then are rehired at some future date, you are eligible to participate in
the Plan again on the first day that you complete one Hour of Service
following your reemployment.
III CONTRIBUTIONS
-------------
Tax-Deferred Contributions
--------------------------
Contributions to the 401(k) plan are deducted from your salary before any
state or federal income taxes are withheld. Therefore, any taxes due on
these contributions (and their earnings) are deferred until the money is
actually paid out to you. For many employees, this will occur at
retirement, a time when your taxable income may be considerably less.
2
<PAGE>
Contribution Limits
-------------------
You may contribute up to 15% (in whole percentages) of your total salary
on a tax-deferred basis. The percentage you choose to defer is
automatically deducted from your paycheck and contributed to your "401(k)
Contribution Account."
Current tax laws limit your annual 401(k) contribution to no more than
$9,500 in 1996. This amount is adjusted annually by the Secretary of the
Treasury. Under some circumstances, federal regulations may further
limit the amount an individual is allowed to contribute to ensure that
the plan does not favor employees at higher income levels. If a reduction
in your contribution level is necessary, you will be notified in writing.
Profit Sharing Contributions by the Company.
-------------------------------------------
The Company may contribute an additional amount to the Plan each Plan
Year. If a profit sharing contribution is made for the Plan Year, the
contribution will be allocated to your Employer Account (if you are an
eligible participant) as a percentage of your compensation for the year.
If you are an employee newly eligible to participate in the plan, the
contribution will be allocated only on the compensation you earned
following the entry date an which you become a participant.
You must be employed on the last day of the Plan Year to share in the
Employer contribution.
IV. VESTING
-------
The amount in your 401(k) Contribution Account is always 100% vested and
nonforfeitable. This means you have complete ownership in this account
and are entitled to receive the full balance when you leave the firm.
The amount in your Employer Profit Sharing Contribution Account will vest
based on your years of service under the following schedule. If you
leave the Company's employ, you will be entitled to receive the vested
percentage of the amount in your account.
<TABLE>
<CAPTION>
Years of Service Vested Interests
---------------- -----------------
<S> <C>
0-1 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
</TABLE>
4
<PAGE>
V. FORFEITURES
-----------
Forfeitures are created when participants terminate employment before
becoming entitled to the full benefits under the Plan. These forfeited
amounts will be used to reduce your Employees contributions to the plan.
VI. TRANSFERS FROM QUALIFIED PLANS (ROLLOVERS)
------------------------------------------
At the discretion of the Administrator, you may be permitted to deposit
into your Plan distributions you have received from other plans. Such a
deposit is called a "rollover" and may result in tax savings to you. You
should consult qualified counsel.
VII PLAN INVESTMENTS
----------------
The Plan provides you the flexibility to direct your investments to match
your needs.
Portfolio I: Short-Term Bond Blend
-----------------------------------
This Portfolio is invested in money market instruments and short term
bonds. The allocation of assets is designed to provide a competitive
rate of return with a primary emphasis on capital preservation.
Portfolio II: 20/80 Blend (20% Stocks and 80% Bonds)
-----------------------------------------------------
This diversified investment Portfolio includes a much higher component of
fixed income securities (80%) than stocks (20%) with much of the assets
invested in money market instruments. The stock portion of the portfolio
includes large mid-sized and small U.S. companies and large international
companies.
Portfolio III: 40/60 Blend (40% Stocks and 60% Bonds)
------------------------------------------------------
This diversified investment Portfolio has a larger investment in fixed
income securities (60%) than in stocks (40%). The fixed income holdings
include money market instruments and intermediate/long-term bonds. The
stock portion has a heavy investment in large U.S. companies, plus large
international companies and small and mid-sized U.S. growth companies,
4
<PAGE>
Portfolio IV: 60/40 Blend (60% Stocks and 40% Bonds)
-----------------------------------------------------
More of this diversified Portfolio is invested in stocks (60%) than in
bonds (40%). Long term growth is provided by the stock portion which
includes international companies, as well as small and mid-sized U.S.
growth companies. A portion is invested in income stocks with higher
than average dividend yields. The fixed portion is invested in
intermediate/long-term bonds.
Portfolio V: 80/20 Blend (80% Stocks and 20% Bonds)
----------------------------------------------------
A larger commitment to small and mid-sized companies expected to have
above-average growth characterizes the stock portion (80%) of this
diversified investment Portfolio. Stocks of large U.S. companies make up
over half the portfolio and 15% is invested in international companies.
The Bond portion (20%) is invested in intermediate/long-term bonds.
Portfolio VI: Equity Blend
---------------------------
This 100% stock fund includes small and mid-sized companies, as well as a
major commitment to international companies. Over half the Portfolio is
invested in large U.S. companies.
For more detailed information on your investment alternatives, see your
Enrollment Packet.
Should you want to:
1. Change your investment choices for future contributions, or
2. Transfer your existing account balance from one investment portfolio
to another,
complete the appropriate election form found in the Enrollment Packer or
call the Reber Group at 1-800-932-5501.
Valuations
----------
Your account is valued for any increase or decrease in the fair market
value an a daily basis. The Reber Group will prepare a statement of
account each quarter detailing your transactions from one statement to
the next. This statement will show your beginning balance,
contributions, investment transfers, any earnings on your account and
your ending balance.
5
<PAGE>
VIII PARTICIPANT LOANS
-----------------
The Company allows you to borrow against the value of your Accounts in
the 401(k) Profit Sharing Plan. Loans are available to help you meet
your financial needs, but remember, they must be repaid.
Eligibility
-----------
All Plan participants may apply for a loan. Loan applications are
available from the Plan Administrator.
Your loan will be approved if (1) you have sufficient funds available in
your Account as determined by the formula below; (2) you are not under a
"financial hardship" such that the requested loan may be in jeopardy of
default; and (3) you are competent to enter into legal contracts.
How Much May Be Borrowed?
-------------------------
A loan may not exceed the lesser of:
(a) 50% of the combined vested value of your Account.
(b) $50,000 reduced by the excess (if any) of:
The highest loan balance during the one-year period preceding the
date of the loan,
over
The outstanding balance of loans on the date this loan is made.
The minimum loan amount is $1,000.
Interest Rates
--------------
The law requires that the Plan charge an interest rate comparable to that
being charged by commercial lenders. See your Plan Administrator for
current rates and details.
Loan Repayment Period
---------------------
Loans must be repaid within a maximum period of 5 years, unless they are
for the purchase of your primary residence. Residential loans must be
repaid within 20 years. Payments must be made on at least a quarterly
basis.
6
<PAGE>
Payments are made by payroll deductions.
Loans must be amortized equally over the life of the loan, providing
substantially equal payments of principal and interest payments.
Default on Loan
---------------
If you fail to pay the full amount of any payment on the date such
payment is due, or if a required spousal consent is effectively revoked
or otherwise becomes invalid or inoperative, then the loan is considered
in default. If a default occurs at a time when a distribution is
prohibited by law (e.g., prior to age 59-1/2 or termination of
employment), then the defaulted loan is declared a deemed distribution.
A deemed distribution will not result in the immediate reduction of your
Account, but in all other respects, the outstanding indebtedness win be
treated as a distribution. For example, the Plan Administrator will
direct the Trustee to issue the appropriate tax forms so that the
outstanding balance of your loan will be reported to the IRS as gross
income, and as such, will be subject to federal and state income taxes in
the year of default. Also, unless you are at least age 59-1/2, you will
be required to a pay a 10% penalty tax on the deemed distribution.
Spousal Consent Required
------------------------
If you are married, you must obtain your spouse's consent to obtain a
loan. Your spouse must sign the appropriate forms as provided by the
Plan Administrator, and your spouse's signature must be notarized by a
notary public.
Administrative Fees
-------------------
Your Account will be charged the following administrative fees for each
outstanding loan:
$60 Setup charge
$60 Annual administrative fee
IX. IN-SERVICE WITHDRAWALS
----------------------
Hardship Withdrawal
-------------------
Because 401(k) plans are designed to encourage long-term savings,
withdrawals are limited by law. This is the government's trade-off for
allowing you the advantages of saving with pre-tax dollars. However, if
you have an immediate and heavy financial hardship, and you have no other
resources available to meet this financial need, you may
8
<PAGE>
be permitted to withdraw an amount necessary to meet the hardship. The
law is very strict, thus the Plan only permits hardship withdrawals to
cover:
1. Non-reimbursable medical expenses previously incurred by yourself or
your dependents, or funds necessary for yourself or dependents to obtain
medical care;
2. The purchase of your primary residence;
3. Payment of amounts necessary to prevent eviction from, or foreclosure on
the mortgage of, your primary residence; or
4. Payment of tuition for the next 12 months of post-secondary education
for yourself or dependents.
Furthermore, hardship withdrawals are subject to the following conditions:
1. You can only withdraw the amount necessary to satisfy your financial
need (however, the amount withdrawn may include any amounts necessary to
pay any federal, state, or local income taxes or penalties reasonably
anticipated to result from the distribution);
2. You can only withdraw your own 401(k) Contributions -- you cannot
withdraw the income earned on your contributions or any Company
contribution;
3. You must first obtain all distributions and all nontaxable loans
currently available under all plans maintained by the Company;
4. You are prohibited from contributing to any plans sponsored by the
Company for at least 12 months after receipt of the hardship withdrawal;
5. You may only make one hardship withdrawal in each Plan Year; and
6. The maximum amount of pre-tax elective contribution for the year after
the year you received the hardship withdrawal will be reduced by the amount
of pre-tax contribution you made to the Plan in the year of the hardship
withdrawal.
Money withdrawn from your 401(k) account becomes taxable in the year
withdrawn. In addition, if you take a hardship withdrawal prior to
attaining age 59-1/2, the amount that is withdrawn will be subject to a 10%
penalty tax.
As a practical matter, you should not consider your money in the Plan to be
available for current needs, and you should not put money in the 401(k)
Plan if you suspect you might need it in the near future. Remember, this
is not "rainy day" money -- you are saving for your
8
<PAGE>
retirement.
Withdrawals After Age 59-1/2
----------------------------
Upon attaining age 59-1/2, you may withdraw your entire account balance
without penalty, but the amount withdrawn will be taxable in the year it
is withdrawn.
After receiving an age 59-1/2 withdrawal, you may continue to participate
in the Plan.
X. NORMAL RETIREMENT AGE
---------------------
The normal retirement age is the date you attain age 65 and at least 5
years after your date of employment with Pan American Bank.
XI. PAYMENTS WHEN YOU ARE NO LONGER EMPLOYED
----------------------------------------
When you leave the firm for any reason, you are entitled to the vested
balance in your Account(s). If your total Account(s) balance is $3,500 or
less, you will receive your full balance in a lump sum cash payment. If
your total Account balance is more than $3,500, you (and your spouse, if
you are married) may elect to postpone payment of your Account until a
later date. You will be provided forms on which to make this election and
you may change your election at any time.
In the event of your death, your vested balance will be distributed to
your beneficiary. The beneficiary of a participant who has been married
for at least one year will be his surviving spouse unless the spouse
consents in writing to the designation of another beneficiary.
XII. MANDATORY DISTRIBUTIONS
-----------------------
Whether you are actively employed by the Firm or not, you must begin
receiving your retirement benefits no later than April 1 of the calendar
year following the year in which you reach age 70-1/2.
XIII. TAXES ON BENEFITS
-----------------
You do not pay taxes on the money in your account until you actually
receive it. Until then, it is sheltered from federal and state income
tax. When payment is actually made, the total amount received will be
subject to tax.
9
<PAGE>
The amount of tax you pay depends on the type of distribution you elect and
the tax laws in effect when the payment is made.
When you leave the Company, you may continue to defer taxes by transferring
your account to a special rollover IRA or to the qualified retirement plan
of another employer. A payment from the Plan that is eligible for
"rollover" can be taken in two ways. You can have all or any portion of
your payment either (1) PAID IN A "DIRECT ROLLOVER" or (2) PAID TO YOU. A
rollover is a payment of your Plan benefits to your individual retirement
arrangement (IRA) or to another employer plan. This choice will affect the
tax you owe.
If you choose a DIRECT ROLLOVER
. Your payment will not be taxed in the current year and no income tax
will be withheld.
. Your payment will be made directly to your IRA or, if you choose, to
another employer plan that accepts your rollover.
. Your payment will be taxed later when you take it out of the IRA or
the employer plan.
If you choose to have your Plan benefits PAID TO YOU
. You will receive only 80% of the payment, because the Plan
administrator is required to withhold 20% of the payment and send it to
the IRS as income tax withholding to be credited against your taxes.
. Your payment will be taxed in the current year unless you roll it
over. You may be able to use special tax rules that could reduce the tax
you owe. However, if you receive the payment before age 59-1/2, you also
may have to pay an additional 10% tax.
. You can roll over the payment to your IRA or to another employer
plan that accepts your rollover within 60 days of receiving the payment.
The amount rolled over will not be taxed until you take it out of the IRA
or employer plan.
. If you want to roll over 100% of the payment to an IRA or an
employer plan, you must find other money to replace the 20% that was
withheld. If you roll over only the 80% that you received, you will be
taxed on the 20% that was withheld and that is not rolled over.
Without a rollover, most withdrawals before age 59-1/2 (other than for
disability or death) result in an additional federal penalty tax equal to
10% of the amount received.
10
<PAGE>
Withdrawals after age 59-1/2 are subject only to income tax and may
qualify for favorable "five year averaging" tax treatment.
Before you apply for distribution of your accounts, you should consult
with a tax advisor about the consequences of the various types of
payment.
XIV BENEFICIARY DESIGNATION
-----------------------
You may designate a beneficiary, or beneficiaries, who will receive any
benefits payable at your death. If you are married, and your designated
beneficiary is to be someone other than your spouse, your spouse must
consent to the designation. His or her consent must be on a form
provided by the Plan Administrator and must be notarized by a notary
public.
Your beneficiary may be changed at any time by written designation filed
with the Plan Administrator. If you are married, your spouse must
consent to any change in beneficiary(ies). If you do not name a
beneficiary or if the beneficiary you name is not alive, the amount in
your accounts will be paid to your surviving spouse, or if none, as
provided in the Plan.
XV. TOP HEAVY PLAN REQUIREMENTS
---------------------------
The Internal Revenue Service has issued special rules establishing
minimum vesting and benefit formulas for plans which are "top heavy." If
the Company's plans become top heavy, and compliance with the additional
rules imposed by the IRS becomes necessary, you will be notified.
XVI CONTINUANCE OF PLAN
-------------------
The Company reserves the right to amend or terminate the Plan at any
time.
Amendment
---------
The firm shall ensure that no amendment:
1. Provides in any way for the use or diversion of Plan assets for
any purpose other than the exclusive benefit of the participants and
their beneficiaries, including the payment of the administrative expenses
of the Plan and Trust;
2. Reduces the vested percentage of the amount credited to the account of
any participant or beneficiary; or
11
<PAGE>
3. Provides for the direct or indirect reversion of Plan assets to the
Company.
Termination of Plan
-------------------
The firm anticipates and fully intends that the Plan will be a permanent
program for the exclusive benefit of the participants and their
beneficiaries. The firm, however, reserves the right to terminate the
Plan at any time if such action becomes necessary.
If it is necessary to discontinue the Plan, all Plan assets will be used
to provide benefits for Plan participants. No part of the Plan assets
will be returned to the firm.
XVII CLAIMS PROCEDURE
----------------
A claim is made whenever a participant or a participant's beneficiary
submits a written request for benefits to the Plan Administrator. If the
claim is wholly or partially denied, the Plan Administrator will supply
you with a written notice explaining the reasons for the denial within 60
days of the date you filed your claim. After you receive the written
notice, you may appeal the denial of the Claim under the Claim Review
Procedure, as stated below.
Notice of Decision on Your Claim
--------------------------------
The Plan Administrator will provide to every claimant who is denied
benefits a written notice that contains:
1. The specific reason or reasons for the denial;
2. Reference to specific Plan provisions on which the denial is based;
3. A description of any additional material or information necessary to
correct the claim and an explanation why the material or information is
necessary; and
4. An explanation of the Plan's claim review procedure. If you do not
receive notice of the decision on your claim within the 60-day period
following the filing of your claim, you can consider the claim denied.
Claim Review Procedure
----------------------
If your claim has been denied in whole or in part, you have the following
rights of appeal under the Claim Review Procedure:
1. You can submit a written request for a full and fair review of the
denial of your claim;
12
<PAGE>
2. You can review all documents relevant to the denial of your claim; and
3. You can submit additional issues or comments to the Plan Administrator
as part of your appeal.
If you submit your claim for review, the Plan Administrator will notify
you, in writing, of its decision within 60 days after you file your
appeal. If your appeal has been denied, the decision will set forth the
specific reason or reasons for the denial and will cite the Plan
provisions on which the denial is based. The decision of the Plan
Administrator is final. You may, however, file your claim for benefits
in a state or federal court.
XVIII MISCELLANEOUS
-------------
Participant's Rights
--------------------
The terms of your employment are not affected in any way by the Plan and
Trust. Nothing in the Plan or Trust can be construed as providing you or
any other person with any legal or equitable right against the firm,
except as explicitly stated in the Plan or Trust, or as required by law.
Insurance of Benefits
---------------------
Under ERISA, the benefits of defined contribution plans are exempted from
coverage by the Pension Benefit Guaranty Corporation. Since this Plan is
a defined contribution plan, your benefits under the Plan are not
federally insured.
Alienation of Benefits
----------------------
Under federal law, you cannot assign or alienate your Plan benefits
before you receive them. In addition, to the extent permitted by law,
your creditors cannot attach, garnish, execute against, or otherwise
subject your account balance to legal or equitable process. One exception
to this rule is a payment made pursuant to a Qualified Domestic Relations
Order (QDRO). A QDRO is a court order or decree that compels the Plan
Administrator to pay or allocate a portion of your benefits to someone
else, generally your spouse, ex-spouse, or child. The Plan Administrator
will promptly notify any participant whose benefits are the subject of a
court order and will determine within a reasonable period of time whether
the court order is in fact a QDRO.
Controlling Law
---------------
This Plan and Trust shall be construed and enforced according to the laws
of Colorado. Federal law shall govern in any instance in which state law
is preempted.
13
<PAGE>
Maximum Benefits
----------------
Internal Revenue Service regulations limit the annual amount of
contributions and forfeitures that can be allocated to a participants
account. These limitations normally apply only to the highest paid
employees.
XIX A STATEMENT OF YOUR RIGHTS UNDER ERISA
--------------------------------------
As a participant in the Company 401(k) Profit Sharing Plan, you are
entitled to certain rights and protections under the Employee Retirement
Income Security Act of 1974 (ERISA). ERISA provides that all plan
participants shall be entitled to:
1. Examine, without charge, at the Plan Administrator's office and at
other specified locations, all Plan documents, including insurance
contracts, and copies of all documents filed by the Plan with the
Department of Labor, such as detailed annual reports and plan
descriptions.
2. Obtain copies of all Plan documents and other Plan information upon
written request to the Plan Administrator. The Administrator may make a
reasonable charge for the copies.
3. Receive a summary of the Plan's annual financial report. The Plan
Administrator is required by law to furnish each participant with a copy
of this summary annual report.
4. Obtain a statement of your total Plan benefits. The statement must be
requested in writing and is not required to be given to you more than
once a year. The Plan must provide the statement free of charge. In
addition to creating rights for Plan participants, MISA imposes duties
upon the people who are responsible for the operation of an employee
benefit plan. The people who administer your Plan are called
"fiduciaries," and have a duty to act prudently in the sole interest of
you and other Plan participants and beneficiaries. No one, including
your employer, or any other person, may fire you or otherwise
discriminate against you in any way to prevent you from obtaining a
benefit or exercising your rights under ERISA. If your claim for a
benefit is denied in whole or in part, you must receive a written
explanation of the reason for the denial. You have the right to have the
Plan review and reconsider your claim.
Under ERISA, there are steps you can take to enforce the above stated
rights. For instance, if you request materials from the Plan and do not
receive them within 30 days, you may file suit in a federal court. In
such a case, the court may require the Plan Administrator to provide the
materials and pay you up to $100 per day until you receive the materials,
unless the materials were not sent because of reasons beyond the control
of
14
<PAGE>
the Administrator. If you have a claim for benefits which is denied or
ignored, in whole or in part, you may file suit in a state or federal
court.
If the Plan's fiduciaries misuse the assets of the Plan or if you are
discriminated against for asserting your rights, you may seek assistance
from the U.S. Department of Labor, or you may file suit in a federal
court. The court will decide who should pay court costs and legal fees.
If you are successful, the court may order the person you have sued to
pay these costs and fees. If you lose, the court may order you to pay
these costs and fees, if, for example, it finds your claim is frivolous.
If you have any questions about your Plan, you should contact the Plan
Administrator. If you have any questions about this statement or about
your rights under ERISA, you should contact the nearest Area Office of
the U.S. Labor Management Services Administration, Department of Labor.
15
<PAGE>
XX. PLAN DIRECTORY
--------------
Plan Name: Pan American Bank 401(k) Profit Sharing Plan
Employer and Plan Sponsor: Pan American Bank, FSB
(the "Company") 1300 South El Camino Real, Suite 320
San Mateo, CA 94402
(415) 345-1800
Employer
Identification No.: 94-3201867
Plan Number: 001
Plan Year: January 1 - December 31
Original Effective Date: April 1, 1995
Type of Plan: 401(k) Profit Sharing Plan
Funding Medium: Trust
Trustee: Advisors Trust Company
450 N. Higgins
Missoula, Montana 59802
Plan Administrator: Pan American Bank, FSB
1300 South El Camino Real, Suite 320
San Mateo, CA 94402
Legal Agent: Service of legal process may be made
upon either the Plan Administrator
or upon the Trustee.
This booklet is a summary of the provisions of the Company 401(k) Profit
Sharing Plan. Its purpose is to explain how the Plan works, how you
qualify for and ultimately receive Plan benefits, what benefits are
available to you, and what your rights are as a Plan participant. We
have tried to write this summary in clear, understandable and informal
language, but please refer to the Plan document for complete information.
In the event of any conflict between this booklet and the Plan document,
the Plan document will govern. A complete copy of the Plan document is
available for inspection during normal business hours from the Plan
Administrator.
16
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C> <C>
I. INTRODUCTION................................ 1
II. ELIGIBILITY................................. 2
III. CONTRIBUTIONS............................... 2
IV. VESTING..................................... 3
V. FORFEITURES................................. 4
VI. TRANSFERS FROM QUALIFIED PLANS (ROLLOVERS).. 4
VII. PLAN INVESTMENTS............................ 4
VIII. PARTICIPANT LOANS........................... 6
IX. IN-SERVICE WITHDRAWALS...................... 7
X. NORMAL RETIREMENT AGE....................... 9
XI. PAYMENTS WHEN YOU ARE NO LONGER EMPLOYED.... 9
XII. MANDATORY DISTRIBUTIONS..................... 9
XIII. TAXES ON BENEFITS........................... 9
XIV. BENEFICIARY DESIGNATION.....................11
XV. TOP HEAVY PLAN REQUIREMENTS.................11
XVI. CONTINUANCE OF PLAN.........................11
XVII. CLAIMS PROCEDURE............................12
XVIII. MISCELLANEOUS...............................13
XIX. A STATEMENT OF YOUR RIGHTS UNDER ERISA......14
XX. PLAN DIRECTORY..............................16
</TABLE>
i
<PAGE>
Exhibit 10.63.1
L.P.AMENDED AND RESTATED
PROMISSORY NOTE
---------------
$1,628,000 (Unsecured Loan) Los Angeles, California
January 15, 1998
FOR VALUE RECEIVED, UNITED PANAM FINANCIAL CORP., a Delaware
corporation formerly known as Pan American Group, Inc. (the "Borrower"),
promises to pay to the order of Pan American Financial, L.P., its successors and
assigns (the "Lender") at 1999 Avenue of the Stars, Suite 2960, Los Angeles,
California 90067 or at such other place as might be designated in writing by the
Lender, the principal sum of One Million Six Hundred Twenty-Eight Thousand
Dollars ($1,628,000) or so much thereof as has been disbursed by the Lender and
remains unpaid, together with interest thereon at a fixed rate equal to Eight
Percent (8.0%) per annum. Interest will be calculated on the basis of the actual
days elapsed based on a per diem charge computed over a year composed of three
hundred sixty (360) days. This Note amends and restates in its entirety the
Promissory Note of Borrower, dated July 1, 1997, representing a loan from Lender
to Borrower, the proceeds of which were disbursed to Borrower on or after July
1, 1997.
Principal and interest will be paid as follows: Interest on the
amounts disbursed, accrued from the date of disbursement through the last day of
each annual period ending June 30, will be paid by the 15th day of the
following July, commencing with July 15, 1998. On June 30, 1999, the entire
unpaid principal balance and all accrued but unpaid interest thereon will be due
and payable.
The Borrower will have the right at any time and from time to time to
prepay the unpaid principal balance of this Note, in whole or in part, without
penalty, but with interest on the unpaid principal balance accrued to the date
of prepayment. In addition, the Borrower shall immediately prepay all amounts
due hereunder, including accrued interest, within fifteen (15) days of
Borrower's raising of not less than $10,000,000 in equity capital after the date
hereof.
The Borrower agrees that if, and as often as, this Note is placed in
the hands of an attorney for collection or to defend or enforce any of the
Lender's rights under this Note or otherwise relating to the indebtedness hereby
evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all
court costs and all other expenses incurred by the Lender in connection
therewith. At the option of the Lender, after the failure of the Borrower to
pay any such sum hereunder within ten (10) days of the date due, the unpaid
balance of this Note will bear interest at Ten Percent (10.0%) per annum.
During the existence of any default, the Lender may apply payments received on
any amount due hereunder or under the terms of any instrument now
<PAGE>
or hereafter evidencing or securing payment of this indebtedness as the Lender
determines from time to time.
This Note is issued by the Borrower and accepted by the Lender
pursuant to a lending transaction negotiated, consummated and to be performed in
California. This Note is to be construed according to the internal laws of the
State of California.
The makers, endorsers, sureties, guarantors and all other persons who
might become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of nonpayment. Such parties consent
to any extension of time (whether one or more) of payment hereof, release of all
or any part of the collateral securing payment hereof or release of any party
liable for the payment of this obligation. Any such extension or release may be
made without notice to any such party and without discharging such party's
liability hereunder.
This Note is intended to strictly conform with all usury laws to the
extent applicable to the transactions contemplated hereby. The provisions of
this Note and of all agreements between the Borrower and the Lender are hereby
expressly limited so that in no contingency or event whatsoever, shall the
amount contracted for, charged, paid or agreed to be paid to the Lender for the
use, forbearance or retention of money or credit hereunder or otherwise exceed
the maximum rate permitted by law therefor. If, from any circumstance
whatsoever, performance or fulfillment of any provision hereof or of any
agreement between the Borrower and the Lender shall, at the time of the
execution and delivery thereof, or at the time or performance of such provision
shall be due, involve or purport to require any payment in excess of the limits
prescribed by law, the obligation to be performed or fulfilled shall be reduced
automatically to the limit prescribed by law without the necessity of the
execution of any amendment or new document.
IN WITNESS WHEREOF, the Borrower has executed this instrument
effective the date first above written.
UNITED PANAM FINANCIAL CORP.
a Delaware corporation
By: /s/ Guillermo Bron
-----------------------------------------
Its: Chairman
----------------------------------
2
<PAGE>
Exhibit 10.64.1
AMENDED AND RESTATED
PROMISSORY NOTE
---------------
$258,000 (Unsecured Loan) Los Angeles, California
January 15, 1998
FOR VALUE RECEIVED, UNITED PANAM FINANCIAL CORP., a Delaware
corporation formerly known as Pan American Group, Inc. (the "Borrower"),
promises to pay to the order of BVG West Corp., its successors and assigns (the
"Lender") at 1999 Avenue of the Stars, Suite 2960, Los Angeles, California 90067
or at such other place as might be designated in writing by the Lender, the
principal sum of Two Hundred Fifty-Eight Thousand Dollars ($258,000) or so much
thereof as has been disbursed by the Lender and remains unpaid, together with
interest thereon at a fixed rate equal to Eight Percent (8.0%) per annum.
Interest will be calculated on the basis of the actual days elapsed based on a
per diem charge computed over a year composed of three hundred sixty (360) days.
This Note amends and restates in its entirety the Promissory Note of Borrower,
dated July 1, 1997, representing a loan from Lender to Borrower, the proceeds of
which were disbursed to Borrower on or after July 1, 1997.
Principal and interest will be paid as follows: Interest on the
amounts disbursed, accrued from the date of disbursement through the last day of
each annual period ending June 30, will be paid by the 15th day of the following
July, commencing with July 15, 1998. On June 30, 1999, the entire unpaid
principal balance and all accrued but unpaid interest thereon will be due and
payable.
The Borrower will have the right at any time and from time to time to
prepay the unpaid principal balance of this Note, in whole or in part, without
penalty, but with interest on the unpaid principal balance accrued to the date
of prepayment. In addition, the Borrower shall immediately prepay all amounts
due hereunder, including accrued interest, within fifteen (15) days of
Borrower's raising of not less than $10,000,000 in equity capital after the date
hereof.
The Borrower agrees that if, and as often as, this Note is placed in
the hands of an attorney for collection or to defend or enforce any of the
Lender's rights under this Note or otherwise relating to the indebtedness hereby
evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all
court costs and all other expenses incurred by the Lender in connection
therewith. At the option of the Lender, after the failure of the Borrower to
pay any such sum hereunder within ten (10) days of the date due, the unpaid
balance of this Note will bear interest at Ten Percent (10.0%) per annum.
During the existence of any default, the Lender may apply payments received on
any amount due hereunder or under the terms of any instrument now
<PAGE>
or hereafter evidencing or securing payment of this indebtedness as the Lender
determines from time to time.
This Note is issued by the Borrower and accepted by the Lender
pursuant to a lending transaction negotiated, consummated and to be performed in
California. This Note is to be construed according to the internal laws of the
State of California.
The makers, endorsers, sureties, guarantors and all other persons who
might become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of nonpayment. Such parties consent
to any extension of time (whether one or more) of payment hereof, release of all
or any part of the collateral securing payment hereof or release of any party
liable for the payment of this obligation. Any such extension or release may be
made without notice to any such party and without discharging such party's
liability hereunder.
This Note is intended to strictly conform with all usury laws to the
extent applicable to the transactions contemplated hereby. The provisions of
this Note and of all agreements between the Borrower and the Lender are hereby
expressly limited so that in no contingency or event whatsoever, shall the
amount contracted for, charged, paid or agreed to be paid to the Lender for the
use, forbearance or retention of money or credit hereunder or otherwise exceed
the maximum rate permitted by law therefor. If, from any circumstance
whatsoever, performance or fulfillment of any provision hereof or of any
agreement between the Borrower and the Lender shall, at the time of the
execution and delivery thereof, or at the time or performance of such provision
shall be due, involve or purport to require any payment in excess of the limits
prescribed by law, the obligation to be performed or fulfilled shall be reduced
automatically to the limit prescribed by law without the necessity of the
execution of any amendment or new document.
IN WITNESS WHEREOF, the Borrower has executed this instrument
effective the date first above written.
UNITED PANAM FINANCIAL CORP.
a Delaware corporation
By: /s/ Guillermo Bron
-----------------------------------------
Its: Chairman
----------------------------------
2
<PAGE>
Exhibit 10.65.1
AMENDED AND RESTATED
PROMISSORY NOTE
---------------
$52,500 (Unsecured Loan) Los Angeles, California
January 15, 1998
FOR VALUE RECEIVED, UNITED PANAM FINANCIAL CORP., a Delaware
corporation formerly known as Pan American Group, Inc. (the "Borrower"),
promises to pay to the order of Lawrence J. Grill, its successors and assigns
(the "Lender") at 1300 South El Camino Real, Suite 320, San Mateo, California
94402 or at such other place as might be designated in writing by the Lender,
the principal sum of Fifty-Two Thousand Five Hundred Dollars ($52,500) or so
much thereof as has been disbursed by the Lender and remains unpaid, together
with interest thereon at a fixed rate equal to Eight Percent (8.0%) per annum.
Interest will be calculated on the basis of the actual days elapsed based on a
per diem charge computed over a year composed of three hundred sixty (360) days.
This Note amends and restates in its entirety the Promissory Note of Borrower,
dated July 1, 1997, representing a loan from Lender to Borrower, the proceeds of
which were disbursed to Borrower on or after July 1, 1997.
Principal and interest will be paid as follows: Interest on the
amounts disbursed, accrued from the date of disbursement through the last day of
each annual period ending June 30, will be paid by the 15th day of the following
July, commencing with July 15, 1998. On June 30, 1999, the entire unpaid
principal balance and all accrued but unpaid interest thereon will be due and
payable.
The Borrower will have the right at any time and from time to time to
prepay the unpaid principal balance of this Note, in whole or in part, without
penalty, but with interest on the unpaid principal balance accrued to the date
of prepayment. In addition, the Borrower shall immediately prepay all amounts
due hereunder, including accrued interest, within fifteen (15) days of
Borrower's raising of not less than $10,000,000 in equity capital after the date
hereof.
The Borrower agrees that if, and as often as, this Note is placed in
the hands of an attorney for collection or to defend or enforce any of the
Lender's rights under this Note or otherwise relating to the indebtedness hereby
evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all
court costs and all other expenses incurred by the Lender in connection
therewith. At the option of the Lender, after the failure of the Borrower to
pay any such sum hereunder within ten (10) days of the date due, the unpaid
balance of this Note will bear interest at Ten Percent (10.0%) per annum.
During the existence of any default, the Lender may apply payments received on
any amount due hereunder or under the terms of any instrument now
<PAGE>
or hereafter evidencing or securing payment of this indebtedness as the Lender
determines from time to time.
This Note is issued by the Borrower and accepted by the Lender
pursuant to a lending transaction negotiated, consummated and to be performed in
California. This Note is to be construed according to the internal laws of the
State of California.
The makers, endorsers, sureties, guarantors and all other persons who
might become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of nonpayment. Such parties consent
to any extension of time (whether one or more) of payment hereof, release of all
or any part of the collateral securing payment hereof or release of any party
liable for the payment of this obligation. Any such extension or release may be
made without notice to any such party and without discharging such party's
liability hereunder.
This Note is intended to strictly conform with all usury laws to the
extent applicable to the transactions contemplated hereby. The provisions of
this Note and of all agreements between the Borrower and the Lender are hereby
expressly limited so that in no contingency or event whatsoever, shall the
amount contracted for, charged, paid or agreed to be paid to the Lender for the
use, forbearance or retention of money or credit hereunder or otherwise exceed
the maximum rate permitted by law therefor. If, from any circumstance
whatsoever, performance or fulfillment of any provision hereof or of any
agreement between the Borrower and the Lender shall, at the time of the
execution and delivery thereof, or at the time or performance of such provision
shall be due, involve or purport to require any payment in excess of the limits
prescribed by law, the obligation to be performed or fulfilled shall be reduced
automatically to the limit prescribed by law without the necessity of the
execution of any amendment or new document.
IN WITNESS WHEREOF, the Borrower has executed this instrument
effective the date first above written.
UNITED PANAM FINANCIAL CORP.
a Delaware corporation
By: /s/ Guillermo Bron
------------------------------------------
Its: Chairman
-----------------------------------
2
<PAGE>
Exhibit 10.66.1
AMENDED AND RESTATED
PROMISSORY NOTE
---------------
$33,000 (Unsecured Loan) Los Angeles, California
January 15, 1998
FOR VALUE RECEIVED, UNITED PANAM FINANCIAL CORP., a Delaware
corporation formerly known as Pan American Group, Inc. (the "Borrower"),
promises to pay to the order of Robert Wilson, its successors and assigns (the
"Lender") at 1900 North California, Suite 20, Walnut Creek, California 94596 or
at such other place as might be designated in writing by the Lender, the
principal sum of Thirty-Three Thousand Dollars ($33,000) or so much thereof as
has been disbursed by the Lender and remains unpaid, together with interest
thereon at a fixed rate equal to Eight Percent (8.0%) per annum. Interest will
be calculated on the basis of the actual days elapsed based on a per diem charge
computed over a year composed of three hundred sixty (360) days. This Note
amends and restates in its entirety the Promissory Note of Borrower, dated July
1, 1997, representing a loan from Lender to Borrower, the proceeds of which were
disbursed to Borrower on or after July 1, 1997.
Principal and interest will be paid as follows: Interest on the
amounts disbursed, accrued from the date of disbursement through the last day of
each annual period ending June 30, will be paid by the 15th day of the following
July, commencing with July 15, 1998. On June 30, 1999, the entire unpaid
principal balance and all accrued but unpaid interest thereon will be due and
payable.
The Borrower will have the right at any time and from time to time to
prepay the unpaid principal balance of this Note, in whole or in part, without
penalty, but with interest on the unpaid principal balance accrued to the date
of prepayment. In addition, the Borrower shall immediately prepay all amounts
due hereunder, including accrued interest, within fifteen (15) days of
Borrower's raising of not less than $10,000,000 in equity capital after the date
hereof.
The Borrower agrees that if, and as often as, this Note is placed in
the hands of an attorney for collection or to defend or enforce any of the
Lender's rights under this Note or otherwise relating to the indebtedness hereby
evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all
court costs and all other expenses incurred by the Lender in connection
therewith. At the option of the Lender, after the failure of the Borrower to
pay any such sum hereunder within ten (10) days of the date due, the unpaid
balance of this Note will bear interest at Ten Percent (10.0%) per annum.
During the existence of any default, the Lender may apply payments received on
any amount due hereunder or under the terms of any instrument now
<PAGE>
or hereafter evidencing or securing payment of this indebtedness as the Lender
determines from time to time.
This Note is issued by the Borrower and accepted by the Lender
pursuant to a lending transaction negotiated, consummated and to be performed in
California. This Note is to be construed according to the internal laws of the
State of California.
The makers, endorsers, sureties, guarantors and all other persons who
might become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of nonpayment. Such parties consent
to any extension of time (whether one or more) of payment hereof, release of all
or any part of the collateral securing payment hereof or release of any party
liable for the payment of this obligation. Any such extension or release may be
made without notice to any such party and without discharging such party's
liability hereunder.
This Note is intended to strictly conform with all usury laws to the
extent applicable to the transactions contemplated hereby. The provisions of
this Note and of all agreements between the Borrower and the Lender are hereby
expressly limited so that in no contingency or event whatsoever, shall the
amount contracted for, charged, paid or agreed to be paid to the Lender for the
use, forbearance or retention of money or credit hereunder or otherwise exceed
the maximum rate permitted by law therefor. If, from any circumstance
whatsoever, performance or fulfillment of any provision hereof or of any
agreement between the Borrower and the Lender shall, at the time of the
execution and delivery thereof, or at the time or performance of such provision
shall be due, involve or purport to require any payment in excess of the limits
prescribed by law, the obligation to be performed or fulfilled shall be reduced
automatically to the limit prescribed by law without the necessity of the
execution of any amendment or new document.
IN WITNESS WHEREOF, the Borrower has executed this instrument
effective the date first above written.
UNITED PANAM FINANCIAL CORP.
a Delaware corporation
By: /s/ Guillermo Bron
-----------------------------------------
Its: Chairman
----------------------------------
2
<PAGE>
Exhibit 10.67.1
AMENDED AND RESTATED
PROMISSORY NOTE
---------------
$28,500 (Unsecured Loan) Los Angeles, California
January 15, 1998
FOR VALUE RECEIVED, UNITED PANAM FINANCIAL CORP., a Delaware
corporation formerly known as Pan American Group, Inc. (the "Borrower"),
promises to pay to the order of Villaneuva Management, Inc., its successors and
assigns (the "Lender") at 1999 Avenue of the Stars, Suite 2960, Los Angeles,
California 90067 or at such other place as might be designated in writing by the
Lender, the principal sum of Twenty-Eight Thousand Five Hundred Dollars
($28,500) or so much thereof as has been disbursed by the Lender and remains
unpaid, together with interest thereon at a fixed rate equal to Eight Percent
(8.0%) per annum. Interest will be calculated on the basis of the actual days
elapsed based on a per diem charge computed over a year composed of three
hundred sixty (360) days. This Note amends and restates in its entirety the
Promissory Note of Borrower, dated July 1, 1997, representing a loan from Lender
to Borrower, the proceeds of which were disbursed to Borrower on or after July
1, 1997.
Principal and interest will be paid as follows: Interest on the
amounts disbursed, accrued from the date of disbursement through the last day of
each annual period ending June 30, will be paid by the 15th day of the following
July, commencing with July 15, 1998. On June 30, 1999, the entire unpaid
principal balance and all accrued but unpaid interest thereon will be due and
payable.
The Borrower will have the right at any time and from time to time to
prepay the unpaid principal balance of this Note, in whole or in part, without
penalty, but with interest on the unpaid principal balance accrued to the date
of prepayment. In addition, the Borrower shall immediately prepay all amounts
due hereunder, including accrued interest, within fifteen (15) days of
Borrower's raising of not less than $10,000,000 in equity capital after the date
hereof.
The Borrower agrees that if, and as often as, this Note is placed in
the hands of an attorney for collection or to defend or enforce any of the
Lender's rights under this Note or otherwise relating to the indebtedness hereby
evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all
court costs and all other expenses incurred by the Lender in connection
therewith. At the option of the Lender, after the failure of the Borrower to
pay any such sum hereunder within ten (10) days of the date due, the unpaid
balance of this Note will bear interest at Ten Percent (10.0%) per annum.
During the existence of any default, the Lender may apply payments received on
any amount due hereunder or under the terms of any instrument now
<PAGE>
or hereafter evidencing or securing payment of this indebtedness as the Lender
determines from time to time.
This Note is issued by the Borrower and accepted by the Lender
pursuant to a lending transaction negotiated, consummated and to be performed in
California. This Note is to be construed according to the internal laws of the
State of California.
The makers, endorsers, sureties, guarantors and all other persons who
might become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of nonpayment. Such parties consent
to any extension of time (whether one or more) of payment hereof, release of all
or any part of the collateral securing payment hereof or release of any party
liable for the payment of this obligation. Any such extension or release may be
made without notice to any such party and without discharging such party's
liability hereunder.
This Note is intended to strictly conform with all usury laws to the
extent applicable to the transactions contemplated hereby. The provisions of
this Note and of all agreements between the Borrower and the Lender are hereby
expressly limited so that in no contingency or event whatsoever, shall the
amount contracted for, charged, paid or agreed to be paid to the Lender for the
use, forbearance or retention of money or credit hereunder or otherwise exceed
the maximum rate permitted by law therefor. If, from any circumstance
whatsoever, performance or fulfillment of any provision hereof or of any
agreement between the Borrower and the Lender shall, at the time of the
execution and delivery thereof, or at the time or performance of such provision
shall be due, involve or purport to require any payment in excess of the limits
prescribed by law, the obligation to be performed or fulfilled shall be reduced
automatically to the limit prescribed by law without the necessity of the
execution of any amendment or new document.
IN WITNESS WHEREOF, the Borrower has executed this instrument
effective the date first above written.
UNITED PANAM FINANCIAL CORP.
a Delaware corporation
By: Guillermo Bron
-----------------------------------------
Its: Chairman
----------------------------------
2
<PAGE>
Exhibit 10.73
United PanAm Financial Corp.
1999 Avenue of the Stars, #2960
Los Angeles, CA 90067
Tel (310) 788-5718 FAX (310) 277-7582
January 6, 1998
Mr. Stephen D. Taylor
President and CEO
NIPF Holding Company
1750 S. Mesa Drive, Suite 100
Mesa, AZ 85210
Mr. Robert W. Molke
Vice President
Providian National Bank
201 Mission Street
San Francisco, CA 94105
Dear Mr. Taylor and Mr. Molke:
The purpose of this letter agreement is to confirm our agreement regarding the
business arrangement described below (the "Transaction") between United PanAm
Financial Corp. ("United PanAm"), Pan American Bank, FSB ("PanAm Bank") and BPN
Corporation ("BPN" and, together with United PanAm and PanAm Bank, the "Buyer"),
NIPF Holding Company ("NIPF Holding"), National Consumer Services, Inc. ("NCSI")
and National IPF Company ("NIPF" and, together with NIPF Holding and NCSI,
"NIPF") and Providian National Bank, formerly known as First Deposit National
Bank ("Providian").
NIPF and Providian have been engaged in the business of insurance premium
finance for several years, and NIPF currently services insurance premium
business for Providian under the Commonwealth name (the "Commonwealth
Portfolio"). NIPF also services IPF loans for IPF Receivables Funding Trust B
(the "SunAmerica Portfolio") and IPF Receivables Funding Trust A (the "Teachers
Portfolio"). Collectively, all business and other matters related to the
Commonwealth Portfolio, the SunAmerica Portfolio and the Teachers Portfolio,
whether existing on or after the date of this letter, is referred to as the
"Existing Business".
On or about January 7, 1998, the Notification Date, NIPF and Providian expect to
commence a process that effectively will remove them from the premium finance
business in California. NIPF will continue to service all the premium finance
contracts on Providian's books now and the new business that will be written
during January 1998. NIPF and Providian shall set a date after which it will
not accept new business in California. This service period is expected to last
approximately 12-18 months (the "Run-Off Period").
<PAGE>
NIPF Holding Company
January 6, 1999
Page 2
Following are the terms of the Transaction.
1. In consideration for the agreement of NIPF and Providian contained
herein, and concurrent with the execution and delivery of this letter, the Buyer
shall pay (i) to NIPF $325,000 in cash by wire transfer of immediately available
funds to NIPF's account designated by NIPF, and (ii) to Providian $225,000 in
cash by wire transfer of immediately available funds to Providian's account
designated by Providian. NIPF will immediately wire $100,000 to PanAm Bank for
deposit, for the ownership and benefit of BPN Corporation as security to Buyer
for the future financing of broker fees for Abraham & Associates. The Buyer
assumes no liabilities of NIPF.
2. On and after the Notification Date, the Buyer shall have the right to
write and finance all new and renewal business related to the Commonwealth
Portfolio for the account of PanAm Bank through the PanAm Bank's "ClassicPlan"
venture with BPN.
3. During the Run-Off Period, the Buyer may use the names "Commonwealth"
or "Commonwealth Premium Finance" only in conjunction with communications that
identify the Buyer as a successor to Providian's IPF business in California.
Without limiting the generality of the foregoing, the Buyer may not use the
names "Commonwealth" or "Commonwealth Premium Finance" to originate new business
during the Run-Off Period. After the termination of the Run-Off Period, the
Buyer will own the names "Commonwealth" and "Commonwealth Premium Finance" in
connection with the origination of new business. Both Providian and NIPF
covenant not to sell, license or otherwise transfer the names "Commonwealth" or
"Commonwealth Premium Finance" to any third-party. Notwithstanding the
foregoing, NIPF and Providian may continue to use the names "Commonwealth" or
"Commonwealth Premium Finance" for the purpose of collecting the Commonwealth
Portfolio after the Run-Off Period.
4. For a period of three years commencing on the date of this letter,
neither NIPF nor any company now or hereafter owned or controlled by NIPF, in
whole or in part, shall directly or indirectly participate or engage in the
insurance premium finance business in California, either as an owner, partner,
financier, shareholder, manager, operator or otherwise; provided, the foregoing
shall not prohibit and inhibit in any manner the ability of NIPF to collect and
service the "Existing Business".
In addition, for a period of three years commencing on the date of this
letter, Providian shall not compete with the Buyer in the business of financing
insurance premiums for direct personal lines auto business and small ticket
commercial (under $250,000) generated through producers in a manner similar to
now existing Commonwealth Premium Finance or ClassicPlan IPF loan contract
generation; provided, however, that nothing herein shall restrict Providian from
financing the products of Providian and its affiliates or from collecting and
servicing the Commonwealth Portfolio.
<PAGE>
NIPF Holding Company
January 6, 1999
Page 3
5. After the Notification Date, the Buyer will own whatever rights that
NIPF and Providian have in the computer equipment, modems, printers, forms and
fixtures provided to any producers and agents located in California. NIPF and
Providian make no representations or warranties regarding the existence or its
ownership of such equipment. Providian and NIPF hereby quit claim to right and
title to such equipment and transfer title to Buyer. NIPF and Providian will
make available for review their current files of Commonwealth producer
agreements.
6. Within 10 days of the execution of this letter, NIPF will supply Buyer
without further consideration, and without representation and warranty, a
complete configuration and software adequate to run the Commonwealth servicing,
and quotation software sufficient to operate the commercial portfolio at the
Buyer's location. This configuration will consist of a P.C. network with
approximately 5-6 P.C.s and associated software.
7. NIPF shall not sell, license or otherwise transfer any rights in and
to NTF's proprietary software that NIPF uses to service the Commonwealth
Portfolio (the "Commonwealth Software"), except as it would relate to its use by
NIPF or a back-up servicer for Providian, SunAmerica, SunAmerica Life Insurance
Company ("SunAmerica"), and/or Teachers Insurance and Annuity Associates of
America ("Teachers") for the sole purpose of continuing the collection and
recovery of the Commonwealth Portfolio, the SunAmerica Portfolio and/or the
Teachers Portfolio. At the end of the Run-Off Period, NIPF agrees to transfer
all of its right, title and interest in the Commonwealth Software to the Buyer
without further consideration and without any representations or warranties
subject to the rights of SunAmerica, Teachers, or any Servicers of the
SunAmerica Portfolio or the Teachers Portfolio to use such software for the sole
purpose of continuing the collection and recovery of the SunAmerica Portfolio
and/or the Teachers Portfolio, as the case may be. Buyer has the option to use
the Commonwealth Software any time after the Notification Date at its operations
center. The parties agree that a breach of the foregoing three sentences would
irreparably harm the Buyer, and that the Buyer may seek equitable action,
including injunction, to enforce such provision.
8. Concurrent with the execution and delivery of this letter agreement,
the parties are executing and delivering an agreement regarding the details of
the transition to the Buyer of the auto business and the operation of
Providian's commercial business in California (the "Operating Agreement").
9. As part of its termination of new business in California, NIPF will
send a letter to the agents that have produced business for Providian during
1997 who are not terminated prior to the Notification Date (the "Initial
Producer Letter"). As a part of the Operating Agreement, the Buyer, NIPF and
Providian shall agree on the form and contents of the Initial Producer Letter.
10. The Buyer will have the opportunity to speak with a few of
Commonwealth's largest producers in California immediately after receipt of
funds specified in Paragraph 1.
<PAGE>
NIPF Holding Company
January 6, 1999
Page 4
11. During the Run-off Period, the Buyer shall not directly solicit for
employment or employ any person who is now employed by NIPF; provided, however,
that upon execution and delivery of this letter and the consideration set forth
above, the Buyer and NIPF will arrange a mutually convenient time for the Buyer
to discuss employment opportunities with NIPF's representative sales force and
internal sales and marketing staff.
12. Whether or not the transactions contemplated hereby are consummated,
each of the parties hereto will pay its own costs and expenses incurred in
connection with the preparation and negotiation of this letter agreement.
13. Each party hereto agrees to hold harmless each other party for any
loss or expense it may incur as a result of (1) its actions or failure to act
pursuant to the terms of the Letter Agreement between the parties dated January
6, 1998 or the ClassicPlan Operating Agreement between the parties dated January
6, 1998, and (2) its gross negligence or wilful misconduct. NIPF agrees to hold
harmless Buyer for any loss or expense it may incur as a result of NIPF's
origination of loans or servicing of the Commonwealth Portfolio. Buyer agrees
to hold harmless NIPF and Providian for any loss or expense it may incur which
relates to the ClassicPlan Program, or any loan funded by Buyer (whether or not
written on ClassicPlan paper). Nothing herein shall affect existing
indemnification or hold harmless obligations between Providian and NIPF.
14. All notices and other communication provided for in this letter
agreement shall be in writing and delivered by registered or certified mail,
postage prepaid, or delivered by overnight courier (for next business day
delivery) or telecopied, addressed as follows, or at such other address as any
of the parties hereto may hereafter designate by notice to the other parties
given in accordance with this paragraph:
If to the Seller:
National IPF Company
1750 S. Mesa Drive, Suite 100
Mesa, AZ 85210
Attention: Charles Holland
<PAGE>
NIPF Holding Company
January 6, 1999
Page 5
If to Providian:
Providian National Bank
201 Mission Street
San Francisco, CA 94105
Attention: Robert W. Molke
If to the Buyer:
BPN Corporation
13750 Pipeline Avenue
Chino, CA 91710
Attention: Pete Walski
If you are in agreement with the foregoing, please so indicate by signing in the
space set forth below, whereupon this letter shall constitute our binding
agreement in accordance with the terms and provisions set forth above.
Sincerely yours,
United PanAm Financial Corp.
Pan American Bank, FSB
Lawrence Grill
President
Agreed and accepted by:
BPN Corporation
By: /s/ Pete Walski
________________________
Pete Walski
President
<PAGE>
NIPF Holding Company
January 6, 1999
Page 6
NIPF Holding Company
By: /s/ Charles H. Holland, Jr.
____________________________
Charles H. Holland, Jr.
President and CEO
Providian National Bank
By: /s/ Robert W. Molke
____________________________
Robert W. Molke
Vice President-Treasury and Finance
<PAGE>
Exhibit 10.74
MASTER ASSIGNMENT AGREEMENT
This Agreement is made by and between PanAmerican Bank FSB a Federal Savings
Bank d/b/a "Classic Plan" ("Classic"), and Providian National Bank (formerly
known as First Deposit National Bank) d/b/a "Commonwealth," ("Commonwealth" or
"Assignor") AND National IPF Company, a Delaware corporation ("NIPF").
Recitals:
A. Commonwealth is a division of Providian National Bank a national banking
association in the business of providing insurance premium financing.
B. Classic is in the business of providing insurance premium financing by
acquiring insurance premium finance agreements from licensed insurance
agents and brokers in California on behalf of their insureds.
C. NIPF is a sub-servicer under contract to originate and service premium
finance contracts for Commonwealth.
D. Commonwealth desires to assign to Classic a portion of the insurance
premium finance agreements originated by Commonwealth.
AGREEMENT:
1. Commonwealth may, but is not obligated to, tender to Classic any or all
insurance premium finance agreements originated by Assignor in the State of
California (the "Assigned Contracts").
2. Classic may, but shall not be required to, accept the assignment of any or
all Assigned Contracts tendered to it by Commonwealth and will advise
Commonwealth within one (1) business day following receipt of fax
transmission of signed contracts of those contracts accepted and those
contracts rejected.
3. In consideration for the assignment of each Assigned Contract accepted by
Classic, Classic agrees as follows:
(a) As to each Assigned Contract that has not been funded or drafted
as of the date of the assignment, Classic shall assume Commonwealth's
obligation to fund the loan for the benefit of the borrower named in such
Assigned Contract (the "Borrower").
(b) As to each Assigned Contract that has been funded by the issuance
of one or more Drafts, payable against Commonwealth, Classic agrees to pay,
by wire transfer or immediate available funds, Commonwealth for the face
value of each such draft honored by Commonwealth within one business day of
being advised by Commonwealth by fax transmission of the presentation of
that draft.
1
<PAGE>
4. Commonwealth does hereby represent and warrant to Classic, as to each
Assigned Contract tendered by Commonwealth to Classic that to the best of
Assignor's knowledge:
(a) The Assigned Contract is genuine, and is the legal, valid and
binding obligation of the Borrower, enforceable in accordance with its
terms subject to bankruptcy, insolvency, reorganization and other laws of
general application relating to or affecting rights of creditors and to
general principles of equity, that all parties executing such Assigned
Contract had legal capacity to so act, and that the Assigned Contract has
been properly and duly executed by the Borrower;
(b) Commonwealth is the sole owner and holder of the Assigned Contract
free and clear of any and all liens, pledges, charges or security interests
of any nature, and has full right and authority, subject to no interest or
participation of, or agreement with, any other party, to sell assign the
same;
(c) The Assigned Contract is not subject to any right of rescission,
set-off, counterclaim or defense, including the defense of usury, nor will
the operation of any of the terms of the Assigned Contract, or the exercise
of any right thereunder by Borrower, render the Assigned Contract
unenforceable, in whole or in part, nor is the Assigned Contract subject to
any right of rescission, set-off, counterclaim or defense been asserted
with respect thereof;
(d) The Assigned Contract complies with all applicable state and
federal laws, regulation and other requirements including, without
limitation, Truth-in-Lending, consumer credit protection, equal credit
opportunity, and California Insurance Code disclosure laws, and the
Assigned Contract gives Classic the right to cancel the Assigned contract
and receive back the total unearned premium and seek back from the borrower
any unpaid balance;
(e) The Assigned Contract was executed in the State of California and,
to the best of Assignor's knowledge, the Borrower is a resident of the Sate
of California;
(f) The outstanding principal balance of the Assigned Contract is
equal to the amount financed stated in the Assigned Contract, and
Commonwealth has not received any payments of interest unless otherwise
disclosed to Classic in writing; and
(g) Commonwealth will deliver to Classic the original of each Assigned
Contract along with the down payment or monthly payment provided by the
producer, properly endorsed on the face thereof by Commonwealth to Classic,
together with any file documents relating to such Assigned Contract.
5. As to each Assigned Contract, Commonwealth and Classic agree as follows
2
<PAGE>
(a) After the assignment date, Classic shall receive any and all funds
payable under each Assigned Contract and will handle all borrower and
insurer inquiries and all servicing relating to the Assigned Contracts.
Any payments received by Commonwealth from or on behalf of the Borrower
shall be remitted to Classic within two (2) business days of receipt (and
Commonwealth will make a best efforts to notify Classic of the receipt of
such payments within one (1) business day); and any refund of unearned
premium received by Commonwealth from or on behalf of an insurance company
with respect to the Assigned Contracts shall be remitted to Classic within
five (5) business days of receipt.
(b) Commonwealth shall provide to Classic any and all documents or
correspondence which Commonwealth receives for each Assigned Contract,
including but not limited to policy declaration pages.
(c) At Classic's request, Commonwealth will cooperate with Classic and
will provide such additional documents pertinent to the Assigned Contract
as are necessary to enable Classic to obtain refunds of unearned premium or
unpaid balance from a borrower.
6. This Agreement will begin on January 16, 1998, and will terminate as to new
assignments on February 16, 1998; but will remain in effect as to section 5
until February 16, 1999; and as to section 7 until April 16, 1998.
7. In the event that Commonwealth's representations and warranties are untrue
with respect to an Assigned Contract, Commonwealth will be obligated to
remedy the situation or repurchase such Assigned Contract for an amount
equal to the amount of consideration paid by Classic to or on behalf of
Commonwealth (including any amount funded by Classic), less the total
amount of principal repaid to Classic by the Borrower.
8. NIPF agrees, as servicer to Commonwealth, to deliver contracts,
correspondence, and funds according to the terms of this Agreement.
9. Classic agrees to indemnify and hold harmless Commonwealth for any loss or
liability Commonwealth may experience in connection with any Assigned
Contract after the assignment of such contract, excepting any loss or
liability caused by the negligence of Commonwealth in connection with the
origination of such Assigned Contract.
10. Commonwealth agrees to indemnify and hold harmless Classic for any loss or
liability Classic may experience as a result of Commonwealth's actions with
respect to the origination of such Assigned Contracts.
3
<PAGE>
11. All notices permitted or required herein shall be given by fax and also by
United States mail, first class postage prepaid, to the following:
Commonwealth Commonwealth Premium Finance
and NIPF: National IPF Company
P.O. Box 8998
Mesa, Arizona 85214
Attn:
____________________________
Fax: (602) 545-3444
Classic: Classic Plan
13750 Pipeline Avenue
Chino, California 91710
Attn:
____________________________
Fax: (909) 628-5490
EXECUTED and delivered to be effective the 21 day of January, 1998.
Commonwealth:
Providian National Bank
By: /s/ Bob Molke
______________________________
Name: Bob Molke
Title: Vice President - Treasurer
Classic:
PanAmerican Bank, FSB
By: /s/ Lawrence J. Grill
_____________________________
Name: Lawrence J. Grill
___________________________
Title: President
__________________________
NIPF
National IPF Company
By: /s/ Charles H. Holland, Jr.
_____________________________
Name: Charles H. Holland, Jr.
Title: President and CEO
4
<PAGE>
Exhibit 10.75
EXECUTION COPY
================================================================================
LEHMAN ABS CORPORATION,
as Depositor
and
UNITED PANAM MORTGAGE CORPORATION,
as Seller
and
PAN AMERICAN BANK, FSB,
as Master Servicer
and
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
_______________________
POOLING AND SERVICING AGREEMENT
Dated as of December 1, 1997
______________________
United PanAm Mortgage Loan Asset Backed Certificates,
Series 1997-1
================================================================================
<PAGE>
Table of Contents
-----------------
Page
----
ARTICLE I
DEFINITIONS
SECTION 1.01. Defined Terms........................................... 2
ARTICLE II
CONVEYANCE OF MORTGAGE LOANS;
ORIGINAL ISSUANCE OF CERTIFICATES
SECTION 2.01. Conveyance of Mortgage Loans............................. 40
SECTION 2.02. Acceptance by Trustee.................................... 42
SECTION 2.03. Repurchase or Substitution of Mortgage Loans by the
Bank..................................................... 43
SECTION 2.04. Representations and Warranties of the Seller............. 45
SECTION 2.05. Representations, Warranties and Covenants of the Master
Servicer................................................. 54
SECTION 2.06. Issuance of Certificates................................. 56
SECTION 2.07. Representations and Warranties with Respect to Subsequent
Mortgage Loans........................................... 56
ARTICLE III
ADMINISTRATION AND SERVICING
OF THE TRUST FUND
SECTION 3.01. Master Servicer and Sub-Servicers........................ 57
SECTION 3.02. Collection of Certain Mortgage Loan Payments............. 59
SECTION 3.03. Sub-Servicing Agreements Between Master Servicer and
Sub-Servicers............................................ 59
SECTION 3.04. Successor Sub-Servicers.................................. 60
SECTION 3.05. Liability of Master Servicer; Indemnification............ 60
SECTION 3.06. No Contractual Relationship Between Sub-Servicer, Trustee
or the Certificateholders................................ 61
SECTION 3.07. Assumption or Termination of Sub-Servicing Agreement by
Trustee.................................................. 61
SECTION 3.08. Sub-Servicing Accounts................................... 62
SECTION 3.09. Collection of Taxes, Assessments and Similar Items;
Servicing Accounts....................................... 62
SECTION 3.10. Collection Account and Distribution Account.............. 63
SECTION 3.11. Withdrawals from the Collection Account and Distribution
Account.................................................. 65
i
<PAGE>
Table of Contents (cont'd)
--------------------------
Page
----
SECTION 3.12. Investment of Funds in the Collection Account, the Expense
Account and the Distribution Account..................... 66
SECTION 3.13. Maintenance of Insurance................................. 67
SECTION 3.14. Due-on-Sale Clauses; Assumption and Substitution
Agreements............................................... 70
SECTION 3.15. Realization Upon Defaulted Mortgage Loans................ 71
SECTION 3.16. Trustee to Cooperate; Release of Files................... 73
SECTION 3.17. Servicing Compensation................................... 74
SECTION 3.18. Annual Statement as to Compliance........................ 74
SECTION 3.19. Annual Independent Certified Public Accountants' Reports. 75
SECTION 3.20. Access to Certain Documentation and Information Regarding
the Mortgage Loans....................................... 75
SECTION 3.21. Assignment and Delegation by Master Servicer; Resignation
of Master Servicer....................................... 75
SECTION 3.22. Inspections by the Trustee and the Certificate Insurer;
Errors and Omissions Insurance........................... 77
SECTION 3.23. Title, Management and Disposition of REO Property........ 77
SECTION 3.24. Obligations of the Master Servicer in Respect of
Prepayment Interest Shortfalls........................... 80
SECTION 3.25. Expense Account.......................................... 81
SECTION 3.26. Obligations of the Master Servicer in Respect of Mortgage
Rates and Monthly Payments............................... 81
ARTICLE IV
PAYMENTS TO CERTIFICATEHOLDERS
SECTION 4.01. Distributions............................................ 82
SECTION 4.02. Statements to Certificateholders......................... 85
SECTION 4.03. Remittance Reports; Monthly Advances..................... 89
SECTION 4.04. Allocation of Realized Losses............................ 90
SECTION 4.05. Compliance with Withholding Requirements................. 91
SECTION 4.06. REMIC 1 and REMIC 2 Allocations.......................... 92
SECTION 4.07. Basis Risk Reserve Fund.................................. 92
SECTION 4.08. Initial Interest Coverage Account and Funding Account.... 93
ARTICLE V
THE CERTIFICATES
SECTION 5.01. The Certificates......................................... 95
SECTION 5.02. Registration of Transfer and Exchange of Certificates.... 95
ii
<PAGE>
Table of Contents (cont'd)
--------------------------
Page
----
SECTION 5.03. Mutilated, Destroyed, Lost or Stolen Certificates........ 100
SECTION 5.04. Persons Deemed Owners.................................... 100
SECTION 5.05. Appointment of Paying Agent.............................. 101
ARTICLE VI
THE SELLER, THE MASTER SERVICER AND THE DEPOSITOR
SECTION 6.01. Liability of the Seller, the Master Servicer and the
Depositor................................................ 102
SECTION 6.02. Obligations of, the Seller, the Master Servicer or the
Merger or Consolidation of, or Assumption of the
Depositor................................................ 102
SECTION 6.03. Limitation on Liability of the Master Servicer and
Others................................................... 102
SECTION 6.04. Master Servicer Not to Resign............................ 103
SECTION 6.05. Delegation of Duties..................................... 103
SECTION 6.06. Indemnification of the Trust by the Master Servicer...... 104
ARTICLE VII
MASTER SERVICER EVENTS OF DEFAULT
SECTION 7.01. Master Servicer Events of Default........................ 105
SECTION 7.02. Trustee to Act; Appointment of Successor................. 107
SECTION 7.03. Waiver of Defaults....................................... 108
SECTION 7.04. Notification to Certificateholders....................... 108
ARTICLE VIII
THE TRUSTEE
SECTION 8.01. Duties of Trustee........................................ 109
SECTION 8.02. Certain Matters Affecting the Trustee.................... 110
SECTION 8.03. Trustee Not Liable for Certificates or Mortgage Loans.... 111
SECTION 8.04. Trustee May Own Certificates............................. 112
SECTION 8.05. Master Servicer to Pay Trustee's Fees and Expenses....... 112
SECTION 8.06. Eligibility Requirements for Trustee..................... 113
SECTION 8.07. Resignation or Removal of Trustee........................ 113
SECTION 8.08. Successor Trustee........................................ 114
SECTION 8.09. Merger or Consolidation of Trustee....................... 115
SECTION 8.10. Appointment of Co-Trustee or Separate Trustee............ 115
SECTION 8.11. Limitation of Liability.................................. 116
SECTION 8.12. Trustee May Enforce Claims Without Possession of
Certificates............................................. 116
SECTION 8.13. Suits for Enforcement.................................... 116
SECTION 8.14. Trustee to File Securities Exchange Act Reports.......... 117
iii
<PAGE>
Table of Contents (cont'd)
--------------------------
Page
----
ARTICLE IX
CERTAIN MATTERS REGARDING THE CERTIFICATE INSURER
SECTION 9.01. Rights of the Certificate Insurer To Exercise Rights of
Class A Certificateholders.................................. 118
SECTION 9.02. Trustee To Act Solely with Consent of the Certificate
Insurer..................................................... 118
SECTION 9.03. Trust Fund and Accounts Held for Benefit of the Certificate
Insurer..................................................... 119
SECTION 9.04. Claims Upon the Policy; Policy Payments Account............. 119
SECTION 9.05. Effect of Payments by the Certificate Insurer; Subrogation.. 121
SECTION 9.06. Notices to the Certificate Insurer.......................... 121
SECTION 9.07. Third-Party Beneficiary..................................... 121
SECTION 9.08. Trustee to Hold the Policy.................................. 122
SECTION 9.09. Termination of the Master Servicer.......................... 122
ARTICLE X
TERMINATION
SECTION 10.01. Termination................................................ 123
SECTION 10.02. Additional Termination Requirements........................ 124
ARTICLE XI
REMIC PROVISIONS
SECTION 11.01. REMIC Administration....................................... 126
SECTION 11.02. Prohibited Transactions and Activities..................... 129
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01. Amendment................................................... 130
SECTION 12.02. Recordation of Agreement.................................... 132
SECTION 12.03. Limitation on Rights of Certificateholders.................. 132
SECTION 12.04. Governing Law............................................... 133
SECTION 12.05. Notices..................................................... 133
SECTION 12.06. Severability of Provisions.................................. 135
SECTION 12.07. Assignment.................................................. 135
SECTION 12.08. Certificates Nonassessable and Fully Paid................... 135
SECTION 12.09. Third-Party Beneficiaries................................... 135
SECTION 12.10. Intention of the Parties.................................... 135
iv
<PAGE>
Table of Contents (cont'd)
--------------------------
Page
----
SECTION 12.11. Counterparts................................................ 135
SECTION 12.12. Effect of Headings and Table of Contents.................... 136
EXHIBITS
- --------
A-1 - Form of Class A Certificate
A-2 - Form of Class X Certificate
A-3 - Form of Class R Certificate
B - Financial Guaranty Insurance Policy
C-1 - Form of Trustee Certification
C-2 - Form of Final Trustee Certificate
D - Form of Mortgage Loan Purchase Agreement
E - Form of Request for Release of Documents
F - Form of Mortgage Note
G - Form of Mortgage
H - Form of Lost Note Affidavit
I - Form of Transfer Affidavit
J - Form of Transferor Certificate
K - Form of Investment Letter
v
<PAGE>
This Pooling and Servicing Agreement, is dated and effective as of December
1, 1997, among LEHMAN ABS CORPORATION, as Depositor, UNITED PANAM MORTGAGE
CORPORATION as Seller, PAN AMERICAN BANK, FSB, as Master Servicer, and BANKERS
TRUST COMPANY OF CALIFORNIA, N.A., as Trustee.
PRELIMINARY STATEMENT:
The Depositor intends to sell pass-through certificates (collectively, the
"Certificates"), to be issued hereunder in multiple classes, which in the
aggregate will evidence the entire beneficial ownership interest in the Trust
Fund created hereunder. The Certificates will consist of three classes of
certificates, designated as (i) the Class A Certificates, (ii) the Class X
Certificates and (iii) the Class R Certificates.
As provided herein, the Trustee shall elect that the Trust Fund be treated
for federal income tax purposes as three separate real estate mortgage
investment conduits (each a "REMIC" or, in the alternative, "REMIC 1", "REMIC 2"
and "REMIC 3", respectively). The Class A Certificates (other than the
contractual rights to receive payments from the Basis Risk Reserve Fund) and the
interests represented by the Class X Certificates constitute all of the "regular
interests" in REMIC 3 and the Class R1 Interest represents the sole class of
"residual interest" in REMIC 3 for purposes of the REMIC Provisions. Each of
the Class R2 Interest and the Class R3 Interest represents the sole class of
"residual interest" in REMIC 1 and REMIC 2, respectively, for purposes of the
REMIC Provisions. There are also three classes of uncertificated REMIC 1
Regular Interests issued under this Agreement (the Class LT1, Class LT2 and
Class LT3 Interests), each of which will constitute regular interests in REMIC
1, and four classes of uncertificated REMIC 2 Regular Interests (the Class MT1,
Class MT2, Class MT3 and Class MT4 Interests), each of which will constitute
regular interests in REMIC 2. The REMIC 1 Regular Interests will be held as
assets of REMIC 2 and the REMIC 2 Regular Interests will be held as assets of
REMIC 3.
The following table irrevocably sets forth the Pass-Through Rate, initial
Aggregate Certificate Principal Balance (or, with respect to the Class X
Certificates, the Class X Notional Balance) and "latest possible maturity date"
for each Class of Certificates comprising interests in REMIC 3.
<TABLE>
<CAPTION>
Initial Aggregate Latest Possible
Description Pass-Through Rate Certificate Principal Balance Maturity Date(1)
- ------------- -------------------- ----------------------------- ---------------------------
<S> <C> <C> <C>
Class A Variable(2) $114,425,00 The Distribution Date in
December 2027
Class X N/A $0 The Distribution Date in
December 2027
Class R N/A $0 The Distribution Date in
December 2027
</TABLE>
(1) Solely for purposes of Section 1.860G-l(a)(4)(iii) of the Treasury
regulations, the Distribution Date immediately following the maturity date
for the Mortgage Loan with the latest maturity date has been designated as
the "latest possible maturity date for the Class A Certificates.
(2) Calculated in accordance with the definition of "Class A Pass-Through Rate"
herein.
<PAGE>
As of the Cut-off Date, the Initial Mortgage Loans had an aggregate
principal balance equal to $95,041,505.27.
In consideration of the mutual agreements herein contained, the Depositor,
the Seller, the Master Servicer and the Trustee agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Defined Terms.
-------------
Whenever used in this Agreement, including, without limitation, in the
Preliminary Statement hereto, the following words and phrases, unless the
context otherwise requires, shall have the meanings specified in this Article.
Unless otherwise specified, all calculations described herein shall be made on
the basis of a 360-day year consisting of twelve 30-day months.
"Accrued Certificate Interest": With respect to each Distribution Date,
one month's interest accrued during the related Interest Accrual Period at the
Class A Pass-Through Rate for such Distribution Date on the Certificate
Principal Balance of such Certificate immediately prior to such Distribution
Date, reduced by an amount equal to the portion allocable to such Certificate of
the aggregate amount of any Relief Act Interest Shortfall, if any, for such
Distribution Date. All distributions of interest on the Class A Certificates
will be calculated on the basis of a 360-day year and the actual number of days
in the applicable Interest Accrual Period.
"Adjustment Date": With respect to each Mortgage Loan, each Adjustment
Date, on which the Mortgage Rate of a Mortgage Loan changes pursuant to the
related Mortgage Note. The first Adjustment Date following the Cut-off Date as
to each Mortgage Loan is set forth in the Mortgage Loan Schedule.
"Affiliate": 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": This Pooling and Servicing Agreement and all amendments
hereof and supplements hereto.
"Aggregate Expense Rate": With respect to any Distribution Date, the sum
of (i) the Minimum Spread, (ii) the Trustee's Fee Rate, (iii) the Servicing Fee
Rate and (iv) the rate obtained by dividing the Certificate Insurer Premium
Amount for such Distribution Date by the aggregate
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Stated Principal Balance of the Mortgage Loans prior to giving effect to the
distribution of principal pursuant to Section 4.01(ii) on such Distribution Date
"Assignment": An assignment of Mortgage, notice of transfer or equivalent
instrument, in recordable form, which is sufficient under the laws of the
jurisdiction wherein the related Mortgaged Property is located to reflect of
record the sale of the Mortgage.
"Available Distribution Amount": With respect to any Distribution Date, an
amount equal to the excess of (i) the sum of (a) the aggregate of the Monthly
Payments received on or prior to the Determination Date, (b) Liquidation
Proceeds, Insurance Proceeds, Principal Prepayments and other unscheduled
recoveries of principal or interest in respect of the Mortgage Loans during the
related Prepayment Period, (c) the aggregate of any amounts received in respect
of an REO Property withdrawn from any REO Account and deposited in the
Distribution Account for such Distribution Date pursuant to Section 3.23, (d)
the aggregate of any amounts deposited in the Distribution Account by the Master
Servicer in respect of Prepayment Interest Shortfalls for such Distribution Date
pursuant to Section 3.24, (e) the aggregate of any Monthly Advances made by the
Master Servicer for such Distribution Date pursuant to Section 4.03 and (f) the
aggregate of any advances made by the Trustee for such Distribution Date
pursuant to Section 7.02, over (ii) the sum of (a) amounts reimbursable or
payable to the Depositor, the Master Servicer, the Trustee, the Seller or any
Sub-Servicer pursuant to Section 3.11 or Section 3.12 or otherwise payable in
respect of extraordinary Trust Fund expenses, (b) amounts deposited in the
Collection Account or the Distribution Account, as the case may be, in error,
(c) the Certificate Insurer Premium payable to the Certificate Insurer pursuant
to Section 3.25(b), and (d) the Trustee Fee payable from the Distribution
Account pursuant to Section 8.05.
"Bank": Pan American Bank, FSB, or its successor in interest.
"Bankruptcy Amount": As of any date of determination, $100,000 minus the
aggregate amount of Bankruptcy Losses on the Mortgage Loans, if any, previously
allocated to the Class X and Residual Certificates in accordance with Section
4.04.
"Bankruptcy Code": The Bankruptcy Reform Act of 1978 (Title 11 of the
United States Code), as amended.
"Bankruptcy Loss": With respect to any Mortgage Loan, a Realized Loss
resulting from a Deficient Valuation or Debt Service Reduction.
"Basis Risk Reserve Fund": The reserve fund established pursuant to
Section 4.07 hereof.
"Basis Risk Shortfall": With respect to any Distribution Date on which the
Class A Pass-Through Rate is calculated pursuant to clause (ii) of the
definition thereof, an amount equal to interest accrued during the related
Interest Accrual Period on the Certificate Principal Balance of the Class A
Certificates immediately prior to such Distribution Date at a rate equal to the
excess of (a) the lesser of (x) the Class A Pass-Through Rate calculated
pursuant to clause (i) of the definition thereof and (y) the Maximum Class A
Pass-Through Rate over (b) the Class A Pass-Through Rate calculated pursuant to
clause (ii) of the definition thereof.
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"Book-Entry Certificate": The Class A Certificates for so long as the
Certificates shall be registered in the name of the Depository or its nominee.
"Business Day": Any day other than a Saturday, a Sunday or a day on which
banking or savings and loan institutions in the State of Florida, the State of
New York, or the State of California, or in the city in which the Corporate
Trust Office of the Trustee is located, are authorized or obligated by law or
executive order to be closed.
"Call Option Date": The Distribution Date on which the aggregate principal
balance of the Mortgage Loans is reduced to 5% or less of the Maximum Collateral
Amount.
"Cap Agreement": As defined in Section 11.01 hereof.
"Cash-Out Refinancing": A Refinanced Mortgage Loan the proceeds of which
were more than $1000 or 1%, whichever is greater, in excess of the sum of (i)
the principal balance of any existing first mortgage and any subordinate
mortgage on the related Mortgaged Property, (ii) the aggregate amount of
consumer debt paid off through escrow and (iii) the related closing costs.
"Certificate": Any one of the United PanAm Mortgage Loan Asset Backed
Certificates, Series 1997-1, Class A, Class X or Class R, issued under this
Agreement.
"Certificate Factor": With respect to any Class of Regular Certificates
(other than the Class X Certificates) as of any Distribution Date, a fraction,
expressed as a decimal carried to six places, the numerator of which is the
aggregate Certificate Principal Balance of such Class of Certificates on such
Distribution Date (after giving effect to any distributions of principal and
allocations of Realized Losses, in reduction of the Certificate Principal
Balance of such Class of Certificates to be made on such Distribution Date), and
the denominator of which is the initial aggregate Certificate Principal Balance
of such Class of Certificates as of the Closing Date.
"Certificate Insurer": Financial Security Assurance Inc., a stock
insurance company organized and created under the laws of the State of New York,
and any successors thereto.
"Certificate Insurer Default": The existence and continuance of any of the
following:
(a) The Certificate Insurer fails to make a payment required under the
Policy in accordance with its terms; or
(b) the Certificate Insurer shall have (i) filed a petition or
commenced any case or proceeding under any provision of chapter of the
United States Bankruptcy Code, the New York State Insurance Law or any
other similar federal or state law relating to insolvency, bankruptcy,
rehabilitation, liquidation, or reorganization, (ii) made a general
assignment for the benefit of its creditors or (iii) had an order for
relief entered against it under the United States Bankruptcy Code, the New
York State Insurance Law or any other similar federal or state law relating
to insolvency, bankruptcy, rehabilitation, liquidation, or reorganization
that is final and nonappealable; or
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(c) a court of competent jurisdiction, the New York Department of
Insurance or any other competent regulatory authority shall have entered a
final and nonappealable order, judgment or decree (i) appointing a
custodian, trustee, agent, or receiver for the Certificate Insurer or for
all or any material portion of its property or (ii) authorizing the taking
of possession by a custodian, trustee, agent, or receiver of the
Certificate Insurer of all or any material portion of its property.
"Certificate Insurer Premium Amount": With respect to any Distribution
Date, the amount payable to the Certificate Insurer pursuant to the Premium
Letter with respect to such Distribution Date.
"Certificate Insurer Premium Rate": 0.25% per annum.
"Certificateholder" or "Holder": The Person in whose name a Certificate is
registered in the Certificate Register, and the Certificate Insurer to the
extent of Cumulative Insurance Payments, except that a "disqualified
organization" (as defined in Section 860E(e)(5) of the Code) or a Non-United
States Person shall not be a Holder of a Residual Certificate for any purposes
hereof and, solely for the purposes of giving any consent pursuant to this
Agreement, any Certificate registered in the name of the Depositor, the Seller
or the Master Servicer or any Affiliate thereof shall be deemed not to be
outstanding and the Voting Rights to which it is entitled shall not be taken
into account in determining whether the requisite percentage of Voting Rights
necessary to effect any such consent has been obtained, except as otherwise
provided in Section 12.01. The Trustee may conclusively rely upon a certificate
of the Depositor, the Seller or the Master Servicer in determining whether a
Certificate is held by an Affiliate thereof. All references herein to "Holders"
or "Certificateholders" shall reflect the rights of Certificate Owners as they
may indirectly exercise such rights through the Depository and participating
members thereof, except as otherwise specified herein; provided, however, that
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the Trustee shall be required to recognize as a "Holder" or "Certificateholder"
only the Person in whose name a Certificate is registered in the Certificate
Register.
"Certificate Owner": With respect to a Book-Entry Certificate, the Person
who is the beneficial owner of such Certificate as reflected on the books of the
Depository or on the books of a Depository Participant or on the books of an
indirect participating brokerage firm for which a Depository Participant acts as
agent.
"Certificate Principal Balance": With respect to each Class A Certificate
as of any date of determination, the Certificate Principal Balance of such Class
A Certificate on the Distribution Date immediately prior to such date of
determination, minus all distributions allocable to principal made thereon
(other than any such distribution pursuant to Section 4.01(a)(iii) in respect of
previously allocated Realized Losses) and Realized Losses allocated thereto on
such immediately prior Distribution Date (or, in the case of any date of
determination up to and including the first Distribution Date, the initial
Certificate Principal Balance of such Class A Certificate, as stated on the face
thereof). The Class X Certificates and Class R Certificates shall not have a
principal balance.
"Certificate Register" and "Certificate Registrar": The register
maintained and the registrar appointed pursuant to Section 5.02.
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"Class": With respect to Certificates or Interests, all of the
Certificates, REMIC 1 Regular Interests or REMIC 2 Regular Interests bearing the
same alphabetical and numerical class designation.
"Class A Adjusted Pass-Through Rate": With respect to the Class A
Certificates and any Distribution Date after the first Distribution Date, a rate
per annum equal to the lesser of (i) One-Month LIBOR plus 0.28%, in the case of
each Distribution Date through and including the Call Option Date or One-Month
LIBOR plus 0.56% per annum, in the case of any Distribution Date thereafter and
(ii) the Net WAC Rate. The Class A Adjusted Pass-Through Rate with respect to
the first Distribution Date shall equal the Class A Pass-Through Rate for such
date.
"Class A Certificate": Any one of the Class A Certificates executed by the
Trustee, and authenticated and delivered by the Certificate Registrar,
substantially in the form annexed hereto as Exhibit A-1 and evidencing a Regular
Interest in the Trust Fund for purposes of the REMIC Provisions.
"Class A Pass-Through Rate": With respect to the Class A Certificates and
any Distribution Date after the first Distribution Date, a rate per annum equal
to the lesser of (i) One-Month LIBOR plus 0.28%, in the case of each
Distribution Date through and including the Call Option Date, or One-Month LIBOR
plus 0.56% per annum, in the case of any Distribution Date thereafter and (ii)
the Net Funds Cap. The "Class A Pass-Through Rate" with respect to the initial
Distribution Date shall be 6.24875%.
"Class LT1 Interest": A regular interest in REMIC 1 that is held as an
asset of REMIC 2 that has an initial principal balance equal to 98% of the
aggregate Stated Principal Balance of the Mortgage Loans as of the Cut-off Date
and bears interest at the Net WAC Rate and has such other terms as are described
in Section 4.06 hereof.
"Class LT2 Interest": A regular interest in REMIC 1 that is held as an
asset of REMIC 2 that has an initial principal balance equal to 1% of the
aggregate Stated Principal Balance of the Mortgage Loans as of the Cut-off Date
and bears interest at the Net WAC Rate and has such other terms as are described
in Section 4.06 hereof.
"Class LT3 Interest": A regular interest in REMIC 1 that is held as an
asset of REMIC 2 that has an initial principal balance equal to 1% of the
aggregate Stated Principal Balance of the Mortgage Loans as of the Cut-off Date
and bears interest at the Net WAC Rate and has such other terms as are described
in Section 4.06 hereof.
"Class MT1 Interest": A regular interest in REMIC 2 that is held as an
asset of REMIC 3 that has an initial principal balance equal to 98% of the
aggregate Stated Principal Balance of the Mortgage Loans as of the Cut-off Date
and bears interest at the Net WAC Rate and has such other terms as are described
in Section 4.06 hereof.
"Class MT2 Interest": A regular interest in REMIC 2 that is held as an
asset of REMIC 3 that has an initial principal balance equal to 1% of the
aggregate Stated Principal Balance of the Mortgage
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Loans as of the Cut-off Date and has the terms described in Section 4.06 hereof
and bears interest at a rate per annum equal to the Class A Adjusted Pass-
Through Rate.
"Class MT3 Interest": A regular interest in REMIC 2 that is held as an
asset of REMIC 3 that has an initial principal balance equal to 1% of the
aggregate Stated Principal Balance of the Mortgage Loans as of the Cut-off Date
and bears interest at the Net WAC Rate and has such other terms as are described
in Section 4.06 hereof.
"Class MT4 Interest": A regular interest in REMIC 2 that is held as an
asset of REMIC 3 as of the Cut off Date and is entitled to 100% of the interest
accruals on the Class LT2 Interest in excess of the Class A Adjusted Pass-
Through Rate and has such other terms as are described in Section 4.06 hereof.
The Class MT4 Interest shall not have a principal balance.
"Class R Certificate": Any one of the Class R Certificates executed by the
Trustee, and authenticated and delivered by the Certificate Registrar,
substantially in the form annexed hereto as Exhibit A-3 and evidencing the
ownership of the Class R1 Interest, the Class R2 Interest and the Class R3
Interest.
"Class R1 Interest": The uncertificated Residual Interest in REMIC 3.
"Class R2 Interest": The uncertificated Residual Interest in REMIC 1.
"Class R3 Interest": The uncertificated Residual Interest in REMIC 2.
"Class UT1 Interest": A regular interest in REMIC 3 ownership of which is
evidenced by the Class X Certificates.
"Class UT1 Distributable Amount": With respect to any Distribution Date,
an amount equal to the product of (i) a fraction, the numerator of which is the
number of days in the related Interest Accrual Period and the denominator of
which is 360, (ii) the Class UT1 Notional Balance immediately prior
distributions of principal on such Distribution Date and (iii) the Class UT1
Pass-Through Rate.
"Class UT1 Notional Balance": A notional principal balance equal to the
principal balance of the Class MT1 Interest.
"Class UT1 Pass-Through Rate": With respect to any Distribution Date, a
per annum rate equal to the excess of (i) the Net WAC Rate over (ii) the product
of (x) two and (y) a fraction, the numerator of which is the product of the
Class A Adjusted Pass-Through Rate and the principal balance of the Class MT2
Interest immediately prior to distributions of principal in respect thereof on
such Distribution Date and the denominator of which is the sum of the principal
balances of the Class MT2 and Class MT3 Interests immediately prior to
distributions of principal in respect thereof on such Distribution Date.
"Class UT2 Interest": A regular interest in REMIC 3 ownership of which is
evidenced by the Class X Certificates.
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"Class UT2 Distributable Amount": With respect to any Distribution Date,
an amount equal to the product of (i) a fraction, the numerator of which is the
number of days in the related Interest Accrual Period and the denominator of
which is 360, (ii) the Class UT2 Notional Balance immediately prior to
distributions of principal in respect thereof on such Distribution Date and
(iii) the Class UT2 Pass-Through Rate.
"Class UT2 Notional Balance": A notional principal balance equal to the
principal balance of the Class MT2 Interest.
"Class UT2 Pass-Through Rate": With respect to any Distribution Date, a
per annum rate equal to the excess of (i) the Class A Adjusted Pass-Through Rate
over (ii) the product of (x) two and (y) a fraction, the numerator of which is
the product of the Class A Adjusted Pass-Through Rate and the principal balance
of the Class MT2 Interest immediately prior to distributions of principal in
respect thereof on such Distribution Date and the denominator of which is the
sum of the principal balances of the Class MT2 and Class MT3 Interests
immediately prior to distributions of principal in respect thereof on such
Distribution Date.
"Class UT3 Interest": A regular interest in REMIC 3 ownership of which is
evidenced by the Class X Certificates.
"Class UT3 Distributable Amount": With respect to any Distribution Date,
an amount equal to the product of (i) a fraction, the numerator of which is the
number of days in the related Interest Accrual Period and the denominator of
which is 360, (ii) the Class UT3 Notional Balance immediately prior to
distributions of principal in respect thereof on such Distribution Date and
(iii) the Class UT3 Pass-Through Rate.
"Class UT3 Notional Balance": A notional principal balance equal to the
principal balance of the Class MT3 Interest.
"Class UT3 Pass-Through Rate": With respect to any Distribution Date, a
per annum rate equal to the excess of (i) the Net WAC Rate over (ii) the product
of (x) two and (y) a fraction, the numerator of which is the product of the
Class A Adjusted Pass-Through Rate and the principal balance of the Class MT2
Interest immediately prior to distributions of principal in respect thereof on
such Distribution Date and the denominator of which is the sum of the principal
balances of the Class MT2 and Class MT3 Interests immediately prior to
distributions of principal in respect thereof on such Distribution Date.
"Class UT4 Interest": A regular interest in REMIC 3 ownership of which is
evidenced by the Class X Certificates.
"Class UT4 Distributable Amount": With respect to any Distribution Date an
amount equal to the Class MT4 Distributable Amount for such Distribution Date.
"Class X Carry-Forward Amount": With respect to any Distribution Date the
sum of (a) the amount, if any, by which (x) the Class X Distributable Amount as
of the immediately preceding
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Distribution Date exceeded (y) the amount of the actual distribution made to
Owners of the Class X Certificates on such immediately preceding Distribution
Date.
"Class X Certificate": Any one of the Class X Certificates executed by the
Trustee, and authenticated and delivered by the Certificate Registrar,
substantially in the form annexed hereto as Exhibit A-2 and evidencing a Regular
Interest in the Trust Fund for purposes of the REMIC Provisions.
"Class X Distributable Amount": With respect to any Distribution Date, the
sum of the Class UT1 Distributable Amount, the Class UT2 Distributable Amount,
the Class UT3 Distributable Amount and the Class UT4 Distributable Amount plus
any Class X Carry-Forward Amount from the preceding Distribution Date.
"Closing Date": December 30, 1997.
"Code": The Internal Revenue Code of 1986, as amended.
"Collection Account": The account or accounts created and maintained by
the Master Servicer or a Sub-Servicer pursuant to Section 3.10(a), which shall
be entitled "Pan American Bank, FSB, as Master Servicer for Bankers Trust
Company of California, N.A., as Trustee, in trust for (A) registered holders of
United PanAm Mortgage Loan Asset Backed Certificates, Series 1997-1, and (B)
Financial Security Assurance Inc." and which must be an Eligible Account.
Amounts held in the Collection Account shall be held as assets of REMIC 1.
"Collection Period": With respect to any Distribution Date, the calendar
month preceding the calendar month in which such Distribution Date occurs.
"Compensating Interest": As defined in Section 3.24 hereof.
"Corporate Trust Office": The principal corporate trust office of the
Trustee at which at any particular time its corporate trust business in
connection with this Agreement shall be administered, which office at the date
of the execution of this instrument is located at 3 Park Plaza, 16th Floor,
Irvine, California 92614, Attention: Corporate Trust: United PanAm 1997-1, or
at such other address as the Trustee may designate from time to time by notice
to the Certificateholders, the Depositor, the Master Servicer, the Seller and
the Certificate Insurer.
"Cumulative Insurance Payments": As of any time of determination, the
aggregate of all Insurance Payments previously made by the Certificate Insurer
under the Policy plus interest thereon from the date such amount became due
until paid in full, at a rate of interest calculated as provided in the
Insurance Agreement minus the sum of (i) all payments previously made to the
Certificate Insurer pursuant to Section 4.01 hereof as reimbursement for such
amounts and (ii) any payments made by the Certificate Insurer attributable to
Excess Bankruptcy Losses, Excess Fraud Losses and Excess Special Hazard Losses.
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"Cumulative Loss Percentage": For any Distribution Date, the percentage
equivalent of a fraction, the numerator of which is the aggregate amount of
Realized Losses incurred from and including the first Collection Period to and
including the most recently ended Collection Period, and the denominator of
which is the Maximum Collateral Amount.
"Cut-off Date": With respect to each Initial Mortgage Loan, December 1,
1997. With respect to all Qualified Substitute Mortgage Loans, their respective
dates of substitution. References herein to the "Cut-off Date," when used with
respect to more than one Mortgage Loan, shall be to the respective Cut-off Dates
for such Mortgage Loans. With respect to any Mortgage Loan originated after
December 1, 1997 (other than a Qualified Substitute Mortgage Loan), the date of
the origination of such Mortgage Loan.
"Debt Service Reduction": With respect to any Mortgage Loan, a reduction
in the scheduled Monthly Payment for such Mortgage Loan by a court of competent
jurisdiction in a proceeding under the Bankruptcy Code, except such a reduction
resulting from a Deficient Valuation.
"Deficiency Amount": With respect to the Class A Certificates as of any
Distribution Date (i) any shortfall in amounts available in the Distribution
Account to pay interest on the Class A Certificates for the related Interest
Accrual Period on the Certificate Principal Balance at the then applicable Class
A Pass-Through Rate thereon, net of any Relief Act Interest Shortfalls allocated
to such Class, (ii) the principal portion of any Realized Loss allocated to the
Class A Certificates, and, without duplication, the excess, if any, of (a) the
aggregate Certificate Principal Balances of the Class A Certificates then
outstanding over (b) the aggregate Stated Principal Balances of the Mortgage
Loans then outstanding, and (iii) without duplication of the amount specified in
clause (ii), the aggregate Certificate Principal Balance of the Class A
Certificates to the extent unpaid on the final Distribution Date or earlier
termination of the Trust Fund pursuant to the terms of this Agreement.
"Deficiency Event": The inability of the Trustee to make the Guaranteed
Distribution on any Distribution Date due to a shortage of funds for such
purpose then held in the Distribution Account and the failure of the Certificate
Insurer to pay in full a claim made in accordance with the Policy with respect
to such Distribution Date.
"Deficient Valuation": With respect to any Mortgage Loan, a valuation of
the related Mortgaged Property by a court of competent jurisdiction in an amount
less than the then outstanding principal balance of the Mortgage Loan, which
valuation results from a proceeding initiated under the Bankruptcy Code.
"Definitive Certificates": As defined in Section 5.02(c).
"Deleted Mortgage Loan": A Mortgage Loan replaced or to be replaced by a
Qualified Substitute Mortgage Loan.
"Delinquency Percentage": As of the last day of any Collection Period, the
percentage equivalent of a fraction, the numerator of which equals the aggregate
Stated Principal Balances of all Mortgage Loans that are 60 or more days
delinquent on a contractual basis, in foreclosure or converted
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to REO Properties as of such last day of such Collection Period, and the
denominator of which is the aggregate Stated Principal Balance of the Mortgage
Loans as of the last day of such Collection Period.
"Depositor": Lehman ABS Corporation, a Delaware corporation, or its
successor in interest.
"Depository": The Depository Trust Company, or any successor Depository
hereafter named. The nominee of the initial Depository, for purposes of
registering those Certificates that are to be Book-Entry Certificates, is Cede &
Co. The Depository shall at all times be a "clearing corporation" as defined in
Section 8-102(3) of the Uniform Commercial Code of the State of New York and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended.
"Depository Institution": Any depository institution or trust company,
including the Trustee, that (a) is incorporated under the laws of the United
States of America or any State thereof, (b) is subject to supervision and
examination by federal or state banking authorities and (c) has outstanding
unsecured commercial paper or other short-term unsecured debt obligations (or,
in the case of a depository institution that is the principal subsidiary of a
holding company, such holding company has unsecured commercial paper or other
short-term unsecured debt obligations) that are rated P-1 by Moody's and A-1 by
S&P (or comparable ratings if Moody's and S&P are not the Rating Agencies).
"Depository Participant": A broker, dealer, bank or other financial
institution or other Person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
"Determination Date": With respect to each Distribution Date, the fifth
Business Day preceding such Distribution Date.
"Directly Operate": With respect to any REO Property, the furnishing or
rendering of services to the tenants thereof, the management or operation of
such REO Property, the holding of such REO Property primarily for sale to
customers, the performance of any construction work thereon or any use of such
REO Property in a trade or business conducted by the Trust Fund other than
through an Independent Contractor; provided, however, that the Trustee (or the
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Master Servicer on behalf of the Trustee) shall not be considered to Directly
Operate an REO Property solely because the Trustee (or the Master Servicer on
behalf of the Trustee) establishes rental terms, chooses tenants, enters into or
renews leases, deals with taxes and insurance, or makes decisions as to repairs
or capital expenditures with respect to such REO Property.
"Disqualified Organization": Any of the following: (i) the United States,
any State or political subdivision thereof, any possession of the United States,
or any agency or instrumentality of any of the foregoing (other than an
instrumentality which is a corporation if all of its activities are subject to
tax and, except for the FHLMC, a majority of its board of directors is not
selected by such governmental unit), (ii) any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, (iii) any organization (other than certain farmers' cooperatives
described in Section 521 of the Code) which is exempt from the tax imposed by
Chapter 1 of the Code (including the tax imposed by Section 511 of the Code on
unrelated business taxable income), (iv)
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rural electric and telephone cooperatives described in Section 1381(a)(2)(C) of
the Code and (v) any other Person so designated by the Trustee based upon an
Opinion of Counsel that the holding of an Ownership Interest in a Residual
Certificate by such Person may cause the Trust Fund or any Person having an
Ownership Interest in any Class of Certificates (other than such Person) to
incur a liability for any federal tax imposed under the Code that would not
otherwise be imposed but for the Transfer of an Ownership Interest in a Residual
Certificate to such Person. The terms "United States," "State" and
"international organization" shall have the meanings set forth in Section 7701
of the Code or successor provisions.
"Distribution Account": The trust account or accounts created and
maintained by the Trustee pursuant to Section 3.10(b) which shall be entitled
"Bankers Trust Company of California, N.A., as Trustee, in trust for (A)
registered holders of United PanAm Mortgage Loan Asset Backed Certificates,
Series 1997-1, and (B) Financial Security Assurance Inc." and which must be an
Eligible Account. Amounts held in the Distribution Account shall be deemed
assets of REMIC 1.
"Distribution Date": The 25th day of any month, or if such 25th day is not
a Business Day, the Business Day immediately following such 25th day, commencing
in January 1998.
"Due Date": With respect to each Distribution Date, the day of the month
on which the Monthly Payment is due on a Mortgage Loan during the related Due
Period, exclusive of any days of grace.
"Due Period": With respect to any Distribution Date, the period commencing
on the second day of the month preceding the month in which such Distribution
Date occurs and ending on the first day of the month in which such Distribution
Date occurs.
"Eligible Account": Any of a segregated account that is (i) maintained
with a depository institution whose debt obligations at the time of any deposit
therein have the short-term debt rating of A-1 by Standard & Poor's and P-1 by
Moody's and whose accounts are insured to the maximum extent provided by either
the Savings Association Insurance Fund or the Bank Insurance Fund of the Federal
Deposit Insurance Corporation established by such fund with a minimum long-term
unsecured debt rating of "A2" by Moody's and "A" by Standard & Poor's and which
is any of (a) a federal savings and loan association duly organized, validly
existing and in good standing under the applicable banking laws of any state,
(b) an institution duly organized, validly existing and in good standing under
the applicable banking laws of any state, (c) a national banking association
duly organized, validly existing and in good standing under the federal banking
laws or (d) a principal subsidiary of a bank holding company, and in each case
of (a) through (d), approved in writing by the Certificate Insurer, (ii)
maintained with the corporate trust department of a federal or state chartered
depository institution or trust company, having capital and surplus of not less
than $50,000,000, acting in its fiduciary capacity or (iii) otherwise acceptable
to each Rating Agency and the Certificate Insurer as evidenced by a letter from
each Rating Agency and the Certificate Insurer to the Trustee, without reduction
or withdrawal of their then current ratings of the Certificates. Eligible
Accounts may bear interest.
"Estate in Real Property": A fee simple estate in a parcel of land.
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"Excess Bankruptcy Loss": Any Bankruptcy Loss, or portion thereof, which
exceeds the then applicable Bankruptcy Amount.
"Excess Basis Risk Shortfall": The sum of (a) the Basis Risk Shortfall for
such Distribution Date and (b) the Unpaid Basis Risk Shortfall for such
Distribution Date less (c) the outstanding amount of REMIC Basis Risk Shortfall.
The outstanding amount of Excess Basis Risk Shortfall shall accrue interest at
the lesser of (a) the Class A Pass-Through Rate without regard to clause (ii)
thereof and (b) the Maximum Class A Pass-Through Rate.
"Excess Fraud Loss": Any Fraud Loss, or portion thereof, which exceeds the
then applicable Fraud Loss Amount.
"Excess Losses": Any Realized Loss that is an Excess Fraud Loss, an Excess
Special Hazard Loss or an Excess Bankruptcy Loss.
"Excess Special Hazard Loss": Any Special Hazard Loss, or portion thereof,
that exceeds the then applicable Special Hazard Amount.
"Excess Subordinated Amount": With respect to the Class A Certificates and
any Distribution Date, the excess, if any, of (i) the Subordinated Amount for
such Distribution Date over (ii) the Required Subordinated Amount for such
Distribution Date.
"Expense Account": The account established and maintained pursuant to
Section 3.25.
"Expense Adjusted Maximum Mortgage Rate": With respect to any Mortgage
Loan and Distribution Date, an amount equal to the excess of (x) the Maximum
Mortgage Rate thereon, over (y) the sum of (i) the Minimum Spread, (ii) the
Trustee's Fee Rate, (iii) the Servicing Fee Rate and (iv) the rate obtained by
dividing the Certificate Insurer Premium Amount for such Distribution Date by
the aggregate Stated Principal Balance of the Mortgage Loans prior to giving
effect to the distribution of principal pursuant to Section 4.01(ii) on such
Distribution Date.
"Expense Adjusted Mortgage Rate": With respect to any Mortgage Loan and
any Distribution Date, an amount equal to the Mortgage Rate thereon minus the
sum of (i) the Minimum Spread, (ii) the Trustee's Fee Rate, (iii) the Servicing
Fee Rate and (iv) the rate obtained by dividing the Certificate Insurer Premium
Amount for such Distribution Date by the aggregate Stated Principal Balance of
the Mortgage Loans prior to giving effect to the distribution of principal
pursuant to Section 4.01(ii) on such Distribution Date.
"Extraordinary Loss": Any Realized Loss or portion thereof caused by or
resulting from:
(i) wear and tear, deterioration, rust or corrosion, mold, wet or dry
rot; inherent vice or latent defect; animals, birds, vermin,
insects;
(ii) smog, smoke, vapor, liquid or dust discharge from agricultural or
industrial operations; pollution; contamination;
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(iii) settling, subsidence, cracking, shrinkage, bulging or expansion
of pavements, foundations, walls, floors, roofs or ceilings;
(iv) errors in design, faulty workmanship or faulty materials,
unless the collapse of the property or a part thereof ensues
and then only for the ensuing loss;
(v) nuclear or chemical reaction or nuclear radiation or
radioactive or chemical contamination, all whether controlled
or uncontrolled and whether such loss be direct or indirect,
proximate or remote or be in whole or in part caused by,
contributed to or aggravated by a peril covered by the
definition of the term "Special Hazard Loss";
(vi) hostile or warlike action in time of peace or war, including
action in hindering, combating or defending against an actual,
impending or expected attack by any government or sovereign
power, de jure or de facto, or by any authority maintaining or
using military, naval or air forces, or by military, naval or
air forces, or by an agent of any such government, power,
authority or forces;
(vii) any weapon of war employing atomic fission or radioactive
forces whether in time of peace or war, and
(viii) insurrection, rebellion, revolution, civil war, usurped power
or action taken by governmental authority in hindering,
combating or defending against such an occurrence, seizure or
destruction under quarantine or customs regulations,
confiscation by order of any government or public authority, or
risks of contraband or illegal transactions or trade.
"FDIC": Federal Deposit Insurance Corporation or any successor thereto.
"FHLMC": Federal Home Loan Mortgage Corporation or any successor thereto.
"Final Recovery Determination": With respect to any defaulted Mortgage
Loan or any REO Property (other than a Mortgage Loan or REO Property purchased
by the Seller, the Master Servicer or the Certificate Insurer pursuant to or as
contemplated by Section 2.03, 3.15(c) or 10.01), a determination made by the
Master Servicer in the form of a Servicing Officer's Certificate that all
Insurance Proceeds, Liquidation Proceeds and other payments or recoveries which
the Master Servicer, in its reasonable good faith judgment, expects to be
finally recoverable in respect thereof have been so recovered. The Master
Servicer shall maintain records, prepared by a Servicing Officer, of each Final
Recovery Determination made thereby.
"FNMA": Federal National Mortgage Association or any successor thereto.
"Fraud Loss": Any Realized Loss or portion thereof sustained by reason of
a default arising from intentional fraud, dishonesty or misrepresentation in
connection with the related Mortgage Loan.
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"Fraud Loss Amount": As of any date of determination after the Cut-off
Date, an amount equal to: (X) prior to the first anniversary of the Cut-off
Date, 3.0% (initially, $3,432,750) of the aggregate outstanding principal
balance of all of the Mortgage Loans as of the Cut-off Date minus the aggregate
amount of Fraud Losses on the Mortgage Loans allocated solely to the Class X and
Residual Certificates in accordance with Section 4.04 since the Cut-off Date up
to such date of determination, (Y) from the first to the second anniversary of
the Cut-off Date, (1) the lesser of (a) the Fraud Loss Amount as of the most
recent anniversary of the Cut-off Date and (b) 2.0% of the aggregate outstanding
principal balance of all of the Mortgage Loans as of the most recent anniversary
of the Cut-off Date minus (2) the Fraud Losses on the Mortgage Loans allocated
solely to the Class X and Residual Certificates in accordance with Section 4.04
since the most recent anniversary of the Cut-off Date up to such date of
determination and (Z) from the second anniversary to the fifth anniversary of
the Cut-off Date, (1) the lesser of (a) the Fraud Loss Amount as of the most
recent anniversary of the Cut-off Date and (b) 1.0% of the aggregate out
standing principal balance of all of the Mortgage Loans as of the most recent
anniversary of the Cut-off Date minus (2) the Fraud Losses on the Mortgage Loans
allocated solely to the Class X and Residual Certificates in accordance with
Section 4.04 since the most recent anniversary of the Cut-off Date up to such
date of determination. On and after the fifth anniversary of the Cut-off Date,
the Fraud Loss Amount shall be zero.
"Funding Account": The Funding Account established pursuant to Section
4.08.
"Gross Margin": With respect to each Mortgage Loan, the fixed percentage
set forth in the related Mortgage Note that is added to the Index on each
Adjustment Date in accordance with the terms of the related Mortgage Note used
to determine the Mortgage Rate for such Mortgage Loan.
"Guaranteed Distribution": As defined in the Policy.
"Independent": When used with respect to any specified Person, any such
Person who (a) is in fact independent of the Depositor, the Master Servicer and
their respective Affiliates, (b) does not have any direct financial interest in
or any material indirect financial interest in the Depositor or the Master
Servicer or any Affiliate thereof, and (c) is not connected with the Depositor
or the Master Servicer or any Affiliate thereof as an officer, employee,
promoter, underwriter, trustee, partner, director or Person performing
similar functions; provided, however, that a Person shall not fail to be
-------- -------
Independent of the Depositor or the Master Servicer or any Affiliate thereof
merely because such Person is the beneficial owner of 1% or less of any class
of securities issued by the Depositor or the Master Servicer or any Affiliate
thereof, as the case may be.
"Independent Contractor": Either (i) any Person (other than the Master
Servicer) that would be an "independent contractor" with respect to the Trust
Fund within the meaning of Section 856(d)(3) of the Code if the Trust Fund were
a real estate investment trust (except that the ownership tests set forth in
that section shall be considered to be met by any Person that owns, directly or
indirectly, 35 percent or more of any Class of Certificates), so long as the
Trust Fund does not receive or derive any income from such Person and provided
that the relationship between such Person and the Trust Fund is at arm's length,
all within the meaning of Treasury Regulation Section 1.856-4(b)(5), or (ii) any
other Person (including the Master Servicer) if the Trustee has received an
Opinion of Counsel, which Opinion of Counsel shall be an expense of the Trust
Fund, to the effect that the taking of any action
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in respect of any REO Property by such Person, subject to any conditions therein
specified, that is otherwise herein contemplated to be taken by an Independent
Contractor will not cause such REO Property to cease to qualify as "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code (determined
without regard to the exception applicable for purposes of Section 860D(a) of
the Code), or cause any income realized in respect of such REO Property to fail
to qualify as Rents from Real Property.
"Index": With respect to each Mortgage Loan and each related Adjustment
Date the average of the interbank offered rates for six-month United States
dollar-denominated deposits in the London market as published in The Wall Street
Journal and as most recently available as of the first Business Day of the month
preceding the month of such Adjustment Date, as specified in the related
Mortgage Note.
"Initial Interest Coverage Account": The Interest Coverage Account
established pursuant to Section 4.08.
"Initial Mortgage Loan": Each Mortgage Loan originated and identified as
of December 1, 1997.
"Insurance Agreement": The Insurance and Indemnity Agreement, dated as of
December 30, 1997, among the Depositor, the Master Servicer, the Certificate
Insurer and the Seller, as amended or supplemented in accordance with the
provisions thereof.
"Insurance Payment": Any payment made by the Certificate Insurer under the
Policy with respect to the Class A Certificates.
"Insurance Proceeds": Proceeds of any title policy, hazard policy or other
insurance policy covering a Mortgage Loan, to the extent such proceeds are not
to be applied to the restoration of the related Mortgaged Property or released
to the Mortgagor in accordance with the procedures that the Master Servicer
would follow in servicing mortgage loans held for its own account, subject to
the terms and conditions of the related Mortgage Note and Mortgage.
"Interest Accrual Period": With respect to any Distribution Date, the
period commencing on the preceding Distribution Date (or in the case of the
first Interest Accrual Period, commencing on the Closing Date) and ending on the
day preceding the current Distribution Date.
"Interest Determination Date": With respect to the Class A Certificates
and any Interest Accrual Period therefor, the second London Business Day
preceding the commencement of such Interest Accrual Period.
"Interest Distribution Amount": With respect to any Distribution Date and
the Class A Certificates, the aggregate Accrued Certificate Interest on the
Certificates for such Distribution Date.
"Late Collections": With respect to any Mortgage Loan, all amounts
received subsequent to the Determination Date immediately following any
Collection Period, whether as late payments of
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Monthly Payments or as Insurance Proceeds, Liquidation Proceeds or otherwise,
which represent late payments or collections of principal and/or interest due
(without regard to any acceleration of payments under the related Mortgage and
Mortgage Note) but delinquent on a contractual basis for such Collection Period
and not previously recovered.
"Liquidation Event": With respect to any Mortgage Loan, any of the
following events: (i) such Mortgage Loan is paid in full; (ii) a Final Recovery
Determination is made as to such Mortgage Loan; or (iii) such Mortgage Loan is
removed from the Trust Fund by reason of its being purchased, sold or replaced
pursuant to or as contemplated by Section 2.03, Section 3.15(c) or Section
10.01. With respect to any REO Property, either of the following events: (i) a
Final Recovery Determination is made as to such REO Property; or (ii) such REO
Property is removed from the Trust Fund by reason of its being purchased
pursuant to Section 10.01.
"Liquidation Proceeds": The amount (other than amounts received in respect
of the rental of any REO Property prior to REO Disposition) received by the
Master Servicer in connection with (i) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation,
(ii) the liquidation of a defaulted Mortgage Loan by means of a trustee's sale,
foreclosure sale or otherwise, or (iii) the repurchase, substitution or sale of
a Mortgage Loan or an REO Property pursuant to or as contemplated by Section
2.03, Section 3.15(c), Section 3.23 or Section 10.01.
"Loan-to-Value Ratio": As of any date of determination, the fraction,
expressed as a percentage, the numerator of which is the principal balance of
the related Mortgage Loan at such date and the denominator of which is the Value
of the related Mortgaged Property.
"London Business Day": Any day on which banks in the City of London are
open and conducting transactions in United States dollars.
"Lost Note Affidavit": With respect to any Mortgage Loan as to which the
original Mortgage Note has been permanently lost or destroyed and has not been
replaced, an affidavit from the Seller certifying that the original Mortgage
Note has been lost, misplaced or destroyed (together with a copy of the related
Mortgage Note) in the form of Exhibit H hereto.
"Majority Class R Certificateholder": Any single Holder of Class R
Certificates representing a greater than 50% Percentage Interest in such Class.
"Master Servicer": Pan American Bank, FSB, a federal savings bank, or any
successor master servicer appointed as herein provided, in its capacity as
Master Servicer hereunder.
"Master Servicer Affiliate": A Person (i) controlling, controlled by or
under common control with the Master Servicer or which is 50% or more owned by
the Master Servicer and (ii) which is qualified to service residential mortgage
loans.
"Master Servicer Event of Default": One or more of the events described in
Section 7.01.
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"Master Servicer Remittance Date": With respect to any Distribution Date,
noon New York time on the fourth Business Day prior to such Distribution Date.
"Maximum Class A Pass-Through Rate": With respect to each Distribution
Date, the weighted average of the Expense Adjusted Maximum Mortgage Rates plus
the Minimum Spread of the then outstanding Mortgage Loans weighted on the basis
of the Stated Principal Balances of such Mortgage Loans immediately prior to
such Distribution Date.
"Maximum Collateral Amount": $115,000,000.
"Maximum Mortgage Rate": With respect to each Mortgage Loan, the
percentage set forth in the related Mortgage Note as the maximum Mortgage Rate
thereunder.
"Minimum Mortgage Rate": With respect to each Mortgage Loan, the
percentage set forth in the related Mortgage Note as the minimum Mortgage Rate
thereunder.
"Minimum Spread": With respect to the 1st through the 12th Distribution
Dates, 0.00% per annum; with respect to the 13th Distribution Date and each
Distribution Date thereafter, 0.50% per annum.
"Monthly Advance": As to any Mortgage Loan or REO Property, any advance
made by the Master Servicer in respect of any Distribution Date pursuant to
Section 4.03.
"Monthly Payment": With respect to any Mortgage Loan, the scheduled
monthly payment of principal and interest on such Mortgage Loan which is payable
by the related Mortgagor from time to time under the related Mortgage Note,
determined: (a) after giving effect to (i) any Deficient Valuation and/or Debt
Service Reduction with respect to such Mortgage Loan and (ii) any reduction in
the amount of interest collectible from the related Mortgagor pursuant to the
Relief Act; (b) without giving effect to any extension granted or agreed to by
the Master Servicer pursuant to Section 3.02; and (c) on the assumption that all
other amounts, if any, due under such Mortgage Loan are paid when due.
"Moody's": Moody's Investors Service, Inc. or its successor in interest.
"Mortgage": The mortgage, deed of trust or other instrument creating a
first lien on, or first priority security interest in, a Mortgaged Property
securing a Mortgage Note.
"Mortgage File": The mortgage documents listed in Section 2.01 pertaining
to a particular Mortgage Loan and any additional documents required to be added
to the Mortgage File pursuant to this Agreement.
"Mortgage Loan": Each mortgage loan transferred and assigned to the
Trustee pursuant to Section 2.01 or Section 2.03(d) as from time to time held as
a part of the Trust Fund, the Mortgage Loans so held being identified in the
Mortgage Loan Schedule.
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"Mortgage Loan Purchase Agreement": The agreement between the Seller and
the Depositor, regarding the transfer of the Mortgage Loans by the Seller to or
at the direction of the Depositor, substantially in the form of Exhibit D
annexed hereto.
"Mortgage Loan Schedule": As of any date, the list of Mortgage Loans
included in the Trust Fund on such date, attached hereto as Schedule 1. The
Mortgage Loan Schedule shall be in an electronic format mutually acceptable to
the Master Servicer and the Trustee and shall be prepared by the Master Servicer
and shall set forth the following information with respect to each Mortgage
Loan:
(i) the Seller's Mortgage Loan identifying number;
(ii) the Mortgagor's name;
(iii) the street address of the Mortgaged Property including the
state and zip code;
(iv) a code indicating whether the Mortgaged Property is owner-
occupied;
(v) the type of Residential Dwelling constituting the Mortgaged
Property;
(vi) the original months to maturity;
(vii) the stated remaining months to maturity from the Cut-off
Date based on the original amortization schedule;
(viii) the Loan-to-Value Ratio at origination;
(ix) the Mortgage Rate in effect immediately following the Cut-off
Date;
(x) (A) the date on which the first Monthly Payment was due on the
Mortgage Loan and, (B) if such date is not consistent with the
Due Date currently in effect, such Due Date;
(xi) the stated maturity date;
(xii) the amount of the Monthly Payment due on the first Due Date
on or after the Cut-off Date;
(xiii) the last Due Date on which a Monthly Payment was actually
applied to the unpaid Principal Balance;
(xiv) the original principal amount of the Mortgage Loan;
(xv) the outstanding principal balance of the Mortgage Loan as of
the close of business on the Cut-off Date;
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(xvi) the Gross Margin;
(xvii) a code indicating the purpose of the Mortgage Loan (i.e.,
purchase financing, Rate/Term Refinancing, Cash-Out
Refinancing);
(xviii) the Maximum Mortgage Rate;
(xix) the Minimum Mortgage Rate;
(xx) the Mortgage Rate at origination;
(xxi) the Periodic Rate Cap and the maximum first Adjustment Date
Mortgage Rate adjustment;
(xxii) a code indicating the documentation style program (i.e.,
Full Documentation, Flex Documentation or Stated Income
Documentation);
(xxiii) the Index;
(xxiv) the first Adjustment Date immediately following the Cut-off
Date;
(xxv) the risk grade;
(xxvi) [intentionally omitted];
(xxvii) the Value of the Mortgaged Property;
(xxviii) [intentionally omitted];
(xxix) the prepayment penalty term;
(xxx) [intentionally omitted];
(xxxi) [intentionally omitted];
(xxxii) the rounding code (nearest 0.125%);
(xxxiii) whether the Mortgage Loan is assumable; whether the
Mortgage Loan has a due-on-sale clause; and
(xxxiv) the program code.
The Mortgage Loan Schedule shall set forth the following information, as of
the Cut-off Date with respect to the Mortgage Loans in the aggregate: (1) the
number of Mortgage Loans; (2) the current principal balance of the Mortgage
Loans; (3) the weighted average Mortgage Rate of the
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Mortgage Loans; and (4) the weighted average maturity of the Mortgage Loans. The
Mortgage Loan Schedule shall be amended from time to time by the Seller in
accordance with the provisions of this Agreement. With respect to any Qualified
Substitute Mortgage Loan, Cut-off Date shall refer to the related Cut-off Date
for such Mortgage Loan, determined in accordance with the definition of Cut-off
Date herein.
"Mortgage Note": The original executed note or other evidence of
indebtedness evidencing the indebtedness of a Mortgagor under a Mortgage Loan.
"Mortgage Pool": The pool of Mortgage Loans, identified on Schedule 1
from time to time, and any REO Properties acquired in respect thereof.
"Mortgage Rate": With respect to each Mortgage Loan, the annual rate at
which interest accrues on such Mortgage Loan from time to time in accordance
with the provisions of the related Mortgage Note, which rate (A) as of any date
of determination until the first Adjustment Date following the Cut-off Date
shall be the rate set forth in the Mortgage Loan Schedule as the Mortgage Rate
in effect immediately following the Cut-off Date and (B) as of any date of
determination thereafter shall be the rate determined in accordance with the
terms of the related Mortgage Note. With respect to each Mortgage Loan that
becomes an REO Property, as of any date of determination, the annual rate
determined in accordance with the immediately preceding sentence as of the date
such Mortgage Loan became an REO Property.
"Mortgaged Property": The underlying property securing a Mortgage Loan,
including any REO Property, consisting of an Estate in Real Property improved
by a Residential Dwelling.
"Mortgagor": The obligor on a Mortgage Note.
"Net Excess Spread": With respect to any Distribution Date, a fraction,
expressed as a percentage, the numerator of which is equal to the excess of (x)
the aggregate Stated Principal Balance of the then outstanding Mortgage Loans
(after giving effect to distributions of principal of the Certificates on such
Distribution Date) times the weighted average of the Expense Adjusted Mortgage
Rates (other than clause (i) thereof) on the then outstanding Mortgage Loans
over (y) the sum of the Interest Distribution Amount for such Distribution Date
and the Certificate Insurer Premium with respect to the Class A Certificates
payable to the Certificate Insurer with respect to the Policy for such
Distribution Date, and the denominator of which is an amount equal to (1) the
aggregate Stated Principal Balance (after giving effect to distributions of
principal of the Certificates on such Distribution Date) of the then outstanding
Mortgage Loans multiplied by (2) the actual number of days elapsed in the
related Interest Accrual Period divided by 360.
"Net Funds Cap": With respect to any Distribution Date, the weighted
average of the Mortgage Rates as of the first day of the related Due Period less
the Aggregate Expense Rate, weighted on the basis of the Stated Principal
Balances as of such date.
"Net Monthly Excess Cashflow": With respect to any Distribution Date, an
amount equal to the sum of (A) any Subordination Reduction Amount for such
Distribution Date and (B) the excess
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of (x) the Available Distribution Amount for such Distribution Date over (y) the
sum for such Distribution Date of (A) the Interest Distribution Amount payable
to the holders of the Class A Certificates and (B) the amount described in
clauses (b)(i) through (iii) of the definition of Principal Distribution Amount.
"Net Mortgage Rate": With respect to any Mortgage Loan (or the related REO
Property), as of any date of determination, a per annum rate of interest equal
to the then applicable Mortgage Rate for such Mortgage Loan minus the Servicing
Fee Rate.
"Net WAC Rate": As to any Distribution Date, the Net Funds Cap for such
Distribution Date plus the Minimum Spread.
"New Lease": Any lease of REO Property entered into on behalf of the Trust
Fund, including any lease renewed or extended on behalf of the Trust Fund if the
Trust Fund has the right to renegotiate the terms of such lease.
"Nonrecoverable Monthly Advance": Any Monthly Advance previously made or
proposed to be made in respect of a Mortgage Loan or REO Property that, in the
good faith business judgment of the Master Servicer, will not or, in the case of
a proposed Monthly Advance, would not be ultimately recoverable from related
late payments, Insurance Proceeds or Liquidation Proceeds on such Mortgage Loan
or REO Property as provided herein.
"Non-United States Person": (i) A person other than a citizen or resident
of the United States, (ii) a partnership, corporation, or entity treated as a
partnership or corporation for United States federal income tax purposes not
formed under the laws of the United States, any State thereof or the District of
Columbia (unless in the case of a partnership Treasury regulations provide
otherwise), (iii) any estate the income of which is not subject to United States
income taxation regardless of sources, and (iv) any trust other than a trust
that a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more United States persons have
the authority to control all substantial decisions of the trust or that is
eligible to and has elected to be treated as a United States Person.
"Officers' Certificate": A certificate signed by the Chairman of the
Board, the Vice Chairman of the Board, the President or a vice president
(however denominated), and by the Treasurer, the Secretary, or one of the
assistant treasurers or assistant secretaries of the Master Servicer, the Seller
or the Depositor, as applicable.
"One-Month LIBOR": The rate for one month United States dollar deposits
quoted on Telerate Page 3750 as of 11:00 A.M., London time, on the second London
Business Day prior to the first day of any Interest Accrual Period relating to
the Class A Certificates (or the second London Business Day prior to the Closing
Date, in the case of the first Distribution Date). "Telerate Page 3750" means
the display designated as page 3750 on the Telerate Service (or such other page
as may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
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comparable rates as may be reasonably selected by the Trustee after consultation
with the Master Servicer), the rate will be the Reference Bank Rate. On the
second London Business Day immediately preceding each Distribution Date, the
Trustee shall determine the Class A Pass-Through Rate for the Interest Accrual
Period commencing on such Distribution Date and inform the Master Servicer of
such rate.
"Opinion of Counsel": A written opinion of counsel, who may, without
limitation, be a salaried counsel for the Depositor or the Master Servicer
acceptable to the Trustee and the Certificate Insurer, except that any opinion
of counsel relating to (a) the qualification of the Trust Fund as a REMIC or (b)
compliance with the REMIC Provisions which must be an opinion of Independent
counsel.
"Original Mortgage Loan": Any of the Mortgage Loans included in the Trust
Fund as of the Closing Date.
"Ownership Interest": As to any Certificate, any ownership or security
interest in such Certificate, including any interest in such Certificate as the
Holder thereof and any other interest therein, whether direct or indirect, legal
or beneficial, as owner or as pledgee.
"Percentage Interest": With respect to Class A Certificates, the undivided
percentage ownership in such Class evidenced by such Certificate, expressed as a
percentage, the numerator of which is the initial Certificate Principal Balance
represented by such Certificate and the denominator of which is the aggregate
initial Certificate Principal Balance of all of the Class A Certificates. The
Class A Certificates are issuable only in minimum Percentage Interests
corresponding to minimum initial Certificate Principal Balances of $100,000 and
increments of $1 in excess thereof. With respect to any Class X Certificate or
Class R Certificate, the undivided percentage ownership in such Class evidenced
by such Certificate, as set forth on the face of such Class X Certificate or
Class R Certificate. The Class R Certificates are issuable only in minimum
Percentage Interests of 25%.
"Periodic Rate Cap": With respect to any Adjustment Date therefor, the
fixed percentage set forth in the related Mortgage Note, which is the maximum
amount by which the Mortgage Rate for such Mortgage Loan may increase or
decrease (without regard to the Maximum Mortgage Rate or the Minimum Mortgage
Rate) on such Adjustment Date from the Mortgage Rate in effect immediately prior
to such Adjustment Date.
"Permitted Investments": Any one or more of the following obligations or
securities acquired at a purchase price of not greater than par, regardless of
whether issued by the Depositor, the Master Servicer, the Trustee or any of
their respective Affiliates:
(i) direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any agency
or instrumentality thereof, provided such obligations are backed by the full
faith and credit of the United States, provided, however, that any
obligation of, or guaranteed by, FHLMC or FNMA, other than a senior debt or
a mortgage participation or pass-through
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certificate guaranteed by FHLMC or FNMA shall be a Permitted Investment only
if, at the time of investment, such investment is acceptable to the
Certificate Insurer.
(ii) demand and time deposits in, certificates of deposit of, or
bankers' acceptances issued by, any Depository Institution;
(iii) repurchase obligations with respect to any security described
in clause (i) above entered into with a Depository Institution (acting as
principal);
(iv) securities bearing interest or sold at a discount that are
issued by any corporation incorporated under the laws of the United States
of America or any State thereof and that are rated by each Rating Agency in
its highest long-term unsecured rating categories at the time of such
investment or contractual commitment providing for such investment;
(v) commercial paper (including both non-interest-bearing discount
obligations and interest-bearing obligations payable on demand or on a
specified date not more than 30 days after the date of acquisition thereof)
that is rated by each Rating Agency in its highest short-term unsecured debt
rating available at the time of such investment;
(vi) units of money market funds that have been rated "Aaa" by
Moody's and "AAA" by S&P; and
(vii) if previously confirmed in writing to the Trustee, any other
demand, money market or time deposit, or any other obligation, security or
investment, as may be acceptable to the Rating Agencies and the Certificate
Insurer as a permitted investment of funds backing securities having ratings
equivalent to its highest initial rating of the Class A Certificates;
provided that no instrument described hereunder shall evidence either the right
to receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provide a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations.
"Permitted Transferee": Any Transferee of a Residual Certificate other
than a Disqualified Organization or Non-United States Person.
"Person": Any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Policy": The Financial Guaranty Insurance Policy (No. 50660-N) issued by
the Certificate Insurer relating to the Class A Certificates, including any
endorsements thereto, attached hereto as Exhibit B.
"Policy Payments Account": The account established pursuant to Section
9.04 hereof.
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"Prepayment Assumption": A prepayment rate for the Mortgage Loans of 125%
of the Prepayment Vector. The Prepayment Assumption is used solely for
determining the accrual of original issue discount and market discount and the
amortization of bond premium on the Certificates for applicable tax purposes. A
100% Prepayment Vector assumes that the outstanding balance of a pool of
mortgage loans prepays at a rate of 4.00% CPR in the first month of the life of
such pool, such rate increasing by an additional approximate 1.455% CPR (exactly
16/11) each month thereafter through the twelfth month of the life of such pool,
and such rate thereafter remaining at 20% CPR for the remainder of the life of
such pool. A CPR (or Constant Prepayment Rate) represents an annualized
constant assumed rate of prepayment each month of a pool of mortgage loans
relative to its outstanding principal balance for the life of such pool.
"Prepayment Interest Shortfall": With respect to any Distribution Date,
for each Mortgage Loan that was during the related Prepayment Period the subject
of a Principal Prepayment in full or in part that was applied by the Master
Servicer to reduce the outstanding principal balance of such loan on a date
preceding the related Due Date, an amount equal to interest at the applicable
Net Mortgage Rate on the amount of such Principal Prepayment for the number of
days commencing on the date on which the prepayment is applied and ending on the
last day of the related Due Period. The obligations of the Master Servicer in
respect of any Prepayment Interest Shortfall are set forth in Section 3.24.
"Prepayment Period": With respect to any Distribution Date, the period
commencing on and including the Business Day following the Determination Date in
the month preceding the month in which the related Distribution Date occurs (or,
in the case of the first Distribution Date, the day following the Cut-off Date)
and ending on the Determination Date in the month in which the related
Distribution Date occurs.
"Prepayment Vector": The prepayment scenario assumed for Mortgage Loans in
determining the accrual of original issue discount on the Certificates for
federal income tax purposes. The Prepayment Vector is described in the
Prospectus Supplement, dated December 22, 1997, pursuant to which the Class A
Certificates were offered.
"Principal Distribution Amount": With respect to any Distribution Date,
the lesser of:
(a) the excess of the Available Distribution Amount over the amount
payable on the Class A Certificates pursuant to Section 4.01(a)(i);
and
(b) the sum of:
(i) the principal portion of each Monthly Payment due during the
related Due Period, to the extent received, on each Mortgage Loan;
(ii) the Stated Principal Balance of any Mortgage Loan that was
purchased during the related Prepayment Period pursuant to or as
contemplated by Section 2.03, 3.15(c) or 10.01 and the amount of any
shortfall deposited in the Collection Account in
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connection with the substitution of a Deleted Mortgage Loan pursuant
to Section 2.03 during the related Collection Period;
(iii) the principal portion of all other unscheduled collections
(including, without limitation, Principal Prepayments, Insurance
Proceeds, Liquidation Proceeds and REO Principal Amortization)
received during the related Prepayment Period, net of any portion
thereof that represents a recovery of principal for which an advance
was made by the Master Servicer pursuant to Section 4.03 in respect of
a preceding Distribution Date; and
(iv) the principal portion of any Realized Losses incurred on any
Mortgage Loans in the calendar month preceding such Distribution Date,
and the principal portion of any Realized Losses previously allocated
to the Class A Certificates and with respect to which a distribution
has not previously been made pursuant to this clause, in each case to
the extent covered by Net Monthly Excess Cashflow for such
Distribution Date; and
(v) the amount of any Subordination Increase Amount for the Class A
Certificates for such Distribution Date;
minus:
-----
(vi) the amount of any Subordination Reduction Amount for the Class A
Certificates for such Distribution Date.
"Principal Prepayment": Any payment of principal made by the Mortgagor on
a Mortgage Loan which is received in advance of its scheduled Due Date and which
is not accompanied by an amount of interest representing the full amount of
scheduled interest due on any Due Date in any month or months subsequent to the
month of prepayment.
"Purchase Price": With respect to any Mortgage Loan or REO Property to be
purchased pursuant to or as contemplated by Section 2.03, 3.15(c) or 10.01, and
as confirmed by an Officers' Certificate from the Master Servicer to the
Trustee, an amount equal to the sum of (i) 100% of the Stated Principal Balance
thereof as of the date of purchase (or such other price as provided in Section
10.01), (ii) in the case of (x) a Mortgage Loan, accrued interest on such Stated
Principal Balance at the applicable Net Mortgage Rate in effect from time to
time from the Due Date as to which interest was last covered by a payment by the
Mortgagor or an advance by the Master Servicer, which payment or advance had as
of the date of purchase been distributed pursuant to Section 4.01, through the
end of the calendar month in which the purchase is to be effected, and (y) an
REO Property, the sum of (1) accrued interest on such Stated Principal Balance
at the applicable Net Mortgage Rate in effect from time to time from the Due
Date as to which interest was last covered by a payment by the Mortgagor or an
advance by the Master Servicer through the end of the calendar month immediately
preceding the calendar month in which such REO Property was acquired, plus (2)
REO Imputed Interest for such REO Property for each calendar month commencing
with the calendar month in which such REO Property was acquired and ending with
the calendar month in which such purchase
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is to be effected, net of the total of all net rental income, Insurance
Proceeds, Liquidation Proceeds and Monthly Advances that as of the date of
purchase had been distributed as or to cover REO Imputed Interest pursuant to
Section 4.01, (iii) any unreimbursed Servicing Advances and Monthly Advances and
any unpaid Servicing Fees allocable to such Mortgage Loan or REO Property, (iv)
any amounts previously withdrawn from the Collection Account in respect of such
Mortgage Loan or REO Property pursuant to Sections 3.11(ix) and 3.15(b), and (v)
in the case of a Mortgage Loan required to be purchased pursuant to Section
2.03, expenses reasonably incurred or to be incurred by the Master Servicer or
the Trustee in respect of the breach or defect giving rise to the purchase
obligation.
"Qualified Substitute Mortgage Loan": A mortgage loan substituted for a
Deleted Mortgage Loan pursuant to the terms of this Agreement which must, on the
date of such substitution, (i) have an outstanding principal balance, after
application of all scheduled payments of principal and interest due during or
prior to the month of substitution, not in excess of the outstanding principal
balance of the Deleted Mortgage Loan as of the Due Date in the calendar month
during which the substitution occurs, (ii) have a Mortgage Rate not less than
(and not more than one percentage point in excess of) the Mortgage Rate of the
Deleted Mortgage Loan, (iii) have a Maximum Mortgage Rate not less than the
Maximum Mortgage Rate on the Deleted Mortgage Loan, (iv) have a Minimum Mortgage
Rate not less than the Minimum Mortgage Rate of the Deleted Mortgage Loan, (v)
have a Gross Margin equal to the Gross Margin of the Deleted Mortgage Loan, (vi)
have a next Adjustment Date not more than two months later than the next
Adjustment Date on the Deleted Mortgage Loan, (vii) have a remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Mortgage Loan, (viii) have the same Due Date as the Due Date on the
Deleted Mortgage Loan, (ix) have a Loan-to-Value Ratio as of the date of
substitution equal to or lower than the Loan-to-Value Ratio of the Deleted
Mortgage Loan as of such date, (x) have a risk grading determined by the Seller
at least equal to the risk grading assigned on the Deleted Mortgage Loan and
(xi) conform to each representation and warranty set forth in Section 2.04
hereof applicable to the Deleted Mortgage Loan. In the event that one or more
mortgage loans are substituted for one or more Deleted Mortgage Loans, the
amounts described in clause (i) hereof shall be determined on the basis of
aggregate principal balances, the Mortgage Rates described in clause (ii) hereof
shall be determined on the basis of weighted average Mortgage Rates, the risk
gradings described in clause (x) hereof shall be satisfied as to each such
mortgage loan, the terms described in clause (vii) hereof shall be determined on
the basis of weighted average remaining term to maturity, the Loan-to-Value
Ratios described in clause (ix) hereof shall be satisfied as to each such
mortgage loan and, except to the extent otherwise provided in this sentence, the
representations and warranties described in clause (xi) hereof must be satisfied
as to each Qualified Substitute Mortgage Loan or in the aggregate, as the case
may be.
"Rate/Term Refinancing": A Refinanced Mortgage Loan, the proceeds of which
are not more than $1000 or 1%, whichever is greater, in excess of the sum of (i)
the existing first mortgage loan and any subordinate mortgage loan on the
related Mortgaged Property, (ii) the aggregate amount of consumer debt paid
through escrow and (iii) related closing costs, and were used exclusively
(except for up to $1000) to satisfy the then existing first mortgage loan, any
subordinate mortgage loan of the Mortgagor on the related Mortgaged Property,
payment of consumer debt and to pay related closing costs.
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"Rating Agency or Rating Agencies": Moody's and S&P or their successors.
If such agencies or their successors are no longer in existence, "Rating
Agencies" shall be such nationally recognized statistical rating agencies, or
other comparable Persons, designated by the Depositor and the Certificate
Insurer, notice of which designation shall be given to the Trustee and Master
Servicer.
"Realized Loss": With respect to each Mortgage Loan as to which a Final
Recovery Determination has been made an amount (not less than zero) equal to (i)
the unpaid principal balance of such Mortgage Loan as of the commencement of the
calendar month in which the Final Recovery Determination was made, plus (ii)
accrued interest from the Due Date as to which interest was last paid by the
Mortgagor through the end of the calendar month in which such Final Recovery
Determination was made, calculated in the case of each calendar month during
such period (A) at an annual rate equal to the annual rate at which interest was
then accruing on such Mortgage Loan and (B) on a principal amount equal to the
Stated Principal Balance of such Mortgage Loan as of the close of business on
the Distribution Date during such calendar month, plus (iii) any amounts
previously withdrawn from the Collection Account in respect of such Mortgage
Loan pursuant to Sections 3.11(x) and 3.15(b), minus (iv) the proceeds, if any,
received in respect of such Mortgage Loan during the calendar month in which
such Final Recovery Determination was made, net of amounts that are payable
therefrom to the Master Servicer with respect to such Mortgage Loan pursuant to
clause (iii) of Section 3.11.
With respect to any REO Property as to which a Final Recovery Determination
has been made an amount (not less than zero) equal to (i) the unpaid principal
balance of the related Mortgage Loan as of the date of acquisition of such REO
Property on behalf of the Trust Fund, plus (ii) accrued interest from the Due
Date as to which interest was last paid by the Mortgagor in respect of the
related Mortgage Loan through the end of the calendar month immediately
preceding the calendar month in which such REO Property was acquired, calculated
in the case of each calendar month during such period (A) at an annual rate
equal to the annual rate at which interest was then accruing on the related
Mortgage Loan and (B) on a principal amount equal to the Stated Principal
Balance of the related Mortgage Loan as of the close of business on the
Distribution Date during such calendar month, plus (iii) REO Imputed Interest
for such REO Property for each calendar month commencing with the calendar month
in which such REO Property was acquired and ending with the calendar month in
which such Final Recovery Deter mination was made, plus (iv) any amounts
previously withdrawn from the Collection Account in respect of the related
Mortgage Loan pursuant to Sections 3.11(x) and 3.15(b), minus (v) the aggregate
of all Monthly Advances made by the Master Servicer in respect of such REO
Property or the related Mortgage Loan for which the Master Servicer has been or,
in connection with such Final Recovery Determination, will be reimbursed
pursuant to Section 3.23 out of rental income, Insurance Proceeds and
Liquidation Proceeds received in respect of such REO Property, minus (vi) the
total of all net rental income, Insurance Proceeds and Liquidation Proceeds
received in respect of such REO Property that has been, or in connection with
such Final Recovery Determination, will be transferred to the Distribution
Account pursuant to Section 3.23.
With respect to each Mortgage Loan which has become the subject of a
Deficient Valuation, the difference between the principal balance of the
Mortgage Loan outstanding immediately prior to such Deficient Valuation and the
principal balance of the Mortgage Loan as reduced by the Deficient Valuation.
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With respect to each Mortgage Loan which has become the subject of a Debt
Service Reduction, the portion, if any, of the reduction in each affected
Monthly Payment attributable to a reduction in the Mortgage Rate imposed by a
court of competent jurisdiction. Each such Realized Loss shall be deemed to
have been incurred on the Due Date for each affected Monthly Payment.
With respect to any Mortgage Loan as to which any principal payment or
portion thereof is forgiven pursuant to Section 3.02, the amount of any such
forgiven principal payment.
"Record Date": With respect to each Distribution Date, the last Business
Day of the month immediately preceding the month in which such Distribution Date
occurs.
"Reference Bank Rate": As to any Interest Accrual Period relating to the
Class A Certificates as follows: the arithmetic mean (rounded upwards, if
necessary, to the nearest one sixteenth of a percent) of the offered rates for
United States dollar deposits for one month which are offered by the Reference
Banks as of 11:00 A.M., London time, on the second London Business Day prior to
the first day of such Interest Accrual Period to prime banks in the London
interbank market for a period of one month in amounts approximately equal to the
Certificate Principal Balance of the Class A Certificates; provided that at
--------
least two such Reference Banks provide such rate. If fewer than two offered
rates appear, the Reference Bank Rate will be the arithmetic mean of the rates
quoted by one or more major banks in New York City, selected by the Trustee
after consultation with the Master Servicer, as of 11:00 A.M., New York time, on
such date for loans in U.S. Dollars to leading European Banks for a period of
one month in amounts approximately equal to the Certificate Principal Balance of
the Class A Certificates. If no such quotations can be obtained, the Reference
Bank Rate shall be the Reference Bank Rate applicable to the preceding Interest
Accrual Period.
"Reference Banks": Three major banks that are engaged in the London
interbank market, selected by the Trustee after consultation with the Master
Servicer.
"Refinanced Mortgage Loan": A Mortgage Loan the proceeds of which were not
used to purchase the related Mortgaged Property.
"Regular Certificate": Any Class A or Class X Certificate.
"Regular Interest": A "regular interest" in a REMIC within the meaning of
Section 860G(a)(l) of the Code.
"Relief Act": The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"Relief Act Interest Shortfall": With respect to any Distribution Date and
any Mortgage Loan, any reduction in the amount of interest collectible on such
Mortgage Loan for the most recently ended calendar month as a result of the
application of the Relief Act.
"REMIC": A "real estate mortgage investment conduit" within the meaning of
Section 860D of the Code.
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"REMIC Basis Risk Shortfall": With respect to any Distribution Date on
which the Class A Pass-Through Rate is calculated pursuant to clause (ii) of the
definition thereof, an amount equal to interest accrued during the related
Interest Accrual Period on the Certificate Principal Balance of the Class A
Certificates immediately prior to such Distribution Date at a rate equal to the
excess of the Class A Adjusted Pass-Through Rate over the Class A Pass-Through
Rate calculated pursuant to clause (ii) of the definition thereof. The
outstanding amount of REMIC Basis Risk Shortfall with respect to any
Distribution Date shall be the aggregate of all REMIC Basis Risk Shortfalls for
the current Distribution Date and any previous Distribution Date less all
payments made in respect of such REMIC Basis Risk Shortfalls on or prior to such
Distribution Date pursuant to Section 4.01(a). The outstanding amount of REMIC
Basis Risk Shortfalls shall accrue interest at the Class A Adjusted Pass Through
Rate.
"REMIC Provisions": Provisions of the federal income tax law relating to
real estate mortgage investment conduits, which appear at Sections 860A-860G of
the Code, and related provisions, and proposed, temporary and final regulations
and published rulings, notices and announcements promulgated thereunder, as the
foregoing may be in effect from time to time.
"Remittance Report": A report in form and substance acceptable to the
Trustee on a magnetic disk or tape prepared by the Master Servicer pursuant to
Section 4.03 with such additions, deletions and modifications as agreed to by
the Trustee and the Master Servicer.
"Rents from Real Property": With respect to any REO Property, gross income
of the character described in Section 856(d) of the Code as being included in
the term "rents from real property.
"REO Account": The account or accounts maintained by the Master Servicer
in respect of an REO Property pursuant to Section 3.23.
"REO Disposition": The sale or other disposition of an REO Property on
behalf of the Trust Fund.
"REO Imputed Interest": As to any REO Property, for any calendar month
during which such REO Property was at any time part of the Trust Fund, one
month's interest at the applicable Net Mortgage Rate on the Stated Principal
Balance of such REO Property (or, in the case of the first such calendar month,
of the related Mortgage Loan if appropriate) as of the close of business on the
Distribution Date in such calendar month.
"REO Principal Amortization": With respect to any REO Property, for any
calendar month, the excess, if any, of (a) the aggregate of all amounts received
in respect of such REO Property during such calendar month, whether in the form
of rental income, sale proceeds (including, without limitation, that portion of
the Termination Price paid in connection with a purchase of all of the Mortgage
Loans and REO Properties pursuant to Section 10.01 that is allocable to such REO
Property) or otherwise, net of any portion of such amounts (i) payable pursuant
to Section 3.23(c) in respect of the proper operation, management and
maintenance of such REO Property or (ii) payable or reimbursable to the Master
Servicer pursuant to Section 3.23(d) for unpaid Servicing Fees in respect of the
related Mortgage Loan and unreimbursed Servicing Advances and Monthly Advances
in respect
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of such REO Property or the related Mortgage Loan, over (b) the REO Imputed
Interest in respect of such REO Property for such calendar month.
"REO Property": A Mortgaged Property acquired by the Master Servicer on
behalf of the Trust Fund through foreclosure or deed-in-lieu of foreclosure, as
described in Section 3.23.
"Request for Release": A release signed by a Servicing Officer, in the
form of Exhibit E-1 or Exhibit E-2 attached hereto.
"Required Reserve Fund Deposit": With respect to any Distribution Date on
which the Net Excess Spread is less than 0.25%, the excess of (i) the product of
0.50% and the aggregate Stated Principal Balance of the Mortgage Loans over (ii)
the amount of funds on deposit in the Basis Risk Reserve Fund prior to deposits
thereto on such Distribution Date. With respect to any Distribution Date on
which the Net Excess Spread is equal to or greater than 0.25%, the excess of (i)
$10,000 over (ii) the amount of funds on deposit in the Basis Risk Reserve Fund
prior to deposits thereto on such Distribution Date.
"Required Subordinated Amount": With respect to any Distribution Date, an
amount equal to 4.00% of the Maximum Collateral Amount, subject to the
following: (i) if the Step Up Trigger has occurred, the Required Subordinated
Amount for such Distribution Date will be an amount equal to the product of
8.00% and the Maximum Collateral Amount, (ii) if the Step Up Trigger has not
occurred but the Step Up Spread Squeeze Trigger has occurred, the Required
Subordinated Amount for such Distribution Date will be an amount equal to the
sum of (A) the Required Subordinated Amount for such Distribution Date
determined as though the Step Up Spread Squeeze Trigger had not occurred plus
(B) the Spread Squeeze Subordination Increase Amount, or (iii) if neither the
Step Up Trigger nor the Step Up Spread Squeeze Trigger has occurred but the Step
Down Trigger has occurred, the Required Subordinated Amount for such
Distribution Date will be an amount equal to the greater of (A) 0.50% of the
Maximum Collateral Amount and (B) the lesser of (x) 4.00% of the Maximum
Collateral Amount and (y) the Stepped Down Required Subordinated Percentage of
the aggregate Stated Principal Balance of the Mortgage Loans as of such
Distribution Date.
"Residential Dwelling": Any one of the following: (i) a detached one-
family dwelling, (ii) a detached two- to four-family dwelling, (iii) a one-
family dwelling unit in a FNMA eligible condominium project, or (iv) a detached
one-family dwelling in a planned unit development, none of which is a co-
operative, mobile or manufactured home (as defined in 42 United States Code,
Section 5402(6)).
"Residual Certificate": Any one of the Class R Certificates.
"Residual Interest": The sole class of "residual interests" in a REMIC
within the meaning of Section 860G(a)(2) of the Code.
"Responsible Officer": When used with respect to the Trustee, the Chairman
or Vice Chairman of the Board of Directors or Trustees, the Chairman or Vice
Chairman of the Executive or Standing Committee of the Board of Directors or
Trustees, the President, the Chairman of the
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Committee on Trust Matters, any vice president, any assistant vice president,
the Secretary, any assistant secretary, the Treasurer, any assistant treasurer,
the Cashier, any assistant cashier, any trust officer or assistant trust
officer, the Controller and any assistant controller or any other officer of the
Trustee customarily performing functions similar to those performed by any of
the above designated officers and, with respect to a particular matter, to whom
such matter is referred because of such officer's knowledge of and familiarity
with the particular subject.
"Rolling Delinquency Percentage": For any Distribution Date, the average
of the Delinquency Percentages as of the last day of each of the six (or one,
two, three, four or five, in the case of the first, second, third, fourth or
fifth Distribution Dates, respectively) most recently ended Collection Periods.
"Rolling Loss Percentage": As of any Distribution Date, the percentage
equivalent of a fraction, the numerator of which is the aggregate amount of
Realized Losses incurred during the preceding twelve Collection Periods, and the
denominator of which is the aggregate Stated Principal Balance of the Mortgage
Loans as of the first day of the twelfth preceding Collection Period.
"Seller": United PanAm Mortgage Corporation, or its successor in interest,
in its capacity as seller under the Mortgage Loan Purchase Agreement.
"Servicing Account": The account or accounts created and maintained
pursuant to Section 3.09.
"Servicing Advances": The reasonable "out-of-pocket" costs and expenses
incurred by the Master Servicer in connection with a default, delinquency or
other unanticipated event by the Master Servicer in the performance of its
servicing obligations, including, but not limited to, the cost of (i) the
preservation, restoration and protection of a Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, in respect of a
particular Mortgage Loan, (iii) the management (including reasonable fees in
connection therewith) and liquidation of any REO Property, and (iv) the
performance of its obligations under Sections 3.01, 3.09, 3.14, 3.15 and 3.23
(in the case of Section 3.23, including but not limited to the cost of obtaining
any Opinion of Counsel of the kind described in Section 3.23(a)). The Master
Servicer shall not be required to make any Servicing Advance in respect of a
Mortgage Loan or REO Property that, in the good faith business judgment of the
Master Servicer, would not be ultimately recoverable from related Insurance
Proceeds or Liquidation Proceeds on such Mortgage Loan or REO Property as
provided herein.
"Servicing Fee": With respect to each Mortgage Loan and for any calendar
month, an amount equal to one month's interest (or in the event of any payment
of interest which accompanies a Principal Prepayment in full made by the
Mortgagor during such calendar month, interest for the number of days covered by
such payment of interest) at the Servicing Fee Rate on the same principal amount
on which interest on such Mortgage Loan accrues for such calendar month. A
portion of such Servicing Fee may be retained by any Sub-Servicer as its
servicing compensation.
"Servicing Fee Rate": .50% per annum.
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"Servicing Officer": Any officer of the Master Servicer involved in, or
responsible for, the administration and servicing of Mortgage Loans, whose name
and specimen signature appear on a list of servicing officers furnished by the
Master Servicer to the Trustee and the Certificate Insurer and the Depositor on
the Closing Date, as such list may from time to time be amended.
"Servicing Standard": As defined in Section 3.01.
"Single Certificate": With respect to any Class of Certificates (other
than the Class X and Residual Certificates), a hypothetical Certificate of such
Class evidencing a Percentage Interest for such Class corresponding to an
initial Certificate Principal Balance of $100,000. With respect to the Class X
Certificates and the Residual Certificates, a hypothetical Certificate of such
Class evidencing a 100% Percentage Interest in such Class.
"Special Hazard Amount": As of any Distribution Date, an amount equal to
$1,144,250 minus the sum of (i) the aggregate amount of Special Hazard Losses on
the Mortgage Loans allocated solely to the Class X and Class R Certificates in
accordance with Section 4.04 and (ii) the Adjustment Amount (as defined below)
as most recently calculated. For each anniversary of the Cut-off Date, the
Adjustment Amount shall be equal to the amount, if any, by which the amount
calculated in accordance with the preceding sentence (without giving effect to
the deduction of the Adjustment Amount for such anniversary) exceeds the
greatest of (i) twice the outstanding principal balance of the Mortgage Loan
which has the largest outstanding principal balance on the Distribution Date
immediately preceding such anniversary, (ii) the product of 1.0% multiplied by
the outstanding principal balance of all Mortgage Loans on the Distribution Date
immediately preceding such anniversary and (iii) the aggregate outstanding
principal balance (as of the immediately preceding Distribution Date) of the
Mortgage Loans in any five-digit California zip code area with the largest
amount of Mortgage Loans by aggregate principal balance as of such anniversary.
"Special Hazard Loss": Any Realized Loss or portion thereof not in excess
of the lesser of the cost of repair or replacement of a Mortgaged Property
suffered by such Mortgaged Property by reason of damage caused by certain
hazards (including earthquakes, mudflows, and, to a limited extent, floods) not
insured against under the hazard insurance policies or fire or flood insurance
policies required to be maintained in respect of such Mortgaged Property
pursuant to Section 3.13, or by reason of the application of any co-insurance
provision, in any event exclusive of any Extraordinary Loss.
"Spread Squeeze Subordination Increase Amount": For any Distribution Date
on which the Step Up Spread Squeeze Trigger has occurred, an amount equal to the
product obtained by multiplying (i) three times (ii) the excess, if any, of (x)
3.0% over (y) the percentage equivalent of a fraction, the numerator of which is
the product of (A) the Net Monthly Excess Cashflow (without regard to clause (A)
thereof) and (B) 12, and the denominator of which is the aggregate Stated
Principal Balance of the Mortgage Loans as of such Distribution Date times (iii)
the Maximum Collateral Amount. Each reduction in the Spread Squeeze
Subordination Increase Amount shall occur ratably (1/6 for each Distribution
Date) over the six month period beginning with the Distribution Date immediately
succeeding the Distribution Date on which such reduction first occurs and ending
on the
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sixth succeeding Distribution Date; provided, however, that no such reduction
shall occur on any Distribution Date on whcih the Subordinated Amount is less
than the Required Subordinated Amount.
"S&P": Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., or its successor in interest.
"Startup Day": The day designated as such pursuant to Section 11.01(b)
hereof.
"Stated Principal Balance": With respect to any Mortgage Loan: (a) as of
any date of determination up to but not including the Distribution Date on which
the proceeds, if any, of a Liquidation Event with respect to such Mortgage Loan
would be distributed, the outstanding principal balance of such Mortgage Loan as
of the Cut-off Date, as shown in the Mortgage Loan Schedule, minus the sum of
(i) the principal portion of each Monthly Payment due on a Due Date subsequent
to the Cut-off Date, to the extent received from the Mortgagor and distributed
pursuant to Section 4.01 on or before such date of determination, (ii) all
Principal Prepayments received after the Cut-off Date, to the extent distributed
pursuant to Section 4.01 on or before such date of determination, (iii) all
Liquidation Proceeds and Insurance Proceeds applied by the Master Servicer as
recoveries of principal in accordance with the provisions of Section 3.15, to
the extent distributed pursuant to Section 4.01 on or before such date of
determination, and (iv) any Realized Loss incurred with respect thereto as a
result of a Deficient Valuation made during or prior to the Collection Period
for the most recent Distribution Date coinciding with or preceding such date of
determination; and (b) as of any date of determination coinciding with or
subsequent to the Distribution Date on which the proceeds, if any, of a
Liquidation Event with respect to such Mortgage Loan would be distributed, zero.
With respect to any REO Property: (a) as of any date of determination up to but
not including the Distribution Date on which the proceeds, if any, of a
Liquidation Event with respect to such REO Property would be distributed, an
amount (not less than zero) equal to the Stated Principal Balance of the related
Mortgage Loan as of the date on which such REO Property was acquired on behalf
of the Trust Fund, minus the aggregate amount of REO Principal Amortization in
respect of such REO Property for all previously ended calendar months, to the
extent distributed pursuant to Section 4.01 on or before such date of
determination; and (b) as of any date of determination coinciding with or
subsequent to the Distribution Date on which the proceeds, if any, of a
Liquidation Event with respect to such REO Property would be distributed, zero.
"Step Down Cumulative Loss Test": The Step Down Cumulative Loss Test will
be met with respect to a Distribution Date as follows: (i) for the 30th through
the 41st Distribution Dates, if the Cumulative Loss Percentage for such
Distribution Date is 1.25% or less, (ii) for the 42nd through the 53rd
Distribution Dates, if the Cumulative Loss Percentage for such Distribution Date
is 1.75% or less, (iii) for the 54th through the 65th Distribution Dates, if the
Cumulative Loss Percentage for such Distribution Date is 2.50% or less and (iv)
for the 66th Distribution Date and any Distribution Date thereafter, if the
Cumulative Loss Percentage for such Distribution Date is 3.15% or less.
"Step Down Rolling Delinquency Test": The Step Down Rolling Delinquency
Test will be met with respect to a Distribution Date if the Rolling Delinquency
Percentage for such Distribution Date is 10.00% or less.
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"Step Down Rolling Loss Test": The Step Down Rolling Loss Test will be met
with respect to a Distribution Date if the Rolling Loss Percentage for such
Distribution Date is less than 1.00%.
"Step Down Trigger": For any Distribution Date after the 30th Distribution
Date, the Step Down Trigger will have occurred if each of the Step Down
Cumulative Loss Test, the Step Down Rolling Delinquency Test and the Step Down
Rolling Loss Test is met. In no event will the Step Down Trigger be deemed to
have occurred for the 30th Distribution Date or any preceding Distribution
Date.
"Stepped Down Required Subordinated Percentage": For any Distribution Date
for which the Step Down Trigger has occurred, a percentage equal to (i) the
percentage equivalent of a fraction, the numerator of which is 4.0% of the
Maximum Collateral Amount, and the denominator of which is the aggregate Stated
Principal Balance of the Mortgage Loans as of such Distribution Date, minus (ii)
the percentage equivalent of a fraction, the numerator of which is the product
of (A) the percentage calculated under clause (i) above minus 8.00%, multiplied
by (B) the number of consecutive Distribution Dates through and including the
Distribution Date for which the Stepped Down Required Subordinated Percentage is
being calculated, up to a maximum of six, for which the Step Down Trigger has
occurred, and the denominator of which is six.
"Step Up Cumulative Loss Test": The Step Up Cumulative Loss Test will be
met with respect to a Distribution Date as follows: (i) for the 1st through the
12th Distribution Dates, if the Cumulative Loss Percentage for such Distribution
Date is more than 0.75%, (ii) for the 13th through the 24th Distribution Dates,
if the Cumulative Loss Percentage for such Distribution Date is more than 1.25%,
(iii) for the 25th through the 36th Distribution Dates, if the Cumulative Loss
Percentage for such Distribution Date is more than 3.00%, (iv) for the 37th
through the 48th Distribution Dates, if the Cumulative Loss Percentage for such
Distribution Date is more than 3.75% and (v) for the 49th Distribution Date and
any Distribution Date thereafter, if the Cumulative Loss Percentage for such
Distribution Date is more than 4.25%.
"Step Up Rolling Delinquency Test": The Step Up Rolling Delinquency Test
will be met with respect to a Distribution Date if the Rolling Delinquency
Percentage for such Distribution Date is more than 11.50%.
"Step Up Rolling Loss Test": The Step Up Rolling Loss Test will be met
with respect to a Distribution Date if the Rolling Loss Percentage for such
Distribution Date 1.65% or more.
"Step Up Spread Squeeze Trigger": The Step Up Spread Squeeze Trigger will
have occurred with respect to a Distribution Date if the percentage equivalent
of a fraction, the numerator of which is the product of (x) 12 and (y) the Net
Monthly Excess Cashflow (calculated without regard to clause (A) thereof), and
the denominator of which is the aggregate Stated Principal Balance of the
Mortgage Loans as of such Distribution Date, is less than 3.00%.
"Step Up Trigger": For any Distribution Date, the Step Up Trigger will
have occurred if any one of the Step Up Cumulative Loss Test, the Step Up
Rolling Delinquency Test or the Step Up Rolling Loss Test is met.
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"Subordinated Adjusted Amount": With respect to any Distribution Date, the
excess, if any, of (a) the aggregate Stated Principal Balances of the Mortgage
Loans immediately following such Distribution Date over (b) the aggregate sum of
(i) the Certificate Principal Balance of the Class A Certificates and (ii) any
outstanding amount of REMIC Basis Risk Shortfall each as of such Distribution
Date (after taking into account the payment of amounts described in clauses
(b)(i) through (iv) of the definition of Principal Distribution Amount on such
Distribution Date).
"Subordinated Amount": With respect to any Distribution Date, the excess,
if any, of (a) the aggregate Stated Principal Balances of the Mortgage Loans
immediately following such Distribution Date over (b) the aggregate Certificate
Principal Balance of the Class A Certificates as of such Distribution Date
(after taking into account the payment of the amounts described in clauses
(b)(i) through (iv) of the definition of Principal Distribution Amount on such
Distribution Date).
"Subordination Deficiency Amount": With respect to any Distribution Date,
the excess, if any, of (a) the Required Subordinated Amount applicable to such
Distribution Date over (b) the Subordinated Amount applicable to such
Distribution Date prior to taking into account the payment of any Subordination
Increase Amounts on such Distribution Date.
"Subordination Increase Amount": With respect to any Distribution Date,
the lesser of (a) the Subordination Deficiency Amount as of such Distribution
Date (after taking into account the payment of the Principal Distribution
Amount, on such Distribution Date, exclusive of the payment of any Subordination
Increase Amount) and (b) the amount of Net Monthly Excess Cashflow on such
Distribution Date as reduced by any Cumulative Insurance Payments or Realized
Losses allocated thereto with respect to such Distribution Date pursuant to
Section 4.04.
"Subordination Reduction Amount": With respect to any Distribution Date,
an amount equal to the lesser of (a) the Excess Subordinated Amount and (b) the
sum of the amounts available for distribution specified in clauses (b)(i)
through (iii) of the definition of Principal Distribution Amount.
"Sub-Servicer": Any Person with which the Master Servicer has entered into
a Sub-Servicing Agreement and which meets the qualifications of a Sub-Servicer
pursuant to Section 3.03.
"Sub-Servicing Account": An account established by a Sub-Servicer which
meets the requirements set forth in Section 3.08 and is otherwise acceptable to
the Master Servicer.
"Sub-Servicing Agreement": The written contract between the Master
Servicer and a Sub-Servicer relating to servicing and administration of certain
Mortgage Loans as provided in Section 3.03.
"Subsequent Mortgage Loan": Each Mortgage Loan originated or acquired by
the Seller during the period from December 1, 1997 through the Closing Date.
"Tax Matters Person": As defined in Section 11.01 hereof.
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"Tax Matters Person Residual Interest": The Residual Interest held by the
Tax Matters Person in its capacity as such.
"Tax Returns": The federal income tax return on Internal Revenue Service
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return,
including Schedule Q thereto, Quarterly Notice to Residual Interest Holders of
REMIC Taxable Income or Net Loss Allocation, or any successor forms, to be filed
on behalf of the Trust Fund under the REMIC Provisions for REMIC 1, REMIC 2 and
REMIC 3, together with any and all other information reports or returns that may
be required to be furnished to the Certificateholders or filed with the Internal
Revenue Service or any other governmental taxing authority under any applicable
provisions of federal, state or local tax laws consistent with the intended
treatment of the Class A and Class X Certificates described in Section 11.01.
"Termination Price": As defined in Section 10.01.
"Transfer": Any direct or indirect transfer, sale, pledge, hypothecation,
or other form of assignment of any Ownership Interest in a Certificate.
"Transferee": Any Person who is acquiring by Transfer any Ownership
Interest in a Certificate.
"Transferor": Any Person who is disposing by Transfer of any Ownership
Interest in a Certificate.
"Trust Fund": The segregated pool of assets subject hereto, constituting
the primary trust created hereby and to be administered hereunder, with respect
to a portion of which a REMIC election is to be made, such entire Trust Fund
consisting of: (i) such Mortgage Loans as from time to time are subject to this
Agreement, together with the Mortgage Files relating thereto, and together with
all collections thereon and proceeds thereof, (ii) any REO Property, together
with all collections thereon and proceeds thereof, (iii) the Trustee's rights
with respect to the Mortgage Loans under all insurance policies required to be
maintained pursuant to this Agreement and any proceeds thereof, (iv) the
Depositor's rights under the Mortgage Loan Purchase Agreement (including any
security interest created thereby) and (v) the Collection Account, the
Distribution Account, the Basis Risk Reserve Fund, any REO Account and the
Expense Account and such assets that are deposited therein from time to time and
any investments thereof, together with any and all income, proceeds and payments
with respect thereto. Notwithstanding the foregoing, however, the Trust Fund
specifically excludes the Policy and all payments and other collections of
principal and interest due on the Mortgage Loans on or before the Cut-off Date.
"Trustee": Bankers Trust Company of California, N.A., a national banking
association, or its successor in interest, or any successor trustee appointed as
herein provided.
"Trustee's Fee": The amount payable to the Trustee on each Distribution
Date pursuant to Section 8.05 as compensation for all services rendered by it in
the execution of the trust hereby created and in the exercise and performance of
any of the powers and duties of the Trustee here under, which amount shall equal
the product of (i) the Trustee's Fee Rate, multiplied by (ii) the aggregate
Stated
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Principal Balance of the Mortgage Loans and any REO Properties as of the
preceding Distribution Date (or, in the case of the initial Distribution Date,
as of the Cut-off Date).
"Trustee's Fee Rate": 0.014% per annum.
"Uninsured Cause": Any cause of damage to a Mortgaged Property such that
the complete restoration of such property is not fully reimbursable by the
hazard insurance policies required to be maintained pursuant to Section 3.13.
"Unpaid Basis Risk Shortfalls": With respect to any Distribution Date, the
aggregate of all Basis Risk Shortfalls for any previous Distribution Dates plus
interest accrued at the lesser of the related Class A Adjusted Pass-Through Rate
(without regard to clause (ii) thereof) and the Maximum Class A Pass-Through
Rate on each such Basis Risk Shortfall less all payments made in respect of such
Basis Risk Shortfalls on or prior to such Distribution Date pursuant to Section
4.01(a)
"Value": With respect to any Mortgaged Property, the lesser of (i) the
lesser of (a) the value thereof as determined by an appraisal made for the
originator of the Mortgage Loan at the time of origination of the Mortgage Loan
by an appraiser who met the minimum requirements of FNMA and FHLMC, and (b) the
value thereof as determined by a review appraisal conducted by the Seller in the
event any such review appraisal determines an appraised value ten percent or
more lower than the value thereof as determined by the appraisal referred to in
clause (i)(a) above and (ii) the purchase price paid for the related Mortgaged
Property by the Mortgagor with the proceeds of the Mortgage Loan, provided,
however, (A) in the case of a Refinanced Mortgage Loan, such value of the
Mortgaged Property is based solely upon the lesser of (1) the value determined
by an appraisal made for the originator of such Refinanced Mortgage Loan at the
time of origination of such Refinanced Mortgage Loan by an appraiser who met the
minimum requirements of FNMA and FHLMC and (2) the value thereof as determined
by a review appraisal conducted by the Seller in the event any such review
appraisal determines an appraised value ten percent or more lower than the value
thereof as determined by the appraisal referred to in clause (ii)(A)(l) above
and (B) in the case of a Mortgage Loan originated in connection with a "lease-
option purchase", such value of the Mortgaged Property is based on the lower of
the value determined by an appraisal made for the originator of such Mortgage
Loan at the time of origination or the sale price of such Mortgaged Property if
the "lease option purchase price" was set less than 12 months prior to
origination, and is based on the value determined by an appraisal made for the
originator of such Mortgage Loan at the time of origination if the "lease option
purchase price" was set 12 months or more prior to origination.
"Voting Rights": The portion of the voting rights of all of the
Certificates which is allocated to any Certificate. The voting rights shall be
allocated to the Class A Certificates in the proportion that the aggregate
Certificate Principal Balance of the Class A Certificates bears to the aggregate
Stated Principal Balance of the Mortgage Loans. The balance of the voting
rights shall be allocated to the Class X Certificates. The Class R Certificates
shall not possess voting rights. The Voting Rights allocated to each Class of
Certificate shall be allocated among Holders of each such Class in accordance
with their respective Percentage Interests as of the most recent Distribution
Date.
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ARTICLE II
CONVEYANCE OF MORTGAGE LOANS;
ORIGINAL ISSUANCE OF CERTIFICATES
SECTION 2.01. Conveyance of Mortgage Loans.
----------------------------
The Depositor, concurrently with the execution and delivery hereof, does
hereby transfer, assign, set over and otherwise convey to the Trustee without
recourse for the benefit of the Certificateholders and the Certificate Insurer
all the right, title and interest of the Depositor, including any security
interest therein for the benefit of the Depositor, in and to the Mortgage Loans
identified on the Mortgage Loan Schedule, the rights of the Depositor under the
Mortgage Loan Purchase Agreement, and all other assets included or to be
included in the Trust Fund. Such assignment includes all interest and principal
due after the Cut-off Date (whether or not received) with respect to the
Mortgage Loans.
In connection with such transfer and assignment, the Depositor does hereby
deliver to, and deposit with, the Trustee the following documents or instruments
with respect to each Mortgage Loan (a "Mortgage File") so transferred and
assigned:
(i) the original Mortgage Note, endorsed in the following form: "Pay
to the order of Bankers Trust Company of California, N.A., as Trustee,
without recourse" or in blank, with all prior and intervening endorsements
showing a complete chain of endorsement from the originator to the Person
so endorsing to the Trustee;
(ii) the original Mortgage with evidence of recording thereon, and
the original recorded power of attorney, if the Mortgage was executed
pursuant to a power of attorney, with evidence of recording thereon;
(iii) an original Assignment of the Mortgage executed in the
following form: "Bankers Trust Company of California, N.A., as Trustee" or
in blank;
(iv) the original recorded Assignment or Assignments of the Mortgage
showing a complete chain of assignment from the originator to the Person
assigning the Mortgage to the Trustee as contemplated by the immediately
preceding clause (iii);
(v) the original or copies of each assumption, modification, written
assurance or substitution agreement, if any; and
(vi) the original lender's title insurance policy or attorney's
opinion of title or a copy thereof certified as true and correct by the
applicable insurer, together with all endorsements or riders that were
issued with or subsequent to the issuance of such policy, insuring the
priority of the Mortgage as a first lien on the Mortgaged Property
represented therein as a fee interest vested in the Mortgagor, or in the
event such original title policy is unavailable, a
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written commitment or uniform binder or preliminary report of title issued
by the title insurance or escrow company or a copy thereof certified by the
title company, with the original policy of title insurance to be delivered
within one year of the Closing Date.
The Seller shall promptly (and in no event later than five Business Days
following the Closing Date) submit or cause to be submitted for recording, at
the Seller's expense and at no expense to the Trust Fund, the Trustee or the
Certificate Insurer, in the appropriate public office for real property records,
each Assignment referred to in Sections 2.01(iii) and (iv) above. In the event
that any such Assignment is lost or returned unrecorded because of a defect
therein, the Seller shall promptly prepare or cause to be prepared a substitute
Assignment or cure or cause to be cured such defect, as the case may be, and
thereafter cause each such Assignment to be duly recorded.
If any original Mortgage Note referred to in Section 2.01(i) cannot be
located, the obligations of the Seller to deliver such documents shall be deemed
to be satisfied upon delivery to the Trustee of a photocopy of the original of
such Mortgage Note, with an original Lost Note Affidavit to follow within one
Business Day. If any of the documents referred to in Sections 2.01(ii), (iii)
or (iv) above has as of the Closing Date been submitted for recording but either
(x) has not been returned from the applicable public recording office or (y) has
been lost or such public recording office has retained the original of such
document, the obligations of the Seller to deliver such documents shall be
deemed to be satisfied upon (1) delivery to the Trustee of a copy of each such
document certified by the Seller in the case of (x) above or the applicable
public recording office in the case of (y) above to be a true and complete copy
of the original that was submitted for recording and (2) if such copy is
certified by the Seller, delivery to the Trustee promptly upon receipt thereof
of either the original or a copy of such document certified by the applicable
public recording office to be a true and complete copy of the original. Notice
shall be provided to the Trustee, the Certificate Insurer and the Rating
Agencies by the Seller if delivery pursuant to clause (2) above will be made
more than 180 days after the Closing Date. If the original lender's title
insurance policy was not delivered pursuant to Section 2.01(vi) above, the
Seller shall deliver or cause to be delivered to the Trustee, promptly after
receipt thereof, the original lender's title insurance policy. The Seller shall
deliver or cause to be delivered to the Trustee promptly upon receipt thereof
any other original documents constituting a part of a Mortgage File received
with respect to any Mortgage Loan, including, but not limited to, any original
documents evidencing an assumption or modification of any Mortgage Loan.
All original documents relating to the Mortgage Loans that are not
delivered to the Trustee are and shall be held by or on behalf of the Seller or
the Master Servicer, as the case may be, in trust for the benefit of the Trustee
on behalf of the Certificateholders and the Certificate Insurer. In the event
that any such original document is required pursuant to the terms of this
Section to be a part of a Mortgage File, such document shall be delivered
promptly to the Trustee. Any such original document delivered to or held by the
Seller that is not required pursuant to the terms of this Section to be a part
of a Mortgage File, shall be delivered promptly to the Master Servicer.
The Depositor herewith delivers to the Trustee an executed copy of the
Mortgage Loan Purchase Agreement.
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In addition to the foregoing, the Depositor shall cause the Certificate
Insurer to deliver the Policy to the Trustee for the benefit of the
Certificateholders.
SECTION 2.02. Acceptance by Trustee.
---------------------
The Trustee acknowledges receipt of the Policy and, subject to the
provisions of Section 2.01 and subject to the review described below and any
exceptions noted on the exception report described in the next paragraph below,
the documents referred to in Section 2.01 (other than such documents described
in Section 2.01(v)) above and all other assets included in the definition of
"Trust Fund" under clauses (i), (iii), (iv) and (v) (to the extent of amounts
deposited into the Distribution Account) and declares that it holds and will
hold such documents and the other documents delivered to it constituting a
Mortgage File, and that it holds or will hold all such assets and such other
assets included in the definition of "Trust Fund" in trust for the exclusive use
and benefit of all present and future Certificateholders and the Certificate
Insurer.
The Trustee agrees, for the benefit of the Certificateholders and the
Certificate Insurer, to review each Mortgage File within 45 days after the
Closing Date (or, with respect to any document delivered after the Startup Day,
within 45 days of receipt and with respect to any Qualified Substitute Mortgage,
within 45 days after the assignment thereof) and to certify in substantially the
form attached hereto as Exhibit C-1 that, as to each Mortgage Loan listed in the
Mortgage Loan Schedule (other than any Mortgage Loan paid in full or any
Mortgage Loan specifically identified in the exception report annexed thereto as
not being covered by such certification), (i) all documents required to be
delivered to it pursuant Section 2.01 of this Agreement are in its possession,
(ii) such documents have been reviewed by it and have not been mutilated,
damaged or torn and appear to relate to such Mortgage Loan, (iii) based on its
examination and only as to the foregoing, the information set forth in the
Mortgage Loan Schedule that corresponds to items (i) and (ii) of the Mortgage
Loan Schedule accurately reflects information set forth in the Mortgage File.
It is herein acknowledged that, in conducting such review, the Trustee is under
no duty or obligation (i) to inspect, review or examine any such documents,
instruments, certificates or other papers to determine that they are genuine,
enforceable, or appropriate for the represented purpose or that they have
actually been recorded or that they are other than what they purport to be on
their face, or (ii) to determine whether any Mortgage File should include any of
the documents specified in clause (v) of Section 2.01.
Prior to the first anniversary date of this Agreement the Trustee shall
deliver to the Depositor, the Master Servicer and the Certificate Insurer a
final certification in the form annexed hereto as Exhibit C-2 evidencing the
completeness of the Mortgage Files, with any applicable exceptions noted
thereon.
If in the process of reviewing the Mortgage Files and making or preparing,
as the case may be, the certifications referred to above, the Trustee finds any
document or documents constituting a part of a Mortgage File to be missing or
defective in any material respect, at the conclusion of its review the Trustee
shall so notify the Depositor, the Master Servicer and the Certificate Insurer.
In addition, upon the discovery by the Depositor or the Master Servicer (or upon
receipt by the Trustee of written notification of such breach) of a breach of
any of the representations and warranties made by the Seller in the related
Mortgage Loan Purchase Agreement in respect of any Mortgage Loan which
materially
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adversely affects such Mortgage Loan or the interests of the related
Certificateholders in such Mortgage Loan, the party discovering such breach
shall give prompt written notice to the other parties and the Certificate
Insurer.
SECTION 2.03. Repurchase or Substitution of Mortgage Loans by the Bank.
--------------------------------------------------------
(a) Upon discovery or receipt of written notice of any materially defective
document in, or that a document is missing from, a Mortgage File or of the
breach by the Seller or the Bank of any representation, warranty or covenant
under the Mortgage Loan Purchase Agreement or this Agreement in respect of any
Mortgage Loan which materially adversely affects the value of such Mortgage Loan
or the interest therein of the Certificateholders and the Certificate Insurer
(in the case of any such representation or warranty made to the knowledge or the
best knowledge of the Seller as to which the Seller has no knowledge, without
regard to the Seller's lack of knowledge with respect to the substance of such
representation or warranty being inaccurate at the time it was made), the
Trustee shall promptly notify the Seller, the Bank, the Master Servicer and the
Certificate Insurer of such defect, missing document or breach and request that
(i) the Bank deliver such missing document or cure such defect or breach within
60 days from the date the Seller was notified of such missing document, defect
or breach, and if the Bank does not deliver such missing document or cure such
defect or breach in all material respects during such period, if the Bank shall
have commenced to cure such breach within such 60 day period, to proceed
thereafter diligently and expeditiously to cure the same within the additional
period provided under the Mortgage Loan Purchase Agreement and (ii) in
connection with any such breach (subject to clause (i) above) or in connection
with any missing document or defect, to repurchase such Mortgage Loan from the
Trust Fund at the Purchase Price within 120 days after the date on which the
Bank was notified (subject to Section 2.03(e)) of such missing document, defect
or breach, if and to the extent that the Bank is obligated to do so under the
Mortgage Loan Purchase Agreement. The Purchase Price for the repurchased
Mortgage Loan shall be deposited in the Collection Account and the Trustee, upon
receipt of written certification from the Master Servicer of such deposit, shall
release to the Seller the related Mortgage File and shall execute and deliver
such instruments of transfer or assignment, in each case without recourse, as
the Bank shall furnish to it and as shall be necessary to vest in the Bank any
Mortgage Loan released pursuant hereto and the Trustee shall have no further
responsibility with regard to such Mortgage File. In lieu of repurchasing any
such Mortgage Loan as provided above, if so provided in the Mortgage Loan
Purchase Agreement, the Bank may cause such Mortgage Loan to be removed from the
Trust Fund (in which case it shall become a Deleted Mortgage Loan) and
substitute one or more Qualified Substitute Mortgage Loans in the manner and
subject to the limitations set forth in Section 2.03(d). It is understood and
agreed that the obligation of the Bank to cure or to repurchase (or to
substitute for) any Mortgage Loan as to which a document is missing, a material
defect in a constituent document exists or as to which such a breach has
occurred and is continuing shall constitute the sole remedy against the Bank
respecting such omission, defect or breach available to the Trustee on behalf of
the Certificateholders and the Certificate Insurer.
(b) [RESERVED]
(c) Within 90 days of the earlier of discovery by the Master Servicer or
receipt of notice by the Master Servicer of the breach of any representation,
warranty or covenant of the Master Servicer
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set forth in Section 2.05 which materially and adversely affects the interests
of the Certificateholders in any Mortgage Loan, the Master Servicer shall cure
such breach in all material respects.
(d) Any substitution of Qualified Substitute Mortgage Loans for Deleted
Mortgage Loans made pursuant to Section 2.03(a) must be effected prior to the
last Business Day that is within two years after the Closing Day.
As to any Deleted Mortgage Loan for which the Seller substitutes a
Qualified Substitute Mortgage Loan or Loans, such substitution shall be effected
by the Seller delivering to the Trustee, for such Qualified Substitute Mortgage
Loan or Loans, the Mortgage Note, the Mortgage, the Assignment to the Trustee,
and such other documents and agreements, with all necessary endorsements
thereon, as are required by Section 2.01, together with an Officers' Certificate
providing that each such Qualified Substitute Mortgage Loan satisfies the
definition thereof and specifying the Substitution Shortfall Amount (as
described below), if any, in connection with such substitution. The Trustee
shall acknowledge receipt for such Qualified Substitute Mortgage Loan or Loans
and, within ten Business Days thereafter, review such documents as specified in
Section 2.02 and deliver to the Master Servicer and the Certificate Insurer,
with respect to such Qualified Substitute Mortgage Loan or Loans, a
certification substantially in the form attached hereto as Exhibit C-1, with any
applicable exceptions noted thereon. Within one year of the date of
substitution, the Trustee shall deliver to the Master Servicer and the
Certificate Insurer a certification substantially in the form of Exhibit C-2
hereto with respect to such Qualified Substitute Mortgage Loan or Loans, with
any applicable exceptions noted thereon. Monthly Payments due with respect to
Qualified Substitute Mortgage Loans in the month of substitution are not part of
the Trust Fund and will be retained by the Seller. For the month of
substitution, distributions to Certificateholders will reflect the collections
and recoveries in respect of such Deleted Mortgage Loan in the Collection Period
preceding the month of substitution and the Seller shall thereafter be entitled
to retain all amounts subsequently received in respect of such Deleted Mortgage
Loan. The Seller shall give or cause to be given written notice to the
Certificateholders that such substitution has taken place, shall amend the
Mortgage Loan Schedule to reflect the removal of such Deleted Mortgage Loan from
the terms of this Agreement and the substitution of the Qualified Substitute
Mortgage Loan or Loans and shall deliver a copy of such amended Mortgage Loan
Schedule to the Trustee. Upon such substitution, such Qualified Substitute
Mortgage Loan or Loans shall constitute part of the Mortgage Pool and shall be
subject in all respects to the terms of this Agreement and, in the case of a
substitution effected by the Seller, the Mortgage Loan Purchase Agreement,
including, in the case of a substitution effected by the Seller all applicable
representations and warranties thereof included in the Mortgage Loan Purchase
Agreement as of the date of substitution.
For any month in which the Seller substitutes one or more Qualified
Substitute Mortgage Loans for one or more Deleted Mortgage Loans, the Master
Servicer will determine the amount (the "Substitution Shortfall Amount"), if
any, by which the aggregate Purchase Price of all such Deleted Mortgage Loans
exceeds the aggregate, as to each such Qualified Substitute Mortgage Loan, of
the principal balance thereof as of the date of substitution, together with one
month's interest on such principal balance at the applicable Net Mortgage Rate.
On the date of such substitution, the Seller will deliver or cause to be
delivered to the Master Servicer for deposit in the Collection Account an amount
equal to the Substitution Shortfall Amount, if any, and the Trustee, upon
receipt of the related
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Qualified Substitute Mortgage Loan or Loans and certification by the Master
Servicer of such deposit in the form of Exhibit E hereto, shall release to the
Seller the related Mortgage File or Files and shall execute and deliver such
instruments of transfer or assignment, in each case without recourse, as the
Seller shall deliver to it and as shall be necessary to vest therein any Deleted
Mortgage Loan released pursuant hereto.
In addition, the Seller shall obtain at its own expense and deliver to the
Trustee and the Certificate Insurer an Opinion of Counsel to the effect that
such- substitution will not cause (a) any federal tax to be imposed on the Trust
Fund, including without limitation, any federal tax imposed on "prohibited
transactions" under Section 860F(a)(l) of the Code or on "contributions after
the startup date" under Section 860G(d)(l) of the Code, or (b) the Trust Fund to
fail to qualify as a REMIC at any time that any Certificate is outstanding. If
such Opinion of Counsel can not be delivered, then such substitution may only be
effected at such time as the required Opinion of Counsel can be given.
(e) Upon discovery by the Depositor, the Seller, the Master Servicer, the
Trustee or the Certificate Insurer that any Mortgage Loan does not constitute a
"qualified mortgage" within the meaning of Section 860G(a)(3) of the Code, the
party discovering such fact shall within two Business Days give written notice
thereof to the other parties and the Certificate Insurer. In connection
therewith, the Bank shall repurchase or, subject to the limitations set forth in
Section 2.03(d), substitute one or more Qualified Substitute Mortgage Loans for
the affected Mortgage Loan within 90 days of the earlier of discovery or receipt
of such notice with respect to such affected Mortgage Loan. Such repurchase or
substitution shall be made by the Seller. Any such repurchase or substitution
shall be made in the same manner as set forth in Section 2.03(a), if made by the
Bank. The Trustee shall reconvey to the Seller the Mortgage Loan to be released
pursuant hereto in the same manner, and on the same terms and conditions, as it
would a Mortgage Loan repurchased for breach of a representation or warranty.
SECTION 2.04. Representations and Warranties of the Seller.
--------------------------------------------
(a) The Seller hereby represents and warrants to the Trustee for the
benefit of the Certificateholders and the Certificate Insurer that as of the
Closing Date or as of such other date specifically provided herein:
(i) The information set forth in the Mortgage Loan Schedule for the
Original Mortgage Loans is complete, true and correct in all material
respects at the date or dates respecting which such information is
furnished;
(ii) As of the Cut-off Date, each Scheduled Payment required to be
made prior to November 1, 1997 has been paid and no Mortgage Loan has been
dishonored. No Mortgage Loan has been thirty or more days delinquent more
than one time in the twelve months preceding the Cut-off Date (assuming
that a "rolling" thirty day delinquency is considered to be one time
delinquent).
(iii) Each Original Mortgage Loan had an original term to maturity of
30 years; each Original Mortgage Loan is an adjustable-rate mortgage loan
with payments due on the first day
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of each month and each such Mortgage Loan is fully amortizing; effective
with the first payment due after each Adjustment Date, the monthly payment
amount for each Mortgage Loan will be adjusted to an amount which would
amortize fully the outstanding principal balance of such Mortgage Loan over
its remaining term and pay interest at the Mortgage Rate so adjusted; on
the first Adjustment Date and on each Adjustment Date thereafter the
Mortgage Rate on each Original Mortgage Loan will be adjusted to equal the
sum of the Index and the related Gross Margin, rounded to the nearest
multiple of 0.125%, subject to the Periodic Rate Cap (the "Initial
Adjustment Rate Cap"), the Maximum Mortgage Rate and the Minimum Mortgage
Rate applicable to such Mortgage Loan;
(iv)(A) no more than approximately 42.14% and approximately 13.55%,
respectively, of the Initial Mortgage Loans, by outstanding principal
balance of the Initial Mortgage Loans as of the Cut-off Date, will be
secured by Mortgaged Properties located in California and Washington,
respectively, and no more than approximately 7.11% of the Initial Mortgage
Loans, by outstanding principal balance of the Initial Mortgage Loans as of
the Cut-off Date, will be secured by Mortgaged Properties located in any
one other state; (B) as of the Cut-off Date, no more than approximately
1.55% of the Initial Mortgage Loans, by outstanding principal balance of
the related Initial Mortgage Loans as of the Cut-off Date, are secured by
Mortgaged Properties located in the 92640 zip code area, and no more than
approximately 19.19% of the Initial Mortgage Loans, by outstanding
principal balance of the related Initial Mortgage Loans as of the Cut-off
Date, are secured by units in two- to four-family dwellings, condominiums,
planned unit developments or manufactured housing and (C) at least
approximately 80.81% of the Initial Mortgage Loans, in each case by
outstanding principal balance of the related Initial Mortgage Loans as of
the Cut-off Date, are secured by real property with a single family
residence erected thereon;
(v) If the Mortgaged Property securing a Mortgage Loan is identified
in the Federal Register by the Federal Emergency Management Agency ("FEMA")
as having special flood hazards, a flood insurance policy is in effect at
the Closing Date which met the requirements of FEMA at the time such policy
was issued;
(vi) With respect to each Mortgage Loan, the Loan-to-Value Ratio was
less than or equal to 90% at the origination of such Mortgage Loan;
(vii) With respect to at least approximately 85.98% of the Initial
Mortgage Loans, by outstanding principal balance as of the Cut-off Date, at
the time that the Mortgage Loan was made, the Mortgagor represented that
the Mortgagor would occupy the Mortgaged Property as the Mortgagor's
primary residence. With respect to approximately 14.03% of the Initial
Mortgage Loans, by outstanding principal balance as of the Cut-off Date, at
the time that the Mortgage Loan was made, the Mortgagor represented that
the Mortgagor would occupy the Mortgaged Property as the Mortgagor's
secondary residence or that the Mortgaged Property would be an investor
property;
(viii) The Seller is duly organized, validly existing and in good
standing under the laws of its state of incorporation and has the power and
authority to own its assets and to
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transact the business in which it is currently engaged. The Seller is duly
qualified to do business and is in good standing in each jurisdiction in
which the character of the business transacted by it or properties owned or
leased by it requires such qualification and in which the failure so to
qualify would have a material adverse effect on (a) its business,
properties, assets or condition (financial or other), (b) its performance
of its obligations under this Agreement or (c) the value or marketability
of the Mortgage Loans;
(ix) The Seller has the power and authority to make, execute, deliver
and perform this Agreement and to consummate all of the transactions
contemplated under this Agreement, and has taken all necessary action to
authorize the execution, delivery and performance of this Agreement. When
executed and delivered, this Agreement will constitute its legal, valid and
binding obligation enforceable in accordance with its terms, except as
enforcement of such terms may be limited by bankruptcy, insolvency,
reorganization, receivership, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by the availability of
equitable remedies;
(x) The Seller holds all necessary licenses, certificates and permits
from all government authorities necessary for conducting its business as it
is presently conducted. It is not required to obtain the consent of any
other party or any consent, license, approval or authorization from, or
registration or declaration with, any governmental authority, bureau or
agency in connection with the execution, delivery, performance, validity or
enforceability of this Agreement, except for such consents, licenses,
approvals or authorizations, or registrations or declarations, as shall
have been obtained or filed, as the case may be, prior to the related
Transfer Date;
(xi) The execution, delivery and performance of this Agreement by it
will not conflict with or result in a breach of, or constitute a default
under, any provision of any existing law or regulation or any order or
decree of any court applicable to the Seller or any of its properties or
any provision of its Articles of Incorporation or Bylaws, or constitute a
material breach of, or result in the creation or imposition of any lien,
charge or encumbrance upon any of its properties pursuant to, any mortgage,
indenture, contract or other agreement to which it is a party or by which
it may be bound;
(xii) No certificate of an officer, statement furnished in writing or
written report, in each case, delivered pursuant to the terms hereof by the
Seller contains any untrue statement of a material fact or omits to state
any material fact necessary to make the certificate, statement or report
not misleading;
(xiii) The transactions contemplated by this Agreement are in the
ordinary course of the Seller's business;
(xiv) The Seller is not insolvent, nor will the Seller be made
insolvent by the transfer of the Mortgage Loans, nor is the Seller aware of
any pending insolvency;
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(xv) The Seller is not in violation of, and the execution and delivery
of this Agreement by it and its performance and compliance with the terms
of this Agreement will not constitute a violation with respect to, any
order or decree of any court or any order or regulation of any federal,
state, municipal or governmental agency having jurisdiction, which
violation would materially and adversely affect the Seller's condition
(financial or otherwise) or operations or any of the Seller's properties or
materially and adversely affect the performance of any of its duties
hereunder;
(xvi) There are no actions or proceedings against, or investigations
of it, pending or, to its knowledge, threatened, before any court,
administrative agency or other tribunal (A) that, if determined adversely,
would prohibit the Seller from entering into this Agreement, (B) seeking
to prevent the consummation of any of the transactions contemplated by this
Agreement or (C) that, if determined adversely, would prohibit or
materially and adversely affect the Seller's performance of its obligations
under, or the validity or enforceability of, this Agreement;
(xvii) The Seller represents and warrants that it did not sell the
Mortgage Loans to the Depositor as Purchaser under the Purchase Agreement
with any intent to hinder, delay or defraud any of its creditors; and the
Seller will not be rendered insolvent as a result of the sale of the
Mortgage Loans to the Depositor as Purchaser under the Purchase Agreement;
(xviii) The Seller represents and warrants that it acquired title to
the Mortgage Loans in good faith, without notice of any adverse claim to
the Mortgage Loans; and
(xix) The Seller represents and warrants that the transfer,
assignment and conveyance of the Mortgage Notes and the Mortgages by the
Seller pursuant to the Purchase Agreement and this Agreement are not
subject to the bulk transfer laws or any similar statutory provisions in
effect in any applicable jurisdiction.
(xx) No Mortgage Loan is a construction loan;
(xxi) Each Mortgage is a valid and subsisting first lien of record on
the Mortgaged Property subject in all cases to the exceptions to title set
forth in the title insurance policy with respect to the related Mortgage
Loan, which exceptions are generally acceptable to second mortgage lending
companies, and such other exceptions to which similar properties are
commonly subject and which do not individually, or in the aggregate,
materially and adversely affect the benefits of the security intended to be
provided by such Mortgage;
(xxii) Except with respect to liens released immediately prior to the
transfer herein contemplated, each Mortgage Note and related Mortgage have
not been assigned or pledged and immediately prior to the transfer and
assignment herein contemplated, the Seller held good, marketable and
indefeasible title to, and was the sole owner and holder of, each Mortgage
Loan subject to no liens, charges, mortgages, claims, participation
interests, equities, pledges or security interests of any nature,
encumbrances or rights of others (collectively, a "Lien"); the Seller has
full right and authority under all governmental and regulatory bodies
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having jurisdiction over the Seller, subject to no interest or
participation of, or agreement with, any party, to sell and assign the same
pursuant to this Agreement; and immediately upon the transfer and
assignment herein contemplated, the Seller shall have transferred all of
its right, title and interest in and to each Mortgage Loan to the Depositor
(or its assignee) and the Purchaser (or its assignee) will hold good,
marketable and indefeasible title, to, and be the sole owner of, each
Mortgage Loan subject to no Liens;
(xxiii) There is no delinquent tax, fee or assessment lien on any
Mortgaged Property, and each Mortgaged Property is free of material damage
and is in good repair;
(xxiv) No Mortgage Loan is subject to any right of rescission, set-
off, counterclaim or defense, including the defense of usury, nor will the
operation of any of the terms of any Mortgage Note or Mortgage, or the
exercise of any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, and no such right of rescission, set-off, counterclaim or defense
has been asserted with respect thereto;
(xxv) There is no mechanics' lien or claim for work, labor or
material affecting any Mortgaged Property which is or may be a lien prior
to, or equal or coordinate with, the lien of the related Mortgage, and, to
the Seller's best knowledge, no rights are outstanding that under law could
give rise to such a lien except those which are insured against by the
title insurance policy referred to in paragraph (xxvii) below;
(xxvi) Each Mortgage Loan at the time it was made complied with, and
each Mortgage Loan at all times was serviced in compliance with, in each
case, in all material respects, applicable state and federal laws and
regulations, including, without limitation, usury, equal credit
opportunity, consumer credit, truth-in-lending and disclosure laws;
(xxvii) With respect to each Mortgage Loan, a lender's title
insurance policy, issued in standard American Land Title Association or
California Land Title Association form, or other form acceptable in a
particular jurisdiction, by a title insurance company authorized to
transact business in the state in which the related Mortgaged Property is
situated, together with a condominium endorsement, if applicable, in an
amount at least equal to the original principal balance of such Mortgage
Loan insuring the Seller and its successor's and assignees' interest under
the related Mortgage Loan as the holder of a valid first mortgage lien of
record on the real property described in the Mortgage, subject only
to the exceptions of the character referred to in paragraph (xxv) above,
was valid and in full force and effect on the date of the origination of
such Mortgage Loan;
(xxviii) Each Mortgage and Mortgage Note is the legal, valid and
binding obligation of the related Mortgagor and is enforceable in
accordance with its terms, except only as such enforcement may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity (whether considered in a proceeding or action in
equity or at law), and all parties to each Mortgage Loan and the Mortgagee
had full legal capacity to execute all Mortgage Loan
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documents and to convey the estate therein purported to be conveyed. The
Mortgagor is a natural person who is a party to the Mortgage Note and the
Mortgage in an individual capacity, and not in the capacity of a trustee or
otherwise;
(xxix) The terms of the Mortgage Note and the Mortgage have not been
impaired, altered or modified in any material respect, except by a written
instrument which has been recorded or is in the process of being recorded,
if necessary, to protect the interests of the Certificateholders and the
Certificate Insurer and which has been or will be delivered to the Trustee.
The substance of any such alteration or modification is reflected on the
related Mortgage Loan Schedule and was approved, if required, by the
related primary mortgage guaranty insurer, if any. Each original Mortgage
was recorded, and all subsequent assignments of the original Mortgage have
been recorded in the appropriate jurisdictions wherein such recordation is
necessary to perfect the lien thereof as against creditors of the Seller,
or are in the process of being recorded;
(xxx) No instrument of release or waiver has been executed in
connection with the Mortgage Loan, and no Mortgagor has been released, in
whole or in part;
(xxxi) Other than delinquencies, if any, as described in paragraph
(ii) above, there are no defaults in complying with the terms of the
Mortgage, and either (1) any taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges or ground rents which
previously became due and owing have been paid, or (2) an escrow of funds
has been established in an amount sufficient to pay for every such item
which remains unpaid and which has been assessed but is not yet due and
payable. Except for payments in the nature of escrow payments, including
without limitation, taxes and insurance payments, 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 by the Mortgage Note, except for interest
accruing from the date of the Mortgage Note or date of disbursement of the
Mortgage proceeds, whichever is later, to the day which precedes by one
month the Due Date of the first installment of principal and interest;
(xxxii) There is no proceeding pending or threatened for the total or
partial condemnation of any Mortgaged Property, nor is such a proceeding
currently occurring;
(xxxiii) All of the improvements which were included for the purpose
of determining the appraised value of the Mortgaged Property lie wholly
within the boundaries and building restriction lines of such property, and
no improvements on adjoining properties encroach upon the Mortgaged
Property;
(xxxiv) No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning law or regulation. 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
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the appropriate authorities and the Mortgaged Property is lawfully occupied
under applicable law;
(xxxv) The proceeds of each Mortgage Loan have been fully disbursed,
and there is no obligation on the part of the mortgagee to make future
advances thereunder. Any and all requirements as to completion of any on-
site or off-site improvements and as to disbursements of any escrow funds
therefor have been complied with. All costs, fees and expenses incurred in
making or closing or recording the Mortgage Loans were paid;
(xxxvi) Each Mortgage Note is not and has not been secured by any
collateral, pledged account or other security except the lien of the
corresponding Mortgage;
(xxxvii) No Mortgage Loan was originated under a buydown plan or is
subject to the Home Ownership and Equity Protection Act of 1994;
(xxxviii) There is no obligation on the part of the Seller or any
other party to make payments on any Mortgage Loan in addition to those made
by the Mortgagor;
(xxxix) With respect to each Mortgage constituting a deed of trust,
a trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in such Mortgage,
and no fees or expenses are or will become payable by the
Certificateholders to the trustee under the deed of trust, except in
connection with a trustee's sale after default by the Mortgagor;
(xl) No Mortgage Loan has a shared appreciation feature, or other
contingent interest feature;
(xli) Each Mortgage Loan was originated by a savings and loan
association, a savings bank, a commercial bank or similar banking
institution which is supervised and examined by a federal or state
authority, or by a mortgagee approved by the Secretary of HUD;
(xlii) There was no fraud involved in the origination of the Mortgage
Loan by the mortgagee or, to the Seller's knowledge, by the Mortgagor, any
appraiser or any other party involved in the origination of the Mortgage
Loan;
(xliii) No Mortgaged Property was, as of the related Cut-Off Date,
located within a one-mile radius of any site listed in the National
Priorities List as defined under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or on any similar state
list of hazardous waste sites which are known to contain any hazardous
substance or hazardous waste;
(xliv) No Mortgage Loan provides for negative amortization;
(xlv) All parties which have had any interest in the Mortgage Loan,
whether as originator, mortgagee, assignee, pledgee, servicer or otherwise,
are (or, during the period in
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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 in light of such person's status,
and (2)(A) organized under the laws of such state, or (B) qualified to do
business in such state, or (C) federal savings and loan associations or
national banks having principal offices in such state, or (D) not doing
business in such state so as to require qualification or licensing;
(xlvi) The Mortgage contains a customary provision for the
acceleration of the payment of the unpaid principal balance of the
Mortgage Loan in the event the related security for the Mortgage Loan is
sold without the prior consent of the mortgagee thereunder;
(xlvii) Any future advances made prior to the related Cut-Off Date
have been consolidated with the outstanding principal amount secured by the
Mortgage, and the secured principal amount, as consolidated, bears a single
interest rate and single repayment term reflected on the related Mortgage
Loan Schedule. The consolidated principal amount does not exceed the
original principal amount of the Mortgage Loan. The Mortgage Note does not
permit or obligate the Seller to make future advances to the Mortgagor at
the option of the Mortgagor;
(xlviii) The Mortgage contains customary and enforceable provisions
which render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the benefits of the security,
including, (i) in the case of a Mortgage designated as a deed of trust, by
trustee's sale, and (ii) otherwise by judicial or non-judicial foreclosure.
There is no homestead or other exemption available to the Mortgagor which
would materially interfere with the right to sell the Mortgaged Property at
a trustee's sale or the right to foreclose the Mortgage;
(xlix) There is no default, breach, violation or event of
acceleration existing under any Mortgage or the related 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 of acceleration; and the Seller has not waived any default,
breach, violation or event of acceleration;
(l) (A) All parties to the Mortgage Note and the Mortgage had legal
capacity to execute the Mortgage Note and the Mortgage and (B) each
Mortgage Note and Mortgage have been duly and properly executed by such
parties;
(li) All amounts received after the related Cut-Off Date with respect
to the Mortgage Loans to which the Seller is not entitled have been
deposited into the Collection Account and are, as of the related Transfer
Date, in the Collection Account;
(lii) All of the Mortgage Loans were originated in accordance with
the underwriting criteria set forth in the Prospectus Supplement;
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(liii) Each Mortgage Loan conforms, and all such Mortgage Loans in
the aggregate conform in all material respects to the description thereof
set forth in the Prospectus Supplement; each Mortgage Note and Mortgage is
in substantially one of the forms attached as Exhibit F and Exhibit G
hereto;
(liv) The Mortgage Loans were not selected by the Seller for
inclusion in the Trust on any basis intended to adversely affect the Trust
or the Certificate Insurer;
(lv) A full appraisal on forms approved by FNMA or FHLMC was
performed in connection with the origination of each Mortgage Loan. Each
appraisal meets guidelines that would be generally acceptable to prudent
mortgage lenders that regularly originate or purchase mortgage loans
comparable to the Mortgage Loans for sale to prudent investors in the
secondary market that invest in mortgage loans such as the Mortgage Loans;
(lvi) Each hazard insurance policy required to be maintained under
Section 3.13 with respect to the Mortgage Loan is a valid, binding,
enforceable and subsisting insurance policy of its respective kind and is
in full force and effect;
(lvii) Each Mortgage Loan was originated by the Seller or an
affiliate of the Seller or purchased by the Seller;
(lviii) None of the Mortgage Loans are subject to a bankruptcy
proceeding;
(lix) Each Mortgage Loan constitutes a "qualified mortgage" within
the meaning of Section 860G(a)(3) of the Code; and
(lx) Each of the documents and instruments included in a Mortgage
File is duly executed and in due and proper form and each such document or
instrument is in a form generally acceptable to prudent institutional
mortgage lenders that regularly originate or purchase mortgage loans
similar to the Mortgage Loans.
(b) It is understood and agreed that the representations and warranties set
forth in this Section 2.04 shall survive delivery of the Mortgage Files to the
Trustee and shall inure to the benefit of the Certificateholders and the
Certificate Insurer notwithstanding any restrictive or qualified endorsement or
assignment. Upon discovery by any of the Depositor, the Master Servicer or the
Trustee of a breach of any of the foregoing representations and warranties which
materially and adversely affects the value of any Mortgage Loan or the interests
therein of the Certificateholders and the Certificate Insurer, the party
discovering such breach shall give prompt written notice to the other parties
and to the Certificate Insurer, and in no event later than two Business Days
from the date of such discovery. It is understood and agreed that the
obligations of the Seller and the Bank set forth in Section 2.03(a) to cure,
substitute for or repurchase a Mortgage Loan pursuant to the Mortgage Loan
Purchase Agreement constitute the sole remedies available to the
Certificateholders or to the Trustee on their behalf respecting a breach of the
representations and warranties contained in this Section 2.04.
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SECTION 2.05. Representations, Warranties and Covenants of the Master
-------------------------------------------------------
Servicer.
--------
The Master Servicer hereby represents, warrants and covenants to the
Trustee, for the benefit of each of the Trustee, the Certificateholders, the
Certificate Insurer and to the Depositor that as of the Closing Date or as of
such date specifically provided herein:
(i) The Master Servicer is duly organized, validly existing and in
good standing as a federal savings bank under the laws of the United States
and is and will remain in compliance with the laws of each state in which
any Mortgaged Property is located to the extent necessary to ensure the
enforceability of each Mortgage Loan and the servicing of the Mortgage Loan
in accordance with the terms of this Agreement;
(ii) The Master Servicer has the full power and authority to conduct
its business as presently conducted by it and to execute, deliver and
perform, and to enter into and consummate, all transactions contemplated by
this Agreement. The Master Servicer has duly authorized the execution,
delivery and performance of this Agreement, has duly executed and delivered
this Agreement, and this Agreement, assuming due authorization, execution
and delivery by the Depositor and the Trustee, constitutes a legal, valid
and binding obligation of the Master Servicer, enforceable against it in
accordance with its terms except as the enforceability thereof may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
the enforcement of creditors' rights generally and by general principles of
equity;
(iii) The execution and delivery of this Agreement by the Master
Servicer and the performance of and compliance with the terms of this
Agreement will not (a) violate the Master Servicer's charter or by-laws or
any law, rule, regulation, order, judgment, award, administrative
interpretation, injunction, writ, decree or the like affecting the Master
Servicer or by which the Master Servicer is bound or (b) result in a breach
of or constitute a default under any indenture or other material agreement
to which the Master Servicer is a party or by which the Master Servicer is
bound, which in the case of either clause (a) or (b) will have a material
adverse effect on the Master Servicer's ability to perform its obligations
under this Agreement;
(iv) The Master Servicer is an approved servicer for FHLMC or FNMA
in good standing and is a HUD approved mortgagee pursuant to Section 203 of
the National Housing Act; no event has occurred, including but not limited
to a change in insurance coverage, which would make the Master Servicer
unable to comply with FHLMC, FNMA or HUD eligibility requirements or which
would require notification to FHLMC, FNMA or HUD;
(v) The Master Servicer 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;
(vi) With respect to each Mortgage Loan, the Master Servicer is in
possession of a complete mortgage file, except for such documents as have
been delivered to the Trustee;
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(vii) There are no actions or proceedings against, investigations
known to it of, the Master Servicer before any court, administrative or
other tribunal (A) that might prohibit its entering into this Agreement,
(B) seeking to prevent the consummation of the transactions contemplated by
this Agreement or (C) that might prohibit or materially and adversely
affect the performance by the Master Servicer of its obligations under, or
validity or enforceability of, this Agreement;
(viii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Master Servicer of, or compliance by the Master Servicer
with, this Agreement or the consummation of the transactions contemplated
by this Agreement, except for such consents, approvals, authorizations or
orders, if any, that have been obtained prior to the Closing Date;
(ix) No litigation or administrative proceeding of or before any
court, tribunal or government body is currently pending, or to its
knowledge threatened, against the Seller or any of its properties or with
respect to this Agreement or the Certificates which in its opinion has a
reasonable likelihood of resulting in a material adverse effect on the
transactions contemplated by this Agreement; and
(x) So long as the Certificates remain outstanding, this Agreement
shall be treated as an official record of the Master Servicer within the
meaning of Section 13(e) of the Federal Deposit Insurance Act (12 USC
1823(e)).
It is understood and agreed that the representations, warranties and
covenants set forth in this Section 2.05 shall survive delivery of the Mortgage
Files to the Trustee and shall inure to the benefit of the Trustee, the
Depositor, the Certificateholders and the Certificate Insurer. Upon discovery
by any of the Depositor, the Master Servicer or the Trustee of a breach of any
of the foregoing representations, warranties and covenants which materially and
adversely affects the value of any Mortgage Loan or the interests therein of the
Certificateholders and the Certificate Insurer, the party discovering such
breach shall give prompt written notice (but in no event later than two Business
Days following such discovery) to the Trustee and the Certificate Insurer.
SECTION 2.06. Issuance of Certificates.
------------------------
The Trustee acknowledges the assignment to it of the Mortgage Loans and the
delivery to it of the Mortgage Files, subject to the provisions of Sections 2.01
and 2.02, together with the assignment to it of all other assets included in the
Trust Fund, receipt of which is hereby acknowledged. Concurrently with such
assignment and delivery and in exchange therefor, the Trustee, pursuant to the
written request of the Depositor executed by an officer of the Depositor, has
executed, authenticated and delivered to or upon the order of the Depositor, the
Certificates in authorized denominations. The interests evidenced by the
Certificates, constitute the entire beneficial ownership interest in the Trust
Fund.
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SECTION 2.07. Representations and Warranties with Respect to Subsequent
---------------------------------------------------------
Mortgage Loans.
--------------
The Seller hereby represents and warrants to the Trustee for the benefit of
the Certificateholders and the Certificate Insurer that as of the Closing Date
or as of such date specified herein and after the inclusion of the Subsequent
Mortgage Loans in the Trust Fund:
(i) No Subsequent Mortgage Loan is 30 days or more delinquent as of
the related Cut-off Date;
(ii) No Subsequent Mortgage Loan has a remaining term to maturity
of more than 30 years;
(iii) No Subsequent Mortgage Loan has a Combined Loan-to Value
Ratio in excess of 85%;
(iv) No Subsequent Mortgage Loan has a Gross Margin of less than
4.25%;
(v) The Mortgage Loans have a weighted average Mortgage Rate of at
least 9.59%;
(vi) The Mortgage Loans have a weighted average Loan-to Value Ratio
of 77.00%;
(vii) The weighted average remaining term to maturity of the
Mortgage Loans is not more than 360 months; and
(viii) Each Mortgage Loan has a Principal Balance not in excess of
$450,000 as of the Cut-off Date.
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ARTICLE III
ADMINISTRATION AND SERVICING
OF THE TRUST FUND
SECTION 3.01. Master Servicer and Sub-Servicers.
---------------------------------
Acting directly or through one or more Sub-Servicers as provided in Section
3.03, the Master Servicer shall service and administer the Mortgage Loans on
behalf of the Trustee and in the best interests of and for the benefit of the
Certificateholders and the Certificate Insurer (as determined by the Master
Servicer in its reasonable judgment) in accordance with the terms of this
Agreement and the respective Mortgage Loans and, to the extent consistent with
such terms, in the same manner in which it services and administers similar
mortgage loans for its own portfolio, giving due consideration to customary and
usual standards of practice of prudent mortgage lenders and loan servicers
administering similar mortgage loans but without regard to:
(i) any relationship that the Master Servicer, any Sub-Servicer or
any Affiliate of the Master Servicer or any Sub-Servicer may
have with the related Mortgagor;
(ii) the ownership of any Certificate by the Master Servicer or any
Master Servicer Affiliate;
(iii) the Master Servicer's obligation to make Monthly Advances or
Servicing Advances; or
(iv) the Master Servicer's or any Sub-Servicer's right to receive
compensation for its services hereunder or with respect to any
particular transaction.
To the extent consistent with the foregoing, the Master Servicer shall also
seek to maximize the complete and timely recovery of principal and interest on
the Mortgage Loans. The standards set forth in the immediately preceding
sentence shall be referred to herein as the "Servicing Standard".
Subject to Section 3.03 hereof, the Master Servicer may, and is hereby
authorized to, perform any of its servicing responsibilities with respect to all
or certain of the Mortgage Loans through a Sub-Servicer as it may from time to
time designate, but no such designation of a Sub-Servicer shall serve to release
the Master Servicer from any of its obligations under this Agreement. Such Sub-
Servicer shall have all the rights and powers of the Master Servicer with
respect to such Mortgage Loans under this Agreement.
Without limiting the generality of the foregoing, but subject to Sections
3.15 and 3.16, the Master Servicer shall direct the Trustee in writing in the
form of a Servicing Officer's Certificate in a form reasonably agreed upon by
the Master Servicer and the Trustee to execute and deliver (i) any and all
instruments of satisfaction or cancellation or of partial or full release or
discharge and all other comparable instruments with respect to the Mortgage
Loans and with respect to the Mortgaged
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Properties, and (ii) documents to institute foreclosure proceedings or obtain a
deed in lieu of foreclosure so as to effect ownership of any Mortgaged Property
in the name of the Trustee; provided, however, that to the extent any
-------- -------
instrument described in clause (i) preceding would be delivered by the Master
Servicer outside of its usual procedures for mortgage loans held in its own
portfolio, the Master Servicer shall, prior to executing and delivering such
instrument, obtain the prior written consent of the Certificate Insurer, and
provided further, however, that Section 3.16(a) shall constitute an
authorization from the Trustee to the Master Servicer to execute an instrument
of satisfaction (or assignment of mortgage without recourse) with respect to any
Mortgage Loan paid in full (or with respect to which payment in full has been
escrowed). The Trustee shall, at the written direction of the Master Servicer in
the form of a Servicing Officer's Certificate in a form reasonably agreed upon
by the Master Servicer and the Trustee, execute any documentation furnished to
it by the Master Servicer for recordation by the Master Servicer in the
appropriate jurisdictions as shall by necessary to effectuate the foregoing.
Subject to Sections 3.14 and 3.15, the Trustee shall execute any authorizations
and other documents as the Master Servicer or such Sub-Servicer shall reasonably
request that are furnished to the Trustee to enable the Master Servicer and such
Sub-Servicer to carry out their respective servicing and administrative duties
hereunder.
In accordance with the Servicing Standard, the Master Servicer shall
advance or cause to be advanced funds as necessary for the purpose of effecting
the timely payment of taxes and assessments on the Mortgaged Properties, which
advances shall be reimbursable in the first instance from related collections
from the Mortgagors pursuant to Section 3.09, and further as provided in Section
3.11. Any cost incurred by the Master Servicer or by Sub-Servicers in effecting
the timely payment of taxes and assessments on a Mortgaged Property shall not,
for the purpose of calculating distributions to Certificateholders, be added to
the unpaid principal balance of the related Mortgage Loan, notwithstanding that
the terms of such Mortgage Loan so permit.
The Master Servicer shall give prompt notice to the Trustee and the
Certificate Insurer of any action, of which the Master Servicer has actual
knowledge, to (i) assert a claim against the Trust Fund or (ii) assert
jurisdiction over the Trust Fund.
Servicing Advances incurred by the Master Servicer or any Sub-Servicer in
connection with the servicing of the Mortgage Loans (including any penalties in
connection with the payment of any taxes and assessments or other charges) on
any Mortgaged Property shall be recoverable by the Master Servicer or such Sub-
Servicer to the extent described in Sections 3.11 and 3.23(d) hereof.
The Trustee may execute such powers of attorney as may be provided by the
Master Servicer to the extent necessary for the Master Servicer to perform the
Master Servicer's obligations hereunder.
SECTION 3.02. Collection of Certain Mortgage Loan Payments.
--------------------------------------------
The Master Servicer shall make reasonable efforts to collect all payments
called for under the terms and provisions of the Mortgage Loans, and shall, to
the extent such procedures shall be consistent with this Agreement, follow such
collection procedures for all Mortgage Loans that are consistent with the
Servicing Standard. The Master Servicer may waive, modify or vary terms of the
Mortgage Loans provided that no such action will (A) decrease the Mortgage Rate
on the Mortgage
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Loan, (B) defer or forgive the payment of principal or interest (except with
respect to liquidation of such Mortgage Loan) or (C) extend the final maturity
date of such Mortgage Loan, provided, however, that no such modification shall
be permitted to the extent that it would (a) affect adversely the status of the
Trust Fund as a REMIC or (b) cause the Trust Fund to be subject to a tax on
"prohibited transactions" or "contributions" pursuant to the REMIC Provisions.
Notwithstanding the foregoing, in the event that any Mortgage Loan is in default
or, in the judgment of the Master Servicer, such default is reasonably
foreseeable, the Master Servicer, consistent with the Servicing Standard, may
also waive, modify or vary any term of such Mortgage Loan (including
modifications that would change the Mortgage Rate, defer or forgive the payment
of principal or interest or extend the final maturity date of such Mortgage
Loan), accept payment from the related Mortgagor of an amount less than the
Stated Principal Balance in final satisfaction of such Mortgage or consent to
the postponement of strict compliance with any such term or otherwise grant
indulgence to any Mortgagor if in the Master Servicer's determination such
waiver, modification, postponement or indulgence is not materially adverse to
the interests of the Certificateholders (taking into account any estimated
Realized Loss that might result absent such action).
SECTION 3.03. Sub-Servicing Agreements Between Master Servicer and Sub-
--------------------------------------------------------
Servicers.
---------
The Master Servicer, with the consent of the Certificate Insurer, may (and
so long as the Certificate Insurer deems it necessary, the Master Servicer
shall) enter into Sub-Servicing Agreements for any servicing and administration
of Mortgage Loans with one or more institutions that are in compliance with the
laws of each state necessary to enable each of them to perform its obligations
under such Sub-Servicing Agreements and each of which (x) has been designated an
approved seller-servicer by FHLMC or FNMA for mortgage loans and has equity of
at least $1,500,000 or (y) is a Master Servicer Affiliate. The Master Servicer
shall give notice to the Trustee, the Certificate Insurer and the Rating
Agencies of the appointment of any Sub-Servicer and shall provide the
Certificate Insurer with copies of any Sub-Servicing Agreements and any
amendments or modifications thereof. For purposes of this Agreement, the Master
Servicer shall be deemed to have received payments on Mortgage Loans when any
Sub-Servicer has received such payments. Each Sub-Servicer shall be required to
service the Mortgage Loans in accordance with this Agreement and any such Sub-
Servicing Agreement shall be consistent with and not violate the provisions of
this Agreement. Each Sub-Servicing Agreement shall provide that the Trustee
(with the consent of the Certificate Insurer) shall have the option to terminate
such agreement without payment of any termination fees if the original Master
Servicer is terminated or resigns, except that such Sub-Servicing Agreement may
provide that such termination fees shall be payable by Pan American Bank, FSB
and such Sub-Servicing Agreement may provide that any third party costs and
expenses associated with the transfer of servicing and collateral files by any
Sub-Servicer shall not be paid by Pan American Bank, FSB nor the Trustee and
shall not be an expense of the Trust.
SECTION 3.04. Successor Sub-Servicers.
-----------------------
The Master Servicer, with the consent of the Certificate Insurer, shall be
entitled to terminate any Sub-Servicing Agreement in accordance with the terms
and conditions of such Sub-Servicing Agreement. Upon termination and with the
consent of the Certificate Insurer, the Master Servicer may
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itself directly service the related Mortgage Loans or enter into a Sub-Servicing
Agreement with a successor Sub-Servicer which qualifies under Section 3.03.
SECTION 3.05. Liability of Master Servicer; Indemnification.
---------------------------------------------
(a) The Master Servicer shall not be relieved of its obligations under this
Agreement notwithstanding any Sub-Servicing Agreement or any of the provisions
of this Agreement relating to agreements or arrangements between the Master
Servicer and a Sub-Servicer and the Master Servicer shall be obligated to the
same extent and under the same terms and conditions as if it alone were
servicing and administering the Mortgage Loans. The Master Servicer shall be
entitled to enter into any agreement with a Sub-Servicer for indemnification of
the Master Servicer by such Sub-Servicer and nothing contained in such Sub-
Servicing Agreement shall be deemed to limit or modify this Agreement.
(b) The Master Servicer (except the Trustee if it is required to succeed
the Master Servicer hereunder) indemnifies and holds the Trustee, the Depositor,
the Seller, the Certificate Insurer and each Certificateholder harmless against
any and all claims, losses, penalties, fines, forfeitures, reasonable legal fees
and related costs, judgments, and any other costs, fees and expenses that the
Trustee, the Depositor, the Certificate Insurer and any Certificateholder may
sustain in any way related to the failure of the Master Servicer to perform its
duties and service the Mortgage Loans in compliance with the terms of this
Agreement. The Master Servicer shall immediately notify the Trustee, the
Depositor, the Certificate Insurer and each Certificateholder if a claim is made
that may result in such claims, losses, penalties, fines, forfeitures, legal
fees or related costs, judgments, or any other costs, fees and expenses, and the
Master Servicer shall assume (with the consent of the Trustee and the
Certificate Insurer) the defense of any such claim and pay all expenses in
connection therewith, including reasonable counsel fees, and promptly pay,
discharge and satisfy any judgment or decree which may be entered against the
Master Servicer, the Trustee, the Depositor, the Certificate Insurer and/or
Certificateholder in respect of such claim. The provisions of this Section 3.05
shall survive the termination of this Agreement and the payment of the
outstanding Certificates.
(c) Neither the Depositor, the Seller, the Master Servicer, nor any of the
directors, officers, employees or agents of the Depositor, the Seller or the
Master Servicer shall be under any liability to the Trust Fund or the
Certificateholders 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 Depositor, the
- -------- -------
Seller or Master Servicer or any such Person against any breach of warranties or
representations made herein, or against any specific liability imposed on the
Master Servicer for a breach of the Servicing Standard, or against any liability
which would otherwise be imposed by reason of its respective willful
misfeasance, bad faith, fraud or negligence in the performance of its duties or
by reasons of negligent disregard of its respective obligations or duties
hereunder.
The Depositor, the Master Servicer, the Seller, and any director, officer,
employee or agent of the Depositor, the Seller or the Master Servicer, may rely
in good faith on any document of any kind which, prima facie, is properly
executed and submitted by any appropriate Person with respect to any matters
arising hereunder. The Depositor, the Seller, the Master Servicer and any
director, officer,
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employee or agent of the Depositor, the Seller or the Master Servicer shall be
indemnified and held harmless by the Trust Fund against any loss, liability or
expense incurred in connection with any legal action relating to this Agreement
or the Certificates, other than any loss, liability or expense incurred in
connection with any legal action incurred by reason of its respective
misfeasance, bad faith, fraud or negligence, a breach of a representation or
warranty hereunder or (in the case of the Master Servicer) a breach of the
Servicing Standard in the performance of its respective duties or by reason of
negligent disregard of its respective obligations or duties hereunder. Neither
the Depositor nor the Master Servicer shall be under any obligation to appear
in, prosecute or defend any legal action unless such action is related to its
respective duties under this Agreement and in its opinion does not expose it to
any expense or liability; provided, however, that the Depositor or the Master
-------- -------
Servicer may in its discretion undertake any action related to its obligations
hereunder which it may deem necessary or desirable with respect to this
Agreement and the rights and duties of the parties hereto and the interests of
the Certificateholders hereunder.
SECTION 3.06. No Contractual Relationship Between Sub-Servicer, Trustee or
------------------------------------------------------------
the Certificateholders.
----------------------
Any Sub-Servicing Agreement and any other transactions or services relating
to the Mortgage Loans involving a Sub-Servicer shall be deemed to be between the
Sub-Servicer and the Master Servicer alone and the Trustee, the
Certificateholders and the Certificate Insurer shall not be deemed parties
thereto and shall have no claims, rights, obligations, duties or liabilities
with respect to any Sub-Servicer except as set forth in Section 3.07.
SECTION 3.07. Assumption or Termination of Sub-Servicing Agreement by
-------------------------------------------------------
Trustee.
-------
In connection with the assumption of the responsibilities, duties and
liabilities and of the authority, power and rights of the Master Servicer
hereunder by the Trustee pursuant to Section 7.02, it is understood and agreed
that the Master Servicer's rights and obligations under any Sub-Servicing
Agreement then in force between the Master Servicer and a Sub-Servicer shall be
assumed simultaneously by the Trustee without act or deed on the part of the
Trustee; provided, however, that the Trustee may terminate the Sub-Servicer as
-------- -------
provided in Section 3.03.
The terminated Master Servicer shall, upon the reasonable request of the
Trustee, but at the expense of the Master Servicer, deliver to the assuming
party documents and records relating to each Sub-Servicing Agreement and an
accounting of amounts collected and held by it and otherwise use its best
reasonable efforts to effect the orderly and efficient transfer of the Sub-
Servicing Agreements to the assuming party.
SECTION 3.08. Sub-Servicing Accounts.
----------------------
On behalf of the Trust Fund and the Certificate Insurer, Ocwen Federal Bank
FSB, as Sub-Servicer, shall establish an account held in trust for the
Certificateholders and the Certificate Insurer. In those cases where a Sub-
Servicer is servicing a Mortgage Loan pursuant to a Sub-Servicing Agreement, the
Sub-Servicer will be required to establish and maintain one or more accounts
(collectively, the "Sub-Servicing Account"). The Sub-Servicing Account shall be
an Eligible Account
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and shall comply with all requirements of this Agreement relating to the
Collection Account. The Sub-Servicer will be required to deposit into the Sub-
Servicing Account no later than the first Business Day after receipt all
proceeds of Mortgage Loans received by the Sub-Servicer, less its servicing
compensation to the extent permitted by the Sub-Servicing Agreement and to remit
such proceeds to the Trustee for deposit in the Distribution Account not later
than the first Business Day prior to each Distribution Date. For purposes of
this Agreement, the Master Servicer shall be deemed to have received payments on
the Mortgage Loans when the Sub-Servicer receives such payments.
SECTION 3.09. Collection of Taxes, Assessments and Similar Items;
---------------------------------------------------
Servicing Accounts.
------------------
The Master Servicer shall establish and maintain, or shall cause to be
established and maintained, one or more accounts (the "Servicing Accounts"),
into which all collections from the Mortgagors (or related advances from Sub-
Servicers) for the payment of taxes, assessments, hazard insurance premiums, and
comparable items for the account of the Mortgagors ("Escrow Payments") shall be
deposited and retained. Servicing Accounts shall be Eligible Accounts. The
Master Servicer shall deposit in the Servicing Accounts on a daily basis, and
retain therein, all Escrow Payments collected on account of the Mortgage Loans,
for the purpose of effecting the timely payment of any such items as required
under the terms of this Agreement. Withdrawals of amounts from a Servicing
Account may be made only to (i) effect timely payment of taxes, assessments,
hazard insurance premiums, and comparable items; (ii) reimburse the Master
Servicer (or a Sub-Servicer to the extent provided in the related Sub-Servicing
Agreement) out of related collections for any advances made pursuant to Section
3.01 (with respect to taxes and assessments) and Section 3.13 (with respect to
hazard insurance); (iii) refund to Mortgagors any sums as may be determined to
be overages; (iv) pay interest, if required and as described below, to
Mortgagors on balances in the Servicing Account; or (v) clear and terminate the
Servicing Account at the termination of the Master Servicer's obligations and
responsibilities in respect of the Mortgage Loans under this Agreement in
accordance with Article X. As part of its servicing duties, the Master Servicer
or Sub-Servicers shall pay to the Mortgagors interest on funds in Servicing
Accounts, to the extent required by law and, to the extent that interest earned
on funds in the Servicing Accounts is insufficient, to pay such interest from
its or their own funds, without any reimbursement therefor. The Master Servicer
assumes full responsibility for the timely payment of all such bills and shall
effect timely payments of all such bills irrespective of the Mortgagor's
faithful performance in the payment of same or the making of the Escrow Payments
and shall make advances from its own funds to effect such payments.
SECTION 3.10. Collection Account and Distribution Account.
-------------------------------------------
(a) On behalf of the Trust Fund, the Master Servicer shall establish and
maintain, or cause to be established and maintained, one or more accounts (such
account or accounts, the "Collection Account"), held in trust for the benefit of
the Trustee, the Certificateholders and the Certificate Insurer. On behalf of
the Trust Fund, the Master Servicer shall deposit or cause to be deposited in
the Collection Account on a daily basis, as and when received or as otherwise
required hereunder, the following payments and collections received or made by
it on or subsequent to the Cut-off Date:
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(i) all payments on account of principal, including Principal
Prepayments, on the Mortgage Loans;
(ii) all payments on account of interest (net of the related
Servicing Fee and any Servicing Fees and other servicing compensation for
prior months not paid in full) on each Mortgage Loan;
(iii) all Insurance Proceeds and Liquidation Proceeds (other than
proceeds collected in respect of any particular REO Property and amounts
paid by the Master Servicer in connection with a purchase of Mortgage Loans
and REO Properties pursuant to Section 10.01);
(iv) any amounts required to be deposited pursuant to Section 3.12
in connection with any losses realized on Permitted Investments with
respect to funds held in the Collection Account; and
(v) any amounts required to be deposited by the Master Servicer
pursuant to the first paragraph of Section 3.13(b) in respect of any
blanket policy deductibles.
For purposes of the immediately preceding sentence, the Cut-off Date with
respect to any Qualified Substitute Mortgage Loan shall be deemed to be the date
of substitution.
The foregoing requirements for deposit in the Collection Account shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, payments in the nature of prepayment or late payment charges
or assumption fees need not be deposited by the Master Servicer in the
Collection Account. In the event the Master Servicer shall deposit in the
Collection Account any amount not required to be deposited therein, it may at
any time withdraw such amount from the Collection Account, any provision herein
to the contrary notwithstanding.
(b) On behalf of the Trust Fund, the Trustee shall establish and maintain
one or more accounts (such account or accounts, the "Distribution Account"),
held in trust for the benefit of the Certificateholders and the Certificate
Insurer. On behalf of the Trust Fund, the Master Servicer shall deliver to the
Trustee in immediately available funds for deposit in the Distribution Account
on or before noon New York time on the Master Servicer Remittance Date, that
portion of the Available Distribution Amount (calculated without regard to the
references in the definition thereof to amounts that may be deposited to the
Distribution Account from a different source as provided herein) for the related
Distribution Date then on deposit in the Collection Account. On each Business
Day as of the commencement of which the balance on deposit in the Collection
Account exceeds $75,000 following any withdrawals pursuant to the next
succeeding sentence, the amount of such excess, but only if the Collection
Account constitutes an Eligible Account, the deposits of which are fully insured
by the FDIC (to the limits established by the FDIC). If the balance on deposit
in the Collection Account exceeds $75,000 as of the commencement of business on
any Business Day and the Collection Account constitutes an Eligible Account
solely pursuant to clause (ii) of the definition of "Eligible
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Account," the Master Servicer shall, on or before 3:00 p.m. New York time on
such Business Day, withdraw such amounts from the Collection Account and deposit
them in the Distribution Account.
(c) Funds in the Collection Account and the Distribution Account may be
invested in Permitted Investments in accordance with the provisions set forth in
Section 3.12. The Master Servicer shall give notice to the Trustee and the
Certificate Insurer of the location of the Collection Account maintained by it
when established and prior to any change thereof. The Trustee shall give notice
to the Master Servicer, the Depositor and the Certificate Insurer of the
location of the Distribution Account when established and prior to any change
thereof.
(d) Funds held in the Collection Account at any time may be delivered by
the Master Servicer to the Trustee for deposit in an account (which may be the
Distribution Account and must satisfy the standards for the Distribution Account
as set forth in the definition thereof) and for all purposes of this Agreement
shall be deemed to be a part of the Collection Account; provided, however, that
-------- -------
the Trustee shall have the sole authority to withdraw any funds held pursuant to
this subsection (d). In the event the Master Servicer shall deliver to the
Trustee for deposit in the Distribution Account any amount not required to be
deposited therein, it may at any time request in writing in the form of a
Servicing Officer's Certificate that the Trustee withdraw such amount from the
Distribution Account and remit to it any such amount, any provision herein to
the contrary notwithstanding. In addition, the Master Servicer shall deliver to
the Trustee from time to time for deposit, and the Trustee shall so deposit, in
the Distribution Account:
(i) any Monthly Advances, as required pursuant to Section 4.03;
(ii) any amounts required to be deposited pursuant to Section 3.23(d)
or (f) in connection with any REO Property;
(iii) any amounts to be paid in connection with a purchase of
Mortgage Loans and REO Properties pursuant to Section 10.01; and
(iv) any amounts required to be deposited pursuant to Section 3.24 in
connection with any Prepayment Interest Shortfalls.
(e) Promptly upon receipt of any Stayed Funds, whether from the Master
Servicer, a trustee in bankruptcy, or federal bankruptcy court or other source,
the Trustee shall deposit such funds in the Distribution Account, subject to
withdrawal thereof as otherwise permitted hereunder. In addition, the Trustee
shall deposit in the Distribution Account any amounts required to be deposited
pursuant to Section 3.12 in connection with losses realized on Permitted
Investments with respect to funds held in the Distribution Account.
SECTION 3.11. Withdrawals from the Collection Account and Distribution
--------------------------------------------------------
Account.
-------
(a) The Master Servicer shall, from time to time, make withdrawals from
the Collection Account for any of the following purposes or as described in
Section 4.03:
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(i) to remit to the Trustee for deposit in the Distribution Account
the amounts required to be so remitted pursuant to Section 3.10(b) or
permitted to be so remitted pursuant to the first sentence of Section
3.10(d);
(ii) subject to Section 3.15(d), to reimburse the Master Servicer
for Monthly Advances, but only to the extent of amounts received which
represent Late Collections, Insurance Proceeds or Liquidation Proceeds (net
of the related Servicing Fees) of Monthly Payments on Mortgage Loans with
respect to which such Monthly Advances were made in accordance with the
provisions of Section 4.03;
(iii) subject to Section 3.15(d), to pay the Master Servicer or any
Sub-Servicer any unpaid Servicing Fees and reimburse any unreimbursed
Servicing Advances with respect to each Mortgage Loan, but only to the
extent of any Late Collection, Liquidation Proceeds and Insurance Proceeds
received with respect to such Mortgage Loan (provided, however, that if, in
the good faith business judgment of the Master Servicer, any unreimbursed
Servicing Advance will not be ultimately recoverable from related Late
Collections, Liquidation Proceeds or Insurance Proceeds on such Mortgage
Loan (which determination shall be evidenced by an Officer's Certificate of
the Master Servicer delivered to Trustee and the Certificate Insurer) on or
prior to the related Master Servicer Remittance Date, then withdrawal from
the general funds in the Collection Account, Liquidation Proceeds and
Insurance Proceeds, without regard to the limitation set forth above, will
be permitted);
(iv) to pay to the Master Servicer as servicing compensation (in
addition to the Servicing Fee) on the Master Servicer Remittance Date any
interest or investment income earned on funds deposited in the Collection
Account;
(v) to pay to the Master Servicer or the Seller, as the case may be,
with respect to each Mortgage Loan that has previously been purchased or
replaced pursuant to Section 2.03 or Section 3.15(c) all amounts received
thereon subsequent to the date of purchase or substitution, as the case may
be;
(vi) to reimburse the Master Servicer for any Monthly Advance
previously made which the Master Servicer has determined to be a
Nonrecoverable Monthly Advance in accordance with the provisions of Section
4.03;
(vii) to reimburse the Master Servicer for expenses incurred by or
reimbursable to the Master Servicer pursuant to Section 6.03;
(viii) to reimburse the Master Servicer or the Trustee, as the case
may be, for expenses reasonably incurred in respect of the breach or defect
giving rise to the purchase obligation under Section 2.03 or Section 2.04
of this Agreement that were included in the Purchase Price of the Mortgage
Loan, including any expenses arising out of the enforcement of the purchase
obligation;
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(ix) to reimburse the Trustee for expenses incurred pursuant to
Section 11.01(c) of this Agreement;
(x) to pay, or to reimburse the Master Servicer for advances in
respect of, expenses incurred in connection with any Mortgage Loan pursuant
to Section 3.15(b); and
(xi) to clear and terminate the Collection Account pursuant to
Section 10.01.
The Master Servicer shall keep and maintain separate accounting, on a
Mortgage Loan by Mortgage Loan basis, for the purpose of justifying any
withdrawal from the Collection Account, to the extent held by or on behalf of
it, pursuant to subclauses (ii), (iii), (iv), (v), (vi), (viii), (x) and (xi)
above. The Master Servicer shall provide written notification to the Trustee,
on or prior to the next succeeding Master Servicer Remittance Date, upon making
any withdrawals from the Collection Account pursuant to subclauses (vi) and
(vii) above.
(b) In addition to the foregoing, the Trustee shall be entitled to
withdraw amounts from the Distribution Account to transfer funds to the Expense
Account on each Distribution Date pursuant to Section 3.25(b) prior to any
payments pursuant to Section 4.01.
SECTION 3.12. Investment of Funds in the Collection Account, the Expense
----------------------------------------------------------
Account and the Distribution Account.
------------------------------------
(a) The Master Servicer may direct any depository institution maintaining
the Collection Account, the Expense Account and the Basis Risk Reserve Fund and
the Trustee may direct any depository institution maintaining the Distribution
Account (each, for purposes of this Section 3.12, an "Investment Account"), to
invest the funds in such Investment Account in one or more Permitted Investments
bearing interest or sold at a discount, and maturing, unless payable on demand,
(i) no later than the Business Day immediately preceding the date on which such
funds are required to be withdrawn from such account pursuant to this Agreement,
if a Person other than the Trustee is the obligor thereon, and (ii) no later
than the date on which such funds are required to be withdrawn from such account
pursuant to this Agreement, if the Trustee is the obligor thereon. All such
Permitted Investments shall be held to maturity, unless payable on demand. Any
investment of funds in an Investment Account shall be made in the name of the
Trustee (in its capacity as such) or in the name of a nominee of the Trustee.
The Trustee shall be entitled to sole possession (except with respect to
investment direction of funds held in the Collection Account, the Basis Risk
Reserve Fund and the Expense Account and any income or gain realized thereon)
over each such investment, and any certificate or other instrument evidencing
any such investment shall be delivered directly to the Trustee or its agent,
together with any document of transfer necessary to transfer title to such
investment to the Trustee or its nominee. In the event amounts on deposit in an
Investment Account are at any time invested in a Permitted Investment payable on
demand, the Trustee shall at the direction of the Master Servicer:
(x) consistent with any notice required to be given thereunder,
demand that payment thereon be made on the last day such
Permitted Investment may otherwise mature hereunder in an amount
equal to the lesser of (1) all amounts
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then payable thereunder and (2) the amount required to be
withdrawn on such date; and
(y) demand payment of all amounts due thereunder promptly upon
determination by a Responsible Officer of the Trustee that such
Permitted Investment would not constitute a Permitted Investment
in respect of funds thereafter on deposit in the Investment
Account.
(b) All income and gain realized from the investment of funds deposited in
the Collection Account and the Expense Account held by or on behalf of the
Master Servicer or the Trustee, shall be for the benefit of the Master Servicer
and shall be subject to its withdrawal in accordance with Section 3.11. The
Master Servicer shall deposit in the Collection Account, the Expense Account or
the Basis Risk Reserve Fund as applicable, the amount of any loss incurred in
respect of any such Permitted Investment made with funds in such accounts
immediately upon realization of such loss. All income and gain realized from
the investment of funds in the Distribution Account shall be for the benefit of
the Trustee. The Trustee shall deposit in the Distribution Account the amount
of any loss incurred on Permitted Investments in the Distribution Account.
(c) Except as otherwise expressly provided in this Agreement, if any
default occurs in the making of a payment due under any Permitted Investment, or
if a default occurs in any other performance required under any Permitted
Investment, the Trustee may and, subject to Section 8.01 and Section 8.02(a)(v),
upon the request of the Certificate Insurer or the Holders of Certificates
representing more than 50% of the Voting Rights allocated to any Class of
Certificates, shall take such action as may be appropriate to enforce such
payment or performance, including the institution and prosecution of appropriate
proceedings.
SECTION 3.13. Maintenance of Insurance.
------------------------
(a) The Master Servicer on behalf of the Trustee, as mortgagee, shall use
its reasonable efforts in accordance with the Servicing Standard to cause the
related Mortgagor to maintain for each Mortgage Loan (other than any Mortgage
Loan as to which the related Mortgaged Property has become an REO Property), and
if the Mortgagor does not so maintain, shall itself maintain (subject to the
provisions of this Agreement concerning Nonrecoverable Advances) to the extent
the Trustee as mortgagee has an insurable interest (A) fire and hazard insurance
with extended coverage on the related Mortgaged Property in an amount which is
at least equal to the lesser of (i) 100% of the then "full replacement cost" of
the improvements and equipment (excluding foundations, footings and excavation
costs), without deduction for physical depreciation, and (ii) the outstanding
principal balance of the related Mortgage Loan or such other amount as is
necessary to prevent any reduction in such policy by reason of the application
of co-insurance and to prevent the Trustee thereunder from being deemed to be a
co-insurer, and (B) such other insurance as provided in the related Mortgage
Loan. The Master Servicer shall maintain fire and hazard insurance from an
insurer having a General Policy Rating of A or better in Best's Key Rating Guide
(a "Qualified Insurer") with extended coverage on each REO Property in an amount
which is at least equal to the lesser of (i) 100% of the then "full replacement
cost" of the improvements which are a part of such property or (ii) the
outstanding principal balance of the related Mortgage Loan at the time it became
an REO Property plus accrued
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interest at the Mortgage Rate and related Servicing Advances. The Master
Servicer shall maintain, from a Qualified Insurer, with respect to each REO
Property such other insurance as provided in the related Mortgage Loan. Any
amounts collected by the Master Servicer under any such policies (other than
amounts to be applied to the restoration and repair of the related Mortgaged
Property or amounts to be released to the Mortgagor in accordance with the terms
of the related Mortgage) shall be deposited into the Collection Account pursuant
to Section 3.10(a), subject to withdrawal pursuant to Section 3.11. Any cost
incurred by the Master Servicer in maintaining any such insurance shall not, for
the purpose of calculating distributions to Certificateholders, be added to the
unpaid principal balance of the related Mortgage Loan, notwithstanding that the
terms of such Mortgage Loan so permit. It is understood and agreed that no
earthquake or other additional insurance other than flood insurance is to be
required of any Mortgagor or to be maintained by the Master Servicer other than
pursuant to the terms of the related Mortgage, Mortgage Note or other Mortgage
Loan documents and pursuant to such applicable laws and regulations as shall at
any time be in force and as shall require such additional insurance. If the
Mortgaged Property is located in a federally designated special flood hazard
area, the Master Servicer will use its reasonable efforts in accordance with the
Servicing Standard to cause the related Mortgagor to maintain or will itself
obtain (subject to the provisions of this Agreement concerning Nonrecoverable
Advances) flood insurance in respect thereof. Such flood insurance shall be in
an amount equal to the lesser of (i) the unpaid principal balance of the related
Mortgage Loan and (ii) the maximum amount of such insurance required by the
terms of the related Mortgage and as is available for the related property under
the national flood insurance program (assuming that the area in which such
property is located is participating in such program). If an REO Property is
located in a federally designated special flood hazard area, the Master Servicer
will obtain flood insurance in respect thereof providing substantially the same
coverage as described in the preceding sentences. If at any time during the term
of this Agreement a recovery under a flood or fire and hazard insurance policy
in respect of an REO Property is not available but would have been available if
such insurance were maintained thereon in accordance with the standards applied
to Mortgaged Properties described herein, the Master Servicer shall either (i)
immediately deposit into the Collection Account from its own funds the amount
that would have been recovered or (ii) apply to the restoration and repair of
the property from its own funds the amount that would have been recovered, if
such application would be consistent with the servicing standard set forth in
Section 3.01; provided, however, that the Master Servicer shall not
-------- -------
be responsible for any shortfall in insurance proceeds resulting from an
insurer's refusal or inability to pay a claim. Costs of the Master Servicer of
maintaining insurance policies pursuant to this Section 3.13 shall be paid by
the Master Servicer as a Servicing Advance and shall be reimbursable to the
Master Servicer.
The Master Servicer agrees to prepare and present, on behalf of itself, the
Trustee, the Certificate Insurer and the Certificateholders, claims under each
related insurance policy maintained pursuant to this Section 3.13 in a timely
fashion in accordance with the terms of such policy and to take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder.
The Master Servicer shall require that all insurance policies required
hereunder shall name the Trustee or the Master Servicer, on behalf of the
Trustee as the mortgagee, as loss payee and that all such insurance policies
require that 30 days' notice be given to the Master Servicer before termination
to the extent required by the related Mortgage, Mortgage Note, or other Mortgage
Loan documents.
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(b)(I) If the Master Servicer obtains and maintains a blanket insurance
policy with a Qualified Insurer at its own expense insuring against fire and
hazard losses or other required insurance on all of the Mortgage Loans, it shall
conclusively be deemed to have satisfied its obligations concerning the
maintenance of such insurance coverage set forth in Section 3.13(a), it being
understood and agreed that such policy may contain a deductible clause, in which
case the Master Servicer shall, in the event that (i) there shall not have been
maintained on one or more of the related Mortgaged Properties a policy otherwise
complying with the provisions of Section 3.13(a), and (ii) there shall have been
one or more losses which would have been covered by such a policy had it been
maintained, immediately deposit into the Collection Account from its own funds
the amount not otherwise payable under the blanket policy because of such
deductible clause. In connection with its activities as Master Servicer
hereunder, the Master Servicer agrees to prepare and present, on behalf of
itself, the Trustee, the Certificate Insurer and Certificateholders, claims
under any such blanket policy which it maintains in a timely fashion in
accordance with the terms of such policy and to take such reasonable steps as
are necessary to receive payment or permit recovery thereunder.
(II) If the Master Servicer causes any Mortgaged Property or REO Property
to be covered by a master force placed insurance policy, which policy is issued
by a Qualified Insurer and provides no less coverage in scope and amount for
such Mortgaged Property or REO Mortgaged Property than the insurance required to
be maintained pursuant to Section 3.13(a), the Master Servicer shall
conclusively be deemed to have satisfied its obligations to maintain insurance
pursuant to Section 3.13(a). Such policy may contain a deductible clause, in
which case the Master Servicer shall, in the event that (i) there shall not have
been maintained on the related Mortgaged Property or REO Property a policy
otherwise complying with the provisions of Section 3.13(a), and (ii) there shall
have been one or more losses which would have been covered by such a policy had
it been maintained, immediately deposit into the Collection Account from its own
funds the amount not otherwise payable under such policy because of such
deductible.
SECTION 3.14. Due-on-Sale Clauses; Assumption and Substitution Agreements.
-----------------------------------------------------------
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer shall, to the extent it has knowledge of such
conveyance or prospective conveyance, exercise its rights to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Mortgage Note; provided, however, that the Master
--------
Servicer shall not exercise any such right if the "due-on-sale" clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law. An Opinion of Counsel at the expense of the Master Servicer delivered to
the Trustee, the Depositor and the Certificate Insurer to the foregoing effect
shall conclusively establish the reasonableness of such belief. In such event,
the Master Servicer shall make reasonable efforts to enter into an assumption
and modification agreement with the Person to whom such property has been or is
about to be conveyed, pursuant to which such Person becomes liable under the
Mortgage Note and, unless prohibited by applicable law or the Mortgage, the
Mortgagor remains liable thereon. If the foregoing is not permitted under
applicable law, the Master Servicer is authorized to enter into a substitution
of liability agreement with such Person, pursuant to which the original
Mortgagor is released from liability and such Person is substituted as Mortgagor
and becomes liable under the Mortgage Note; provided, however, that such person
-------- -------
satisfies the underwriting criteria of the Master Servicer and has a credit risk
rating at least equal to that of the original Mortgagor and
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that to the extent any such substitution of liability agreement would be
delivered by the Master Servicer outside of its usual procedures for mortgage
loans held in its own portfolio the Master Servicer shall, prior to executing
and delivering such agreement, obtain the prior written consent of the
Certificate Insurer. The Mortgage Loan, as assumed, shall conform in all
respects to the requirements, representations and warranties of this Agreement.
The Master Servicer shall notify the Trustee that any such assumption or
substitution agreement has been completed by forwarding to the Trustee the
original copy of such assumption or substitution agreement (indicating the
Mortgage File to which it relates) which copy shall be added by the Trustee to
the related Mortgage File and which shall, for all purposes, be considered a
part of such Mortgage File to the same extent as all other documents and
instruments constituting a part thereof. The Master Servicer shall be
responsible for recording any such assumption or substitution agreements. In
connection with any such assumption or substitution agreement, the Monthly
Payment on the related Mortgage Loan shall not be changed but shall remain as in
effect immediately prior to the assumption or substitution, the stated maturity
or outstanding principal amount of such Mortgage Loan shall not be changed nor
shall any required monthly payments of principal or interest be deferred or
forgiven. Any fee collected by the Master Servicer or the Sub-Servicer for
consenting to any such conveyance or entering into an assumption or substitution
agreement shall be retained by or paid to the Master Servicer as additional
servicing compensation.
Notwithstanding the foregoing paragraph or any other provision of this
Agreement, the Master Servicer shall not be deemed to be in default, breach or
any other violation of its obligations hereunder by reason of any assumption of
a Mortgage Loan by operation of law or any assumption which the Master Servicer
may be restricted by law from preventing, for any reason whatsoever.
SECTION 3.15. Realization Upon Defaulted Mortgage Loans.
-----------------------------------------
(a) The Master Servicer shall use its best efforts, consistent with the
Servicing Standard set forth in Section 3.01, to foreclose upon or otherwise
comparably convert the ownership of properties securing such of the Mortgage
Loans as come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments pursuant to
Section 3.02. The Master Servicer shall be responsible for all costs and
expenses incurred by it in any such proceedings; provided, however, that such
-------- -------
costs and expenses will be recoverable as Servicing Advances by the Master
Servicer as contemplated in Section 3.11 and 3.23. The foregoing is subject to
the provision that, in any case in which Mortgaged Property shall have suffered
damage from an Uninsured Cause, the Master Servicer shall not be required to
expend its own funds toward the restoration of such property unless it shall
determine in its discretion that such restoration will increase the proceeds of
liquidation of the related Mortgage Loan after reimbursement to itself for such
expenses.
(b) Notwithstanding the foregoing provisions of this Section 3.15 or any
other provision of this Agreement, with respect to any Mortgage Loan as to which
the Master Servicer has received actual notice of, or has actual knowledge of,
the presence of any toxic or hazardous substance on the related Mortgaged
Property, the Master Servicer shall not, on behalf of the Trust Fund, either (i)
obtain title to such Mortgaged Property as a result of or in lieu of foreclosure
or otherwise, or (ii) otherwise acquire possession of, or take any other action
with respect to, such Mortgaged Property, if, as a result
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of any such action, the Trustee, the Certificateholders or the Certificate
Insurer would be considered to hold title to, to be a "mortgagee-in-possession"
of, or to be an "owner" or "operator" of such Mortgaged Property within the
meaning of the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended from time to time, or any comparable law, unless the
Master Servicer has also previously determined, based on its reasonable judgment
and a report prepared by a Person who regularly conducts environmental audits
using customary industry standards, in the exercise of prudent judgment, that:
(1) such Mortgaged Property is in compliance with applicable
environmental laws or, if not, that it would be in the best
economic interest of the Trust Fund to take such actions as are
necessary to bring the Mortgaged Property into compliance
therewith; and
(2) there are no circumstances present at such 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 that if any such
materials are present for which such action could be required,
that it would be in the best economic interest of the Trust Fund
to take such actions with respect to the affected Mortgaged
Property.
The cost of the environmental audit report contemplated by this Section
3.15 shall be advanced by the Master Servicer, subject to the Master Servicer's
right to be reimbursed therefor from the Collection Account as provided in
Section 3.11(x), such right of reimbursement being prior to the rights of
Certificateholders to receive any amount in the Collection Account received in
respect of the affected Mortgage Loan or other Mortgage Loans.
If the Master Servicer determines, as described above, that it is in the
best economic interest of the Trust Fund to take such actions as are necessary
to bring any such Mortgaged Property into compliance with applicable
environmental laws, or to take such action with respect to the containment,
clean-up or remediation of hazardous substances, hazardous materials, hazardous
wastes, or petroleum-based materials affecting any such Mortgaged Property, then
the Master Servicer shall take such action as it deems to be in the best
economic interest of such Trust Fund. The cost of any such compliance,
containment, cleanup or remediation shall be advanced by the Master Servicer,
subject to the Master Servicer's right to be reimbursed therefor from the
Collection Account as provided in Section 3.11(x), such right of reimbursement
being prior to the rights of Certificateholders to receive any amount in the
Collection Account received in respect of the affected Mortgage Loan or other
Mortgage Loans.
(c) The Master Servicer may at its option purchase from the Trust Fund any
Mortgage Loan that is 90 days or more delinquent on a contractual basis, which
the Master Servicer determines in good faith will otherwise become subject to
foreclosure proceedings (evidence of such determination to be delivered in
writing to the Trustee and the Certificate Insurer prior to purchase), at a
price equal to the greater of fair market value of such Mortgage Loan and the
Purchase Price;
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provided that, unless otherwise consented to by the Certificate Insurer,
- --------
the Master Servicer may purchase such Mortgage Loans only in the sequence in
which such Mortgage Loans first became delinquent by 90 days, and shall give
prompt notice of each such purchase to the Certificate Insurer and each Rating
Agency; and, provided further that, in the event that the aggregate Stated
Principal Balance of all Mortgage Loans previously repurchased pursuant to this
Section 3.15(c) exceeds 1% of the aggregate principal balance of the Original
Mortgage Loans as of the Cut-off Date, the Master Servicer shall not repurchase
any additional such Mortgage Loans pursuant to this Section 3.15(c) without the
consent of the Certificate Insurer. The Purchase Price for any Mortgage Loan
purchased hereunder shall be deposited in the Collection Account, and the
Trustee, upon receipt of written certification from the Master Servicer of such
deposit in the form of Exhibit E, shall release or cause to be released to the
Master Servicer the related Mortgage File and shall execute and deliver such
instruments of transfer or assignment, in each case without recourse, as the
Master Servicer shall furnish and as shall be necessary to vest in the Master
Servicer title to any Mortgage Loan released pursuant hereto.
(d) Proceeds received in connection with any Final Recovery Determination,
as well as any recovery resulting from a partial collection of Insurance
Proceeds or Liquidation Proceeds, in respect of any Mortgage Loan, will be
applied in the following order of priority: first, to reimburse the Master
Servicer or any Sub-Servicer for any related unreimbursed Servicing Advances and
Monthly Advances, pursuant to Section 3.11(ii) or (iii); second, to accrued and
unpaid interest on the Mortgage Loan, to the date of the Final Recovery
Determination, or to the Due Date prior to the Distribution Date on which such
amounts are to be distributed if not in connection with a Final Recovery
Determination; and third, as a recovery of principal of the Mortgage Loan. If
the amount of the recovery so allocated to interest is less than the full amount
of accrued and unpaid interest due on such Mortgage Loan, the amount of such
recovery will be allocated by the Master Servicer as follows: first, to unpaid
Servicing Fees; and second, to the balance of the interest then due and owing.
The portion of the recovery so allocated to unpaid Servicing Fees shall be
reimbursed to the Master Servicer or any Sub-Servicer pursuant to Section
3.11(iii). The portion of the recovery allocated to interest (net of unpaid
Servicing Fees) and the portion of the recovery allocated to principal of the
Mortgage Loan shall be applied as follows: first, to reimburse the Master
Servicer for any related unreimbursed Monthly Advances in accordance with
Section 3.11(ii), and second, as part of the amounts to be transferred to the
Distribution Account in accordance with Section 3.10(b).
SECTION 3.16. Trustee to Cooperate; Release of Files.
--------------------------------------
(a) Upon the payment in full of any Mortgage Loan (including any
liquidation of such Mortgage Loan through foreclosure or otherwise, or the
receipt by the Master Servicer of a notification that payment in full will be
escrowed in a manner customary for such purposes), the Master Servicer shall
deliver to the Trustee a completed "Request for Release of Documents" in the
form of Exhibit E. Upon receipt of such Request for Release of Documents, the
Trustee shall promptly release the related Mortgage File, in trust to (i) the
Master Servicer, or (ii) such other party identified in the related Request for
Release. Upon any such payment in full, or the receipt of such notification
that such funds have been placed in escrow, the Master Servicer shall direct the
Trustee in writing to execute an instrument of satisfaction (or assignment of
Mortgage without recourse) regarding the Mortgaged Property relating to such
Mortgage, which instrument of satisfaction or assignment, as the
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case may be, shall be delivered to the Person or Persons entitled thereto
against receipt therefor of payment in full, it being understood and agreed that
no expense incurred in connection with such instrument of satisfaction or
assignment, as the case may be, shall be chargeable to the Collection Account.
In lieu of executing any such satisfaction or assignment, as the case may be,
the Master Servicer may prepare and submit to the Trustee a satisfaction (or
assignment without recourse, if requested by the Person or Persons entitled
thereto) in form for execution by the Trustee with all requisite information
completed by the Master Servicer; in such event, the Trustee shall execute and
acknowledge such satisfaction or assignment, as the case may be, and deliver the
same with the related Mortgage File, as aforesaid.
(b) From time to time and as appropriate in the servicing of any Mortgage
Loan, including, without limitation, foreclosure or other comparable conversion
of a Mortgage Loan or collection under any insurance policy relating to a
Mortgage Loan, the Trustee shall (except in the case of the payment or
liquidation pursuant to which the related Mortgage File is released to an escrow
agent or an employee, agent or attorney of the Trustee), upon written request of
the Master Servicer and delivery to the Trustee of a Request for Release of
Documents in the form of Exhibit E signed by a Servicing Officer, release the
related Mortgage File to the Master Servicer and shall execute such documents as
shall be necessary to the prosecution of any such proceedings, including,
without limitation, an assignment without recourse of the related Mortgage to
the Master Servicer. Such receipt shall obligate the Master Servicer to return
the Mortgage File to the Trustee when the need therefor by the Master Servicer
no longer exists unless the Mortgage Loan shall be liquidated, in which case,
upon receipt of a Request for Release evidencing such liquidation, the receipt
shall be released by the Trustee to the Master Servicer.
(c) The Master Servicer shall have the right to accept applications of
Mortgagors for consent to (i) partial releases of Mortgages, (ii) alterations,
(iii) removal, demolition or division of properties subject to Mortgages and
(iv) second mortgage subordination agreements. No application for approval
shall be considered by the Master Servicer unless: (w) it has received an
Opinion of Counsel, addressed to the Certificate Insurer and the Trustee (which
opinion shall not be an expense of the Trust Fund or the Certificate Insurer)
that such sale, disposition, substitution, acquisition or contribution will not
affect adversely the status of the Trust Fund as a REMIC or cause the Trust Fund
to be subject to a tax on "prohibited transactions" or "contributions" pursuant
to the REMIC Provisions; (x) the provisions of the related Note and Mortgage
have been compiled with; (y) the Loan-to-Value Ratio and debt-to-income ratio
after any release does not exceed the maximum Loan-to-Value Ratio and debt-to-
income ratio established in accordance with the underwriting standards of the
Mortgage Loans; and (z) the lien priority of the related Mortgage is not
affected. Upon receipt by the Trustee of a Servicing officer's certificate
setting forth the action proposed to be taken in respect of a particular
Mortgage Loan and certifying that the criteria set forth in the immediately
preceding sentence have been satisfied, the Trustee shall execute and deliver to
the Master Servicer the consent or partial release so requested by the Master
Server. A proposed form of consent or partial release, as the case may be,
shall accompany any Servicing Officer's certificate delivered by the Master
Server pursuant to this paragraph. The Master Servicer shall notify the
Certificate Insurer and the Rating Agencies if an application is approved under
clause (y) above without approval in writing by the Certificate Insurer.
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SECTION 3.17. Servicing Compensation.
----------------------
As compensation for its activities hereunder, the Master Servicer shall be
entitled to retain the amount of the Servicing Fee with respect to each Mortgage
Loan subject to Section 3.24. The Master Servicer shall be entitled to retain
fees, bad check charges, assumption fees, modification or extension fees, late
payment charges, or any other service-related fees, Insurance Proceeds and
Liquidation Proceeds not required to be deposited in the Collection Account
pursuant to Section 3.10(a)(iii) and similar items, to the extent collected from
Mortgagors.
SECTION 3.18. Annual Statement as to Compliance.
---------------------------------
The Master Servicer, at its own expense, will deliver to the Trustee, the
Depositor, the Certificate Insurer and the Rating Agencies, not later than 90
days following the end of the fiscal year of the Master Servicer which as of the
Startup Day ends on the last day of December, commencing in 1999 (to cover the
fiscal year 1998), an Officer's Certificate stating, as to each signer thereof,
that (i) a review of the activities of the Master Servicer during such preceding
fiscal year and of performance under this Agreement has been made under such
officers' supervision, (ii) to the best of such officers' knowledge, based on
such review, the Master Servicer has fulfilled all its obligations under this
Agreement for such year, or, if there has been a default in the fulfillment of
all such obligations, specifying each such default known to such officers and
the nature and status thereof including the steps being taken by the Master
Servicer to remedy such default, and (iii) the Master Servicer's short-term
commercial paper rating.
SECTION 3.19. Annual Independent Certified Public Accountants' Reports.
--------------------------------------------------------
Not later than 90 days following the end of each fiscal year of the Master
Servicer, the Master Servicer commencing in 1999 (to cover the fiscal year
1998), at its expense, shall cause a nationally recognized firm of independent
certified public accountants to furnish to the Master Servicer a report stating
that (i) it has obtained a letter of representation regarding certain matters
from the management of the Master Servicer which includes an assertion that the
Master Servicer has complied with certain minimum residential mortgage loan
servicing standards, identified in either the Uniform Single Attestation Program
for Mortgage Bankers established by the Mortgage Bankers Association of America
or the Audit Program for Mortgages serviced by FHLMC, with respect to the
servicing of residential mortgage loans during the most recently completed
fiscal year and (ii) on the basis of an examination conducted by such firm in
accordance with standards established by the American Institute of Certified
Public Accountants, such representation is fairly stated in all material
respects, subject to such exceptions and other qualifications that may be
appropriate. In rendering its report such firm may rely, as to matters relating
to the direct servicing of residential mortgage loans by Sub-Servicers, upon
comparable reports of firms of independent certified public accountants rendered
on the basis of examinations conducted in accordance with the same standards
(rendered within one year of such report) with respect to those Sub-Servicers.
Immediately upon receipt of such report, the Master Servicer shall furnish a
copy of such report to the Trustee, the Certificate Insurer, the Depositor and
each Rating Agency. Copies of such statement shall be provided by the Trustee
to any
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Certificateholder upon request at the Master Servicer's expense, provided
that such statement is delivered by the Master Servicer to the Trustee.
SECTION 3.20. Access to Certain Documentation and Information Regarding
---------------------------------------------------------
the Mortgage Loans.
------------------
The Master Servicer shall provide to the Trustee, the Certificate Insurer
and the supervisory agents and examiners of each of the foregoing (which, in the
case of supervisory agents and examiners, may be required by applicable state
and federal regulations) access to the documentation regarding the Mortgage
Loans, such access being afforded without charge but only upon reasonable
request and during normal business hours at the offices of the Master Servicer
designated by it.
SECTION 3.21. Assignment and Delegation by Master Servicer; Resignation of
------------------------------------------------------------
Master Servicer.
---------------
(a) The Master Servicer may assign its rights and delegate its duties and
obligations under this Agreement in connection with the sale or transfer of a
substantial portion of its mortgage servicing or asset management portfolio with
the written consent of the Certificate Insurer, provided that: (i) the purchaser
or transferee accepting such assignment and delegation (A) shall be satisfactory
to the Trustee and the Certificate Insurer, (B) shall be (I) an established
mortgage finance institution, bank or mortgage servicing institution, organized
and doing business under the laws of any state of the United States or the
District of Columbia, authorized under such laws to perform the duties of a
servicer of mortgage loans or (II) a Person resulting from a merger,
consolidation or succession that is permitted under Section 6.02, and (C) shall
execute and deliver to the Trustee and the Certificate Insurer an agreement, in
form and substance reasonably satisfactory to the Trustee and the Certificate
Insurer, which contains an assumption by such Person of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Master Servicer under this Agreement from and after the date of
such agreement; (ii) as evidenced by a letter from each Rating Agency delivered
to the Trustee and the Certificate Insurer, each Rating Agency's rating or
ratings of the Certificates in effect immediately prior to such assignment and
delegation will not be qualified, downgraded or withdrawn as a result of such
assignment and delegation; (iii) the Master Servicer shall not be released from
its obligations under this Agreement that arose prior to the effective date of
such assignment and delegation under this Section 3.21(a); and (iv) the rate at
which the Servicing Fee (or any component thereof) is calculated shall not
exceed the rate in effect prior to such assignment and delegation. Upon
acceptance of such assignment and delegation, the purchaser or transferee shall
be the successor Master Servicer hereunder.
(b) The Trustee and any successor Master Servicer shall take such action,
consistent with this Agreement, as shall be necessary to effectuate any such
succession, including the notification to all Mortgagors of the transfer of
servicing. The Master Servicer agrees to cooperate with the Trustee and any
successor Master Servicer in effecting the termination of the Master Servicer's
servicing responsibilities and rights hereunder and shall promptly provide the
Trustee or such successor Master Servicer, as applicable, all documents and
records reasonably requested by it to enable it to assume the Master Servicer's
functions hereunder and shall promptly also transfer to the Trustee or such
successor Master Servicer, as applicable, all amounts which then have been or
should have been
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deposited in the Collection Account by the Master Servicer or which are
thereafter received with respect to the Mortgage Loans. Neither the Trustee
nor any other successor Master Servicer shall be held liable by reason of any
failure to make, or any delay in making, any distribution hereunder or any
portion thereof caused by (i) the failure of the Master Servicer to deliver, or
any delay in delivering, cash, documents or records to it, or (ii) restrictions
imposed by any regulatory authority having jurisdiction over the Master
Servicer. Subject to subsection (c), if the Master Servicer is replaced
hereunder, the Master Servicer agrees to reimburse the Trust Fund, the
Certificateholders and the Certificate Insurer for the costs and expenses
associated with the transfer of servicing to the replacement Master Servicer.
(c) Any successor Master Servicer (other than the Trustee), upon assuming
the duties of Master Servicer hereunder, shall immediately make all required
Monthly Advances and deposit them to the Collection Account which the Master
Servicer has theretofore failed to remit with respect to the Mortgage Loans;
provided, however, that if the Trustee is acting as successor Master Servicer,
- -------- -------
the Trustee shall only be required to make Monthly Advances (including the
Monthly Advances described in this clause (c)) if, in the Trustee's reasonable
good faith judgment, such Monthly Advances will ultimately be recoverable from
the Mortgage Loans.
(d) The successor Master Servicer shall give notice to the Certificate
Insurer, to the Mortgagors, to Moody's and to Standard & Poor's of the transfer
of the servicing to the successor Master Servicer.
SECTION 3.22. Inspections by the Trustee and the Certificate Insurer;
-------------------------------------------------------
Errors and Omissions Insurance.
------------------------------
(a) Upon reasonable notice, the Trustee, the Certificate Insurer or any
agents thereof may inspect the Master Servicer's servicing operations and
discuss the servicing operations of the Master Servicer during the Master
Servicer's normal business hours with any of its officers or directors;
provided, however, that the costs and expenses incurred by the Master Servicer
- -------- -------
or its agents or representatives in connection with any such examinations or
discussions shall be paid by the Master Servicer.
(b) The Master Servicer shall keep in force during the term of this
Agreement a policy or policies of insurance covering errors and omissions for
failure in the performance of the Master Servicer's obligations under this
Agreement, which policy or policies shall be in such form and amount that would
meet the requirements of FNMA or FHLMC if it were the purchaser of the Mortgage
Loans, unless the Master Servicer has obtained a waiver of such requirements
from FNMA or FHLMC. The Master Servicer shall also maintain a fidelity bond in
the form and amount that would meet the requirements from FNMA or FHLMC, unless
the Master Servicer has obtained a waiver of such requirements from FNMA or
FHLMC. The Master Servicer shall be deemed to have complied with this provision
if a Master Servicer Affiliate has such errors and omissions policy and fidelity
bond coverage and, by the terms of such insurance policy and fidelity bond, the
coverage afforded thereunder extends to the Master Servicer. Any such errors
and omissions policy or fidelity bond shall by its terms not be cancelable
without thirty days' prior written notice to the Trustee. The Master Servicer
shall also cause each Sub-Servicer to maintain a policy of insurance covering
errors
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and omissions and a fidelity bond which would meet such requirements. Upon the
request of the Trustee or the Certificate Insurer, the Master Servicer shall
cause to be delivered to such requesting Person a certified true copy of such
fidelity bond or errors and omission policy.
SECTION 3.23. Title, Management and Disposition of REO Property.
-------------------------------------------------
(a) The deed or certificate of sale of any REO Property shall be taken in
the name of the Trustee, or its nominee, on behalf of the Certificateholders and
the Certificate Insurer. The Master Servicer, on behalf of the Trust Fund,
shall either sell any REO Property not later than the latest of (i) three years
following the end of the calendar year in which the acquisition occurred, (ii)
the date to which the Internal Revenue Service grants an extension of time to
sell such property or is deemed to have granted an such an extension under
applicable Treasury regulations, and (iii) a date later than those described in
clauses (i) and (ii) if the Master Servicer obtains an Opinion of Counsel (at
the expense of the Trust Fund), addressed to the Trustee, the Depositor and the
Certificate Insurer, to the effect that the holding by the Trust Fund of such
REO Property for a period later than that described in clauses (i) and/or (ii)
will not result in the imposition on the Trust Fund of taxes on "prohibited
transactions" thereof, as defined in Section 860F of the Code, or cause the
Trust Fund to fail to qualify as a REMIC under Federal law at any time that any
Certificates are outstanding. The Master Servicer shall manage, consent,
protect and operate each REO Property for the Certificateholders solely for the
purpose of its prompt disposition and sale in a manner which does not cause such
REO Property to fail to qualify as "foreclosure property" within the meaning of
Section 860G(a)(8) of the Code or result in the receipt by the Trust Fund of
any "income from non-permitted assets" within the meaning of Section
860F(a)(2)(B) of the Code, or any "net income from foreclosure property" which
is subject to taxation under the REMIC Provisions.
(b) The Master Servicer shall segregate and hold all funds collected and
received in connection with the operation of any REO Property separate and apart
from its own funds and general assets and shall establish and maintain with
respect to REO Properties an account held in trust for the Trustee for the
benefit of the Certificateholders and the Certificate Insurer (the "REO
Account"), which shall be an Eligible Account. The Master Servicer shall be
permitted to allow the Collection Account to serve as the REO Account, subject
to separate ledgers for each REO Property. The Master Servicer shall be
entitled to retain or withdraw any interest income paid on funds deposited in
the REO Account.
(c) The Master Servicer shall have full power and authority, subject only
to the specific requirements and prohibitions of this Agreement, to do any and
all things in connection with any REO Property as are consistent with the manner
in which the Master Servicer manages and operates similar property owned by the
Master Servicer or any of its Affiliates, all on such terms and for such period
as the Master Servicer deems to be in the best interests of Certificateholders.
In connection therewith, the Master Servicer shall deposit, or cause to be
deposited, on a daily basis in the REO Account all revenues received by it with
respect to an REO Property and shall withdraw therefrom funds necessary for the
proper operation, management and maintenance of such REO Property including,
without limitation:
(i) all insurance premiums due and payable in respect of such REO
Property;
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(ii) all real estate taxes and assessments in respect of such REO
Property that may result in the imposition of a lien thereon; and
(iii) all costs and expenses necessary to maintain such REO
Property.
To the extent that amounts on deposit in the REO Account with respect to an REO
Property are insufficient for the purposes set forth in clauses (i) through
(iii) above with respect to such REO Property, the Master Servicer shall advance
from its own funds such amount as is necessary for such purposes if, but only
if, the Master Servicer would make such advances if the Master Servicer owned
the REO Property and if in the Master Servicer's judgment, the payment of such
amounts will be recoverable from the rental or sale of the REO Property.
Notwithstanding the foregoing, the Master Servicer shall not:
(i) permit the Trust Fund to enter into, renew or extend any New
Lease with respect to any REO Property, if the New Lease by its terms will
give rise to any income that does not constitute Rents from Real Property;
(ii) permit any amount to be received or accrued under any New Lease
other than amounts that will constitute Rents from Real Property;
(iii) authorize or permit any construction on any REO Property,
other than the completion of a building or other improvement thereon, and
then only if more than ten percent of the construction of such building or
other improvement was completed before default on the related Mortgage Loan
became imminent, all within the meaning of Section 856(e)(4)(B) of the
Code; or
(iv) allow any Person to Directly Operate any REO Property on any
date more than 90 days after its date of acquisition by the Trust Fund;
unless, in any such case, the Master Servicer has obtained an Opinion of
Counsel, provided to the Trustee and the Certificate Insurer, to the effect that
such action will not cause such REO Property to fail to qualify as "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code at any time that
it is held by the Trust Fund, in which case the Master Servicer may take such
actions as are specified in such Opinion of Counsel.
The Master Servicer may contract with any Independent Contractor for the
operation and management of any REO Property, provided that:
(i) the terms and conditions of any such contract shall not be
inconsistent herewith;
(ii) any such contract shall require, or shall be administered to
require, that the Independent Contractor pay all costs and expenses
incurred in connection with the operation
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and management of such REO Property, including those listed above and
remit all related revenues (net of such costs and expenses) to the Master
Servicer as soon as practicable, but in no event later than thirty days
following the receipt thereof by such Independent Contractor;
(iii) none of the provisions of this Section 3.23(c) relating to
any such contract or to actions taken through any such Independent
Contractor shall be deemed to relieve the Master Servicer of any of its
duties and obligations to the Trustee on behalf of the Certificateholders
and the Certificate Insurer with respect to the operation and management of
any such REO Property; and
(iv) the Master Servicer shall be obligated with respect thereto to
the same extent as if it alone were performing all duties and obligations
in connection with the operation and management of such REO Property.
The Master Servicer shall be entitled to enter into any agreement with any
Independent Contractor performing services for it related to its duties and
obligations hereunder for indemnification of the Master Servicer by such
Independent Contractor, and nothing in this Agreement shall be deemed to limit
or modify such indemnification. The Master Servicer shall be solely liable for
all fees owed by it to any such Independent Contractor, irrespective of whether
the Master Servicer's compensation pursuant to Section 3.17 is sufficient to
pay such fees.
(d) In addition to the withdrawals permitted under Section 3.23(c), the
Master Servicer may from time to time make withdrawals from the REO Account for
any REO Property: (i) to pay itself or any Sub-Servicer unpaid Servicing Fees in
respect of the related Mortgage Loan; and (ii) to reimburse itself or any Sub-
Servicer for unreimbursed Servicing Advances and Monthly Advances made in
respect of such REO Property or the related Mortgage Loan. On the Master
Servicer Remittance Date, the Master Servicer shall withdraw from each REO
Account maintained by it and deposit into the Distribution Account in accordance
with Section 3.10(d)(ii), for distribution on the related Distribution Date in
accordance with Section 4.01, the income from the related REO Property received
during the prior calendar month, net of any withdrawals made pursuant to Section
3.23(c) or this Section 3.23(d).
(e) Subject to the time constraints set forth in Section 3.23(a), each REO
Disposition shall be carried out by the Master Servicer at such price and upon
such terms and conditions as the Master Servicer shall deem necessary or
advisable, as shall be normal and usual in its general servicing activities and
as are in accordance with general FNMA guidelines.
(f) The proceeds from the REO Disposition, net of any amount required by
law to be remitted to the Mortgagor under the related Mortgage Loan and net of
any payment or reimbursement to the Master Servicer or any Sub-Servicer as
provided above, shall be deposited in the Distribution Account in accordance
with Section 3.10(d)(ii) on the Master Servicer Remittance Date in the month
following the receipt thereof for distribution on the related Distribution Date
in accordance with Section 4.01. Any REO Disposition shall be for cash only
(unless changes in the REMIC Provisions
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made subsequent to the Startup Day allow a sale for other consideration and the
Certificate Insurer consents thereto).
(g) On or before February 28 of each year, the Master Servicer shall file
information returns with respect to the receipt of mortgage interest received in
a trade or business, reports of foreclosures and abandonments of any Mortgaged
Property and cancellation of indebtedness income with respect to any Mortgaged
Property as required by Sections 6050H, 6050J and 6050P of the Code,
respectively. Such reports shall be in form and substance sufficient to meet
the reporting requirements imposed by such Sections 6050H, 6050J and 6050P of
the Code and a copy thereof shall be sent to the Trustee promptly after the
filing thereof.
SECTION 3.24. Obligations of the Master Servicer in Respect of Prepayment
-----------------------------------------------------------
Interest Shortfalls.
-------------------
If a Prepayment of a Mortgage Loan occurs during any Prepayment Period
which gives rise to a Prepayment Interest Shortfall, any difference between the
interest collected from the Mortgagor and the full month's interest at the
Mortgage Rate less the Servicing Fee (such difference, "Compensating Interest")
that is due shall be deposited by the Master Servicer to the extent of the
Servicing Fee to the Collection Account on or before noon New York time on the
related Master Servicer Remittance Date and shall be included in the monthly
remittance to be made available to the Trustee on such Master Servicer
Remittance Date. Compensating Interest for any Distribution Date shall be
limited to the Servicing Fee for such Distribution Date.
SECTION 3.25. Expense Account.
---------------
(a) The Trustee shall establish and maintain in its name, for the benefit
of the Trustee in trust for (1) the Certificateholders and (2) the Certificate
Insurer, the Expense Account. The Expense Account shall be an Eligible Account,
and funds on deposit therein shall be held separate and apart from, and shall
not be commingled with, any other moneys, including, without limitation, other
moneys of the Trustee held pursuant to this Agreement.
(b) On each Distribution Date, the Trustee shall withdraw from the
Distribution Account and deposit into the Expense Account an amount equal to the
Certificate Insurer Premium Amount for such Distribution Date.
(c) The Trustee shall make withdrawals from the Expense Account to pay the
Certificate Insurer Premium Amount on each Distribution Date.
(d) Funds in the Expense Account may be invested in Permitted Investments
in accordance with the provisions set forth in Section 3.12. Any earnings on
such amounts shall be payable to the Master Servicer as additional servicing
compensation. The Trustee shall give notice to the Depositor and the
Certificate Insurer of the location of the Expense Account on the Closing Date
and prior to any change thereof.
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(e) Upon termination of the Trust Fund in accordance with Section 10.01,
any amounts remaining in the Expense Account following the payment of all unpaid
Certificate Insurer Premiums and any amounts due under the Insurance Agreement
shall be released to the Master Servicer as additional servicing compensation.
SECTION 3.26. Obligations of the Master Servicer in Respect of Mortgage
---------------------------------------------------------
Rates and Monthly Payments.
--------------------------
In the event that a shortfall in any collection on or liability with
respect to any Mortgage Loan results from or is attributable to adjustments to
Mortgage Rates, Monthly Payments or Stated Principal Balances that were made by
the Master Servicer in a manner not consistent with the terms of the related
Mortgage Note and this Agreement, the Master Servicer, upon discovery or receipt
of notice thereof, immediately shall deliver to the Trustee for deposit in the
Distribution Account from its own funds the amount of any such shortfall and
shall indemnify and hold harmless the Trust Fund, the Trustee, the Certificate
Insurer, the Depositor and any successor master servicer in respect of any such
liability. Such indemnities shall survive the termination or discharge of this
Agreement.
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ARTICLE IV
PAYMENTS TO CERTIFICATEHOLDERS
SECTION 4.01. Distributions.
-------------
(a) On each Distribution Date, the Trustee shall withdraw from the
Distribution Account to the extent of amounts on deposit therein an amount equal
to the Available Distribution Amounts (other than any amount in the Distribution
Account that was transferred from the Policy Payments Account to the
Distribution Account pursuant to Section 9.04), shall allocate such amounts to
the interests issued in respect of REMIC 1 and REMIC 2 in accordance with the
terms hereof and shall distribute to the Certificateholders the following
amounts (together with amounts withdrawn from the Basis Risk Reserve Fund
pursuant to Section 4.07 of this Agreement), in the following order of priority:
(i) to the Holders of the Class A Certificates an amount equal to
(A) the Interest Distribution Amount for such Distribution Date, plus (B)
any undistributed amount described in the immediately preceding clause
(i)(A) from any previous Distribution Date for which no Insurance Payment
has been previously paid to Holders of the Class A Certificates;
(ii) to the Holders of the Class A Certificates in an amount equal
to the Principal Distribution Amount (except for any portion thereof
consisting of any related Subordination Increase Amount or related Realized
Losses), applied to reduce the Certificate Principal Balances of the Class
A Certificates until the aggregate Certificate Principal Balance of the
Class A Certificates is reduced to zero;
(iii) to the Holders of the Class A Certificates, payable from the
Net Monthly Excess Cashflow, the principal portion of any Realized Losses
incurred or deemed to have been incurred during the related Collection
Period on the Mortgage Loans;
(iv) to the Certificate Insurer, to reimburse the Certificate
Insurer for claims under the Policy, to the extent of Cumulative Insurance
Payments;
(v) to the Holders of the Class A Certificates, payable from the Net
Monthly Excess Cashflow remaining, an amount equal to the portion of the
Principal Distribution Amount consisting of any Subordination Increase
Amount;
(vi) to the Holders of the Class A Certificates, payable from the
Net Monthly Excess Cashflow remaining, an amount equal to any Relief Act
Interest Shortfalls that were allocated to such holders and therefore not
distributed pursuant to clause (i) above;
(vii) to the Holders of the Class A Certificates, payable from the
Net Monthly Excess Cashflow remaining, an amount equal to any of the
outstanding amount of REMIC Basis Risk Shortfall for such Distribution
Date;
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(viii) to the Basis Risk Reserve Fund, payable from the Net
Monthly Excess Cashflow remaining, and then to the Holders of the Class A
Certificates, payable from the Basis Risk Reserve Fund (including from any
amounts on deposit in such fund that were so deposited on prior
Distribution Dates), in an amount equal to the unpaid amount of any
outstanding Excess Basis Risk Shortfall such Distribution Date;
(ix) to the Certificate Insurer, any amounts remaining due to the
Insurer under the terms of the Insurance Agreement (other than those
attributable to Excess Bankruptcy Losses, Excess Fraud Losses and Excess
Special Hazard Losses);
(x) to the Basis Risk Reserve Fund in an amount equal to the
Required Reserve Fund Deposit;
(xi) to the Holders of the Class X Certificates, in an amount equal
to the Class X Distributable Amount;
(xii) to the Holders of the Class R Certificates, the balance, if
any, of the amount so withdrawn from the Distribution Account for such
Distribution Date, together with amounts withdrawn from the Basis Risk
Reserve Fund pursuant to Section 4.07(d) and distributable to the Class X
Certificates
(xiii) to the Holders of the Class R Certificates, any remaining
amounts.
Amounts deposited to the Basis Risk Reserve Fund pursuant to the preceding
clauses (viii) and (x) shall be deemed to have been distributed to the Class X
Certificateholders for applicable tax purposes.
All Realized Losses to be allocated to the Certificate Principal Balances
of the Class A Certificates on any Distribution Date shall be so allocated after
the actual distributions to be made on such date as provided above. All
references above to the Certificate Principal Balance of the Class A
Certificates shall be to the Certificate Principal Balance thereof immediately
prior to the relevant Distribution Date, before reduction thereof by any
Realized Losses, in each case to be allocated in accordance with the provisions
of Section 4.04(b) on such Distribution Date pursuant to Section 4.04 .
(b) In addition to making the distributions required pursuant to Section
4.01(a), on each Distribution Date for which there exists a Deficiency Amount,
the Trustee shall withdraw from the Distribution Account any amount therein that
was transferred from the Policy Payments Account to the Distribution Account
pursuant to Section 9.04 and distribute to the Holders of the Class A
Certificates (i) an amount equal to any amount required to be paid to such Class
pursuant to Section 4.01(a)(i) for such Distribution Date remaining unpaid after
giving effect to all distributions made pursuant to Section 4.01(a) for such
Distribution Date, (ii) an amount equal to the principal portion of any Realized
Losses allocated to such Class on such Distribution Date after giving effect to
all distributions made pursuant to Section 4.01(a) for such Distribution Date
and (iii) without duplication, any other amount constituting a Deficiency
Amount.
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(c) Each Holder of a Certificate, by its acceptance of such Certificate,
hereby agrees that, in the event any distribution is made to any Holder of a
Class A Certificate from amounts paid under the Policy, (i) the Certificate
Insurer shall be subrogated in the manner herein provided to the rights of the
Holder of such Class A Certificate to receive from amounts on deposit in the
Distribution Account the distributions allocable to principal and interest that
would have been distributable to such Holder if no such distribution to such
Holder had been made from amounts paid under the Policy; and (ii) in addition to
the rights of the Class A Certificateholders that the Certificate Insurer may
exercise in accordance with the provisions of Section 9.01, the Certificate
Insurer may exercise any option, vote, right, power or the like with respect to
each Class A Certificate for which Cumulative Insurance Payments are
outstanding.
(d) All distributions made with respect to each Class of Certificates on
each Distribution Date shall be allocated pro rata among the outstanding
Certificates in such Class based on their respective Percentage Interests.
Payments in respect of each Class of Certificates on each Distribution Date will
be made to the Holders of the respective Class of record on the related Record
Date (except as otherwise provided in Section 4.01(f) or Section 10.01
respecting the final distribution on such Class), based on the aggregate
Percentage Interest represented by their respective Certificates, and shall be
made by wire transfer of immediately available funds to the account of any such
Holder at a bank or other entity having appropriate facilities therefor, if such
Holder shall have so notified the Trustee in writing at least five Business Days
prior to the Record Date immediately prior to such Distribution Date and is the
registered owner of Certificates having an initial aggregate Certificate
Principal Balance that is in excess of the lesser of (i) $5,000,000 or (ii) two-
thirds of the initial Certificate Principal Balance (or, in the case of the
Class X Certificates or the Class R Certificates, a 66% Percentage Interest) of
such Class of Certificates, or otherwise by check mailed by first class mail to
the address of such Holder appearing in the Certificate Register. The final
distribution on each Certificate will be made in like manner, but only upon
presentment and surrender of such Certificate at the Corporate Trust Office or
such other location specified in the notice to Certificateholders of such final
distribution. Payments to the Certificate Insurer on any Distribution Date will
be made by wire transfer of immediately available funds to the account
designated by the Certificate Insurer.
Each distribution with respect to a Book-Entry Certificate shall be paid to
the Depository, as Holder thereof, and the Depository shall be responsible for
crediting the amount of such distribution to the accounts of its Depository
Participants in accordance with its normal procedures. Each Depository
Participant shall be responsible for disbursing such distribution to the
Certificate Owners that it represents and to each indirect participating
brokerage firm (a "brokerage firm" or "indirect participating firm") for which
it acts as agent. Each brokerage firm shall be responsible for disbursing funds
to the Certificate Owners that it represents. None of the Trustee, the
Certificate Registrar, the Depositor or the Master Servicer shall have any
responsibility therefor except as otherwise provided by this Agreement or
applicable law.
(e) The rights of the Certificateholders to receive distributions in
respect of the Certificates, and all interests of the Certificateholders in such
distributions, shall be as set forth in this Agreement. Neither the Holders of
any Class of Certificates nor the Trustee nor the Master Servicer shall in any
way be responsible or liable to the Holders of any other Class of Certificates
in respect of amounts properly previously distributed on the Certificates.
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(f) Except as otherwise provided in Section 10.01, whenever the Trustee
expects that the final distribution with respect to any Class of Certificates
will be made on the next Distribution Date, the Trustee shall, no later than
five (5) Business Days after the related Determination Date, mail to each Holder
on such date of such Class of Certificates and to the Certificate Insurer a
notice to the effect that:
(i) the Trustee expects that the final distribution with respect to
such Class of Certificates will be made on such Distribution Date but only
upon presentation and surrender of such Certificates at the office of the
Trustee therein specified, and
(ii) no interest shall accrue on such Certificates from and after
the end of the related Interest Accrual Period.
Any funds not distributed to any Holder or Holders of Certificates of such Class
on such Distribution Date because of the failure of such Holder or Holders to
tender their Certificates shall, on such date, be set aside and held in trust
and credited to the account of the appropriate non-tendering Holder or Holders.
If any Certificates as to which notice has been given pursuant to this Section
4.01(f) shall not have been surrendered for cancellation within six months after
the time specified in such notice, the Trustee shall mail a second notice to the
remaining non-tendering Certificateholders to surrender their Certificates for
cancellation in order to receive the final distribution with respect thereto.
If within one year after the second notice all such Certificates shall not have
been surrendered for cancellation, the Trustee shall, directly or through an
agent, contact the remaining non-tendering Certificateholders concerning
surrender of their Certificates in the manner reasonably specified to the
Trustee by the Master Servicer in writing. The costs and expenses of
maintaining the funds in trust and of contacting such Certificateholders shall
be paid out of the assets remaining in the trust fund. If within one year after
the second notice any such Certificates shall not have been surrendered for
cancellation, the Trustee shall pay any such funds to the Master Servicer, the
Master Servicer shall pay to the Certificate Insurer any amount of such funds
that were paid by the Certificate Insurer under the Policy but shall continue to
hold any remaining funds for the benefit of the non-tendering
Certificateholders, and such Certificateholders shall thereafter look solely to
the Master Servicer for payment thereof, and all liability of the Certificate
Insurer and the Trustee with respect to such trust funds shall thereupon cease.
No interest shall accrue or be payable to any Certificateholder on any amount
held in trust by the Master Servicer as a result of such Certificateholder's
failure to surrender its Certificate(s) for final payment thereof in accordance
with this Section 4.01(f).
SECTION 4.02. Statements to Certificateholders.
--------------------------------
On each Distribution Date, the Trustee shall prepare, based solely on
information provided to it by the Master Servicer, and forward by mail to each
Holder of the Regular Certificates, a statement as to the distributions made on
such Distribution Date setting forth:
(i) the amount of the distribution made on such Distribution Date to
the Holders of the Class A Certificates allocable to principal;
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(ii) the amount of the distribution made on such Distribution Date
to the Holders of the Class A Certificates allocable to interest;
(iii) the aggregate amount of servicing compensation received by
the Master Servicer during the related Collection Period and such other
customary information as the Trustee deems necessary or desirable, or which
a Certificateholder reasonably requests, to enable Certificateholders to
prepare their tax returns;
(iv) the Guaranteed Distribution for such Distribution Date and the
respective portions thereof allocable to principal and interest;
(v) the amount of any Insurance Payment made to Class A
Certificateholders on such Distribution Date, the amount of any
reimbursement payment made to the Certificate Insurer on such Distribution
Date pursuant to Section 4.01(a)(iv) and the amount of Cumulative Insurance
Payments after giving effect to any such Insurance Payment to Class A
Certificateholders or any such reimbursement payment to the Certificate
Insurer;
(vi) the aggregate amount of Monthly Advances for such Distribution
Date;
(vii) the aggregate Stated Principal Balance of the Mortgage Loans
and any REO Properties at the close of business on such Determination Date;
(viii) the number, aggregate principal balance, weighted average
remaining term to maturity and weighted average Mortgage Rate of the
Mortgage Loans as of the related Due Date;
(ix) the number and aggregate unpaid principal balance of Mortgage
Loans (a) 30 days past due on a contractual basis as of the related
Determination Date , (b) 60 days past due on a contractual basis as of the
related Determination Date , (c) 90 or more days past due on a contractual
basis as of the related Determination Date and (d) as to which foreclosure
proceedings have been commenced as of the related Determination Date;
(x) with respect to any Mortgage Loan that became an REO Property
during the preceding calendar month, the loan number of such Mortgage Loan,
the unpaid principal balance and the Stated Principal Balance of such
Mortgage Loan as of the date it became an REO Property;
(xi) the book value of any REO Property as of the close of business
on the last Business Day of the calendar month preceding the Distribution
Date;
(xii) the aggregate amount of Principal Prepayments made during the
related Collection Period;
(xiii) the aggregate amount of Realized Losses incurred during the
related Collection Period (or, in the case of Bankruptcy Losses allocable
to interest, during the related Collection
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Period), separately identifying whether such Realized Losses constituted
Extraordinary Losses, Fraud Losses, Special Hazard Losses or Bankruptcy
Losses;
(xiv) the aggregate amount of extraordinary Trust Fund expenses
withdrawn from the Collection Account or the Distribution Account for such
Distribution Date;
(xv) the aggregate Certificate Principal Balance of the Class A
Certificates, after giving effect to the distributions, and allocations of
Realized Losses, made on such Distribution Date, separately identifying any
reduction thereof due to allocations of Realized Losses;
(xvi) the Certificate Factor for each such Class of Certificates
applicable to such Distribution Date;
(xvii) the Interest Distribution Amount in respect of the Class A
Certificates for such Distribution Date and the respective portions
thereof, if any, paid under the Policy or (in the event of a Deficiency
Event) remaining unpaid following the distributions made in respect of such
Certificates on such Distribution Date;
(xviii) the aggregate amount of any Prepayment Interest Shortfalls
for such Distribution Date, to the extent not covered by payments by the
Master Servicer pursuant to Section 3.24;
(xix) the aggregate amount of Relief Act Interest Shortfalls for
such Distribution Date;
(xx) the then-applicable Bankruptcy Amount, Fraud Loss Amount and
Special Hazard Amount and the amount of any Excess Loss;
(xxi) the Basis Risk Shortfall, if any, for such Distribution Date;
(xxii) the Unpaid Basis Risk Shortfalls, if any, outstanding after
reimbursements therefor on such Distribution Date
(xxiii) the Required Subordinated Amount for such Distribution
Date;
(xxiv) the Subordination Increase Amount, if any, for such
Distribution Date;
(xxv) the Subordination Reduction Amount, if any, for such
Distribution Date; and
(xxvi) the Class A Pass-Through Rate for such Distribution Date.
In the case of information furnished pursuant to subclauses (i) through
(ii) above, the amounts shall be expressed as a dollar amount per Single
Certificate of the relevant Class.
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The Master Servicer shall furnish to the Trustee and to the Certificate
Insurer, during the term of this Agreement, such periodic, special, or other
reports or information not specifically provided for herein, as may be
necessary, reasonable, or appropriate with respect to the Trustee or the
Certificate Insurer, as the case may be, or otherwise with respect to the
purposes of this Agreement, all such reports or information to be provided by
and in accordance with such applicable instructions and directions as the
Trustee or the Certificate Insurer may reasonably require.
Within a reasonable period of time after the end of each calendar year, the
Trustee shall furnish to each Person who at any time during the calendar year
was a Holder of a Regular Certificate a statement containing the information set
forth in subclauses (i) through (ii) above, aggregated for such calendar year or
applicable portion thereof during which such person was a Certificateholder.
Such obligation of the Trustee shall be deemed to have been satisfied to the
extent that substantially comparable information shall be provided by the
Trustee pursuant to any requirements of the Code as from time to time are in
force.
On each Distribution Date, the Trustee shall forward to the Depositor, to
each Holder of a Residual Certificate, to the Certificate Insurer and to the
Master Servicer, a copy of the reports forwarded to the Regular
Certificateholders on such Distribution Date and a statement setting forth the
amounts, if any, actually distributed with respect to the Residual Certificates,
respectively, on such Distribution Date.
Within a reasonable period of time after the end of each calendar year, the
Trustee shall furnish to each Person who at any time during the calendar year
was a Holder of a Residual Certificate a statement setting forth the amount, if
any, actually distributed with respect to the Residual Certificates, as
appropriate, aggregated for such calendar year or applicable portion thereof
during which such Person was a Certificateholder.
The Trustee shall, upon request, furnish to each Certificateholder, during
the term of this Agreement, such periodic, special, or other reports or
information, whether or not provided for herein, as shall be reasonable with
respect to the Certificateholder, or otherwise with respect to the purposes of
this Agreement, all such reports or information to be provided at the expense of
the Certificateholder in accordance with such reasonable and explicit
instructions and directions as the Certificateholder may provide. For purposes
of this Section 4.02, the Trustee's duties are limited to the extent that the
Trustee receives timely reports as required from the Master Servicer.
On each Distribution Date the Trustee shall provide Bloomberg Financial
Markets, L.P. ("Bloomberg") Cusip level factors for each class of Certificates
as of such Distribution Date, using a format and media mutually acceptable to
the Trustee and Bloomberg. In connection with providing the information
specified in this Section 4.02 to Bloomberg, the Trustee and any director,
officer, employee or agent of the Trustee shall be indemnified and held harmless
by the Master Servicer, to the extent and in the manner provided in Section
8.05.
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SECTION 4.03. Remittance Reports; Monthly Advances.
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(a) On the Business Day following each Determination Date, the Master
Servicer shall deliver to the Trustee and the Certificate Insurer by telecopy
(or by such other means as the Master Servicer, the Trustee or the Certificate
Insurer, as the case may be, may agree from time to time) a Remittance Report
with respect to the related Distribution Date. On the same date, the Master
Servicer shall forward to the Trustee by overnight mail a computer readable
magnetic tape or diskette containing the information set forth in such
Remittance Report with respect to the related Distribution Date. Not later than
the close of business New York time on the Master Servicer Remittance Date, the
Master Servicer shall deliver or cause to be delivered to the Certificate
Insurer and the Trustee in addition to the information provided on the
Remittance Report, (i) the Guaranteed Distribution for such Distribution Date,
separately identifying the portions thereof allocable to principal and interest;
(ii) the Available Distribution Amount for such Distribution Date; (iii) whether
the Available Distribution Amount expected to be on deposit in the Distribution
Account on such Distribution Date will be sufficient to cover the Guaranteed
Distribution and, if not, the amount of the shortfall; (iv) the amount of
Monthly Advances to be made by the Master Servicer in respect of the related
Distribution Date, the aggregate amount of Monthly Advances outstanding after
giving effect to such Monthly Advances, and the aggregate amount of
Nonrecoverable Monthly Advances in respect of such Distribution Date; (v) with
respect to any reimbursement to be made to the Certificate Insurer on such
Distribution Date pursuant to Section 4.01(a)(iv), the amount, if any, allocable
to principal and the amount allocable to interest; (vi) Cumulative Insurance
Payments after giving effect to the distributions to be made on such
Distribution Date; and (vii) such other information with respect to the Mortgage
Loans as the Trustee may reasonably require to perform the calculations
necessary to make the distributions contemplated by Section 4.01 and to prepare
the statements to Certificateholders contemplated by Section 4.02. The Trustee
shall not be responsible to recompute, recalculate or verify any information
provided to it by the Master Servicer.
(b) The amount of Monthly Advances to be made by the Master Servicer for
any Distribution Date shall equal, subject to Section 4.03(d), the sum of (i)
the aggregate amount of Monthly Payments (net of the related Servicing Fee), due
during the related Collection Period in respect of the Mortgage Loans, which
Monthly Payments were delinquent on a contractual basis as of the close of
business on the related Determination Date and (ii) with respect to each REO
Property, which REO Property was acquired during or prior to the related
Collection Period and as to which REO Property an REO Disposition did not occur
during the related Collection Period, an amount equal to the excess, if any, of
the REO Imputed Interest on such REO Property for the most recently ended
calendar month, over the net income from such REO Property transferred to the
Distribution Account pursuant to Section 3.23 for distribution on such
Distribution Date.
On or before noon New York time on the Master Servicer Remittance Date, the
Master Servicer shall remit in immediately available funds to the Trustee for
deposit in the Distribution Account an amount equal to the aggregate amount of
Monthly Advances, if any, to be made in respect of the Mortgage Loans and REO
Properties for the related Distribution Date either (i) from its own funds or
(ii) from the Collection Account, to the extent of funds held therein for future
distribution (in which case it will cause to be made an appropriate entry in the
records of Collection Account that amounts held for future distribution have
been, as permitted by this Section 4.03, used by the Master
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Servicer in discharge of any such Monthly Advance) or (iii) in the form of any
combination of (i) and (ii) aggregating the total amount of Monthly Advances to
be made by the Master Servicer with respect to the Mortgage Loans and REO
Properties. Any amounts held for future distribution and so used shall be
appropriately reflected in the Master Servicer's records and replaced by the
Master Servicer by deposit in the Collection Account on or before any future
Master Servicer Remittance Date to the extent that the Available Distribution
Amount for the related Distribution Date (determined without regard to Monthly
Advances to be made on the Master Servicer Remittance Date) shall be less than
the total amount that would be distributed to the Classes of Certificateholders
pursuant to Section 4.01 on such Distribution Date if such amounts held for
future distributions had not been so used to make Monthly Advances. The
Trustee will provide notice to the Master Servicer and the Certificate Insurer
by telecopy by the close of business of the Business Day following any Master
Servicer Remittance Date in the event that the amount remitted by the Master
Servicer to the Trustee on such date is less than the Monthly Advances required
to be made by the Master Servicer for the related Distribution Date.
(c) The obligation of the Master Servicer to make such Monthly Advances is
mandatory, notwithstanding any other provision of this Agreement but subject to
(d) below, and, with respect to any Mortgage Loan or REO Property, shall
continue until a Final Recovery Determination in connection therewith or the
removal thereof from the Trust Fund pursuant to any applicable provision of this
Agreement, except as otherwise provided in this Section.
(d) Notwithstanding anything herein to the contrary, no Monthly Advance
shall be required to be made hereunder by the Master Servicer if such Monthly
Advance would, if made, constitute a Nonrecoverable Monthly Advance. The
determination by the Master Servicer that it has made a Nonrecoverable Monthly
Advance or that any proposed Monthly Advance, if made, would constitute a
Nonrecoverable Monthly Advance, shall be evidenced by an Officers' Certificate
of the Master Servicer delivered on or prior to the related Master Servicer
Remittance Date to the Depositor, the Trustee and the Certificate Insurer.
(e) If, at the close of business on the third Business Day prior to any
Distribution Date, the funds on deposit in the Distribution Account are less
than the Guaranteed Distribution for such Distribution Date, the Trustee shall
give notice by telephone or telecopy of the amount of such deficiency, confirmed
in writing in the form set forth as Exhibit A to the Endorsement of the Policy,
to the Certificate Insurer and the Fiscal Agent (as defined in the Policy), if
any, at or before 12:00 noon, New York time, on the second Business Day prior to
such Distribution Date.
SECTION 4.04. Allocation of Realized Losses.
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(a) Prior to each Determination Date, the Master Servicer shall determine
as to each Mortgage Loan and REO Property: (i) the total amount of Realized
Losses, if any, incurred in connection with any Final Recovery Determinations
made during the related Collection Period; (ii) whether and the extent to which
such Realized Losses constituted Fraud Losses, Special Hazard Losses or
Extraordinary Losses; and (iii) the respective portions of such Realized Losses
allocable to interest and allocable to principal. Prior to each Determination
Date, the Master Servicer shall also determine as to each Mortgage Loan: (i)
the total amount of Realized Losses, if any, incurred in
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connection with any Deficient Valuations made during the related Collection
Period; and (ii) the total amount of Realized Losses, if any, incurred in
connection with Debt Service Reductions in respect of Monthly Payments due
during the related Collection Period. The information described in the two
preceding sentences that is to be supplied by the Master Servicer shall be
evidenced by an Officers' Certificate delivered to the Trustee and the
Certificate Insurer by the Master Servicer prior to the Determination Date
immediately following the end of (i) in the case of Bankruptcy Losses allocable
to interest, the Collection Period during which any such Realized Loss was
incurred, and (ii) in the case of all other Realized Losses, the Collection
Period during which any such Realized Loss was incurred.
(b) All Realized Losses on the Mortgage Loans, other than Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses on the Mortgage
Loans shall be allocated on each Distribution Date as follows: first, to the Net
Monthly Excess Cashflow; second, in reduction of the Subordinated Amount; and,
third, to the Class A Certificates. Any Excess Special Hazard Losses, Excess
Bankruptcy Losses and Excess Fraud Losses will be allocated between the Class A
Certificates and the Subordinated Amount on a pro rata basis. No allocations of
Realized Losses pursuant to this Section 4.04 shall affect any liability of the
Certificate Insurer with respect to such amounts under the Policy. Any
allocation of Realized Losses to a Class A Certificate on any Distribution Date
shall be made by reducing the Certificate Principal Balance thereof by the
amount so allocated but only to the extent Guaranteed Distributions in respect
of the allocation of Realized Losses to the Class A Certificates are not made.
All Realized Losses allocated to a Class of Certificates hereunder will be
allocated among the Certificates of such Class in proportion to the Percentage
Interests evidenced thereby.
All Realized Losses and all other losses allocated to a Class of
Certificates hereunder will be allocated among the Certificates of such Class in
proportion to the Percentage Interests evidenced thereby.
(c) Notwithstanding anything to the contrary herein, (i) in no event shall
the Certificate Principal Balance of a Class A Certificate be reduced more than
once in respect of any particular amount both (a) allocated to such Certificate
in respect of Realized Losses pursuant to Section 4.04 and (b) distributed to
the Holder of such Certificate in reduction of the Certificate Principal Balance
thereof pursuant to this Section 4.04 from Net Monthly Excess Cashflow or from
amounts paid under the Policy.
SECTION 4.05. Compliance with Withholding Requirements.
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Notwithstanding any other provision of this Agreement, the Trustee shall
comply with all federal withholding requirements respecting payments to
Certificateholders of interest that the Trustee reasonably believes are
applicable under the Code. The consent of Certificateholders shall not be
required for such withholding. In the event the Trustee does withhold any
amount from interest or original issue discount payments or advances thereof to
any Certificateholder pursuant to federal withholding requirements, the Trustee
shall indicate the amount withheld to such Certificateholders.
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SECTION 4.06. REMIC 1 and REMIC 2 Allocations.
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(a) The initial principal balances of the Class LT1 Interest, Class LT2
Interest, and Class LT3 Interest shall equal 98%, 1%, and 1%, respectively, of
the Maximum Collateral Amount. All principal payments will be allocated 98% to
the Class LT1 Interest. The remaining principal payments will be allocated
first to the Class LT3 Interest up to an amount equal to 2% of any reduction
(other than a reduction due to Realized Losses) in the Subordinated Adjusted
Amount from the prior Distribution Date and then equally to the Class LT2 and
Class LT3 Interests. Interest accruing on the Class LT3 Interest in an amount
equal to 1% of the increase in the Subordinated Adjusted Amount from the prior
Distribution Date will be deferred and added to the principal balance of the
Class LT3 Interest. The amount of interest accrued and deferred on the Class
LT3 Interest under the preceding sentence shall be distributed as principal to
the Class LT2 Interest.
(b) Realized Losses will be allocated 98% to the Class LT1 Interest. The
remaining 2% of Realized Losses will be allocated to the Class LT3 Interest to
the extent that the principal balance of the Class LT3 Interest exceeds 1% of
the aggregate Stated Principal Balance of the Mortgage Loans and then equally
between the Class LT2 Interest and the Class LT3 Interest.
(c) The initial principal balances of the Class MT1 Interest, Class MT2
Interest, and Class MT3 Interest shall equal 98%, 1%, and 1%, respectively, of
the Maximum Collateral Amount. The Class MT4 shall not have a principal
balance. All principal payments will be allocated 98% to the Class MT1
Interest. The remaining principal payments will be allocated first to the Class
MT3 Interest up to an amount equal to 2% of any reduction (other than a
reduction due to Realized Losses) in the Subordinated Adjusted Amount from the
prior Distribution Date and then equally to the Class MT2 and Class MT3
Interest. Interest accruing on the Class MT3 Interest in an amount equal to 1%
of the increase in the Subordinated Adjusted Amount from the prior Distribution
Date will be deferred and added to the principal balance of the Class MT3
Interest. The amount of interest accrued and deferred on the Class MT3 Interest
under the preceding sentence shall be distributed as principal to the Class MT2
Interest.
(d) Realized Losses will be allocated 98% to the Class MT1 Interest. The
remaining 2% of Realized Losses will be allocated to the Class MT3 Interest to
the extent that the principal balance of the Class MT3 Interest exceeds 1% of
the aggregate Stated Principal Balance of the Mortgage Loans and then equally
between the Class MT2 Interest and the Class MT3 Interest.
SECTION 4.07. Basis Risk Reserve Fund.
-----------------------
(a) The Trustee shall establish and maintain in its name, in trust for the
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benefit of the Class A Certificateholders the Basis Risk Reserve Fund treated as
an outside reserve fund within the meaning of Treasury regulation section
1.860G-2(h) in accordance with Section 11.01(a) of this Agreement. The Basis
Risk Reserve Fund shall be an Eligible Account, and funds on deposit therein
shall be held separate and apart from, and shall not be commingled with, any
other moneys, including, without limitation, other moneys of the Trustee held
pursuant to this Agreement.
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(b) On each Distribution Date on which the Net Excess Spread is less than
0.25% the Trustee shall transfer from the Distribution Account to the Basis Risk
Reserve Fund pursuant to Section 4.01(a)(x) an amount equal to the Required
Reserve Fund Deposit.
(c) The Trustee shall make withdrawals from the Basis Risk Reserve Fund to
make distributions pursuant to Sections 4.01(a)(viii) hereof, and shall withdraw
from the Basis Risk Reserve Fund on any Distribution Date on which the Net
Excess Spread is equal to or greater than 0.25% an amount equal to the amount of
funds on deposit in the Basis Risk Reserve Fund in excess of $10,000 and
distribute such excess to the Class A Certificateholders pro rata in accordance
with their respective Percentage Interests. Funds withdrawn from the Basis Risk
Reserve Fund may not be applied pursuant to any other subsection of Section 4.01
other than as expressly provided for in this Section 4.07(c).
(d) Funds in the Basis Risk Reserve Fund may be invested in Permitted
Investments in accordance with the provisions set forth in Section 3.12. Any
earnings on such amounts shall be payable to the Class X Certificateholders.
The Class X Certificateholders shall be the owner of the Basis Risk Reserve Fund
for federal tax purposes and shall direct the Trustee in writing as to which
Permitted Investments such funds shall be invested; provided, that, any such
investment direction provided by the Class X Certificateholders shall remain in
effect until any subsequent Class X Certificateholder provides superseding
written investment direction to the Trustee.
(e) Upon termination of the Trust Fund in accordance with Section 10.01,
any amounts remaining in the Basis Risk Reserve Fund following the payment of
all unpaid Certificate Insurer Premiums shall be distributed to the Class X
Certificateholders in the same manner as if distributed pursuant to Section
4.01(xi).
SECTION 4.08. Initial Interest Coverage Account and Funding Account.
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(a) The Trustee has heretofore established or caused to be established and
shall hereafter maintain or cause to be maintained a separate account
denominated a Initial Interest Coverage Account, which is and shall continue to
be an Eligible Account in the name of the Trustee and shall be designated
"Bankers Trust Company of California, N.A., as Trustee of the United PanAm
Mortgage Loan Trust 1997-1 Initial Interest Coverage Account". The Initial
Interest Coverage Account shall be treated as an "outside reserve fund" under
applicable Treasury regulations and will not be part of the REMIC. Any
investment earnings on the Initial Interest Coverage Account will be treated as
owned by the Class R Certificateholders and will be taxable to such Holders.
The amount on deposit in the Initial Interest Coverage Account shall be invested
in Permitted Investments. The Class R Certificateholders shall direct any
depository institution maintaining the Initial Interest Coverage Account to
invest the funds in such account in one or more Permitted Investments. All
income and gain realized from the investment of funds in the Initial Interest
Coverage Account shall be for the benefit of the Class R Certificateholders.
(b) The Trustee has heretofore established or caused to be established and
shall hereafter maintain or cause to be maintained a separate account
denominated a Funding Account, which is and shall continue to be an Eligible
Account in the name of the Trustee and shall be designated "Bankers
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Trust Company of California, N.A., as Trustee of the United PanAm Mortgage Loan
Trust 1997-1 Funding Account". The Funding Account shall be treated as an
"outside reserve fund" under applicable Treasury regulations and will not be
part of the REMIC. Any investment earnings on the Funding Account will be
treated as owned by the Class R Certificateholders and will be taxable to such
Holders. The amount on deposit in the Funding Account shall be invested in
Permitted Investments. The Class R Certificateholders shall direct any
depository institution maintaining the Funding Account to invest the funds in
such account in one or more Permitted Investments. All income and gain
realized from the investment of funds in the Funding Account shall be for the
benefit of the Class R Certificateholders.
(c) On the Closing Date, the Seller will cause to be deposited in the
Initial Interest Coverage Account the amount of $0 from the sale of the Class
A Certificates. On the Closing Date, the Seller will cause to be deposited in
the Funding Account the amount of $45,084.33 from the sale of the Class A
Certificates.
(d) On the Business Day prior to the initial Distribution Date, the Trustee
shall transfer from the Funding Account to the Distribution Account the amounts
on deposit therein (exclusive of reinvestment earnings thereon, if any) for such
Distribution Date.
(e) The Initial Interest Coverage Account and Funding Account shall be
closed on the initial Distribution Date after the transfer referred to in clause
(c) above. All amounts, if any, remaining in the Initial Interest Coverage
Account and Funding Account on such day after the transfer referred to in clause
(c) above shall be transferred to the Class R Certificateholder.
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ARTICLE V
THE CERTIFICATES
SECTION 5.01. The Certificates.
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Each of the Class A Certificates, Class X and Class R Certificates shall be
substantially in the forms set forth in Exhibits A-1, A-2 and A-3 hereto,
respectively, and shall, on original issue, be executed, authenticated and
delivered by the Trustee to or upon the order of the Depositor concurrently with
the sale and assignment to the Trustee of the Trust. Each Class of Class A
Certificates shall be initially evidenced by one or more certificates
representing a Percentage Interest with a minimum dollar denominations of
$100,000 and dollar multiples in excess thereof, except that one of each of the
Class A Certificate may be in a different denomination so that the sum of the
denominations of all outstanding Class A Certificates shall equal the
Certificate Principal Balance of the aggregate Class A Certificates on the
Closing Date. The Class X and Class R Certificates shall have a minimum
Percentage Interest of 25% with 1% multiples in excess thereof.
The Certificates shall be executed on behalf of the Trust by manual or
facsimile signature on behalf of the Trustee by a Responsible Officer.
Certificates bearing the manual or facsimile signatures of individuals who were,
at the time when such signatures were affixed, authorized to sign on behalf of
the Trustee shall bind the Trust, notwithstanding that such individuals or any
of them have ceased to be so authorized prior to the authentication and delivery
of such Certificates or did not hold such offices at the date of such
Certificate. No Certificate shall be entitled to any benefit under this
Agreement or be valid for any purpose, unless such Certificate shall have been
manually authenticated by the Trustee substantially in the form provided for
herein, and such authentication upon any Certificate shall be conclusive
evidence, and the only evidence, that such Certificate has been duly
authenticated and delivered hereunder. All Certificates shall be dated the date
of their authentication. Subject to Section 5.02(c), the Class A Certificates
shall be Book-Entry Certificates. The Class X and Class R Certificates shall
not be Book-Entry Certificates.
SECTION 5.02. Registration of Transfer and Exchange of Certificates.
-----------------------------------------------------
(a) The Certificate Registrar shall cause to be kept at the Corporate Trust
Office a Certi ficate Register in which, subject to such reasonable regulations
as it may prescribe, the Certificate Registrar shall provide for the
registration of Certificates and of transfers and exchanges of Certificates as
herein provided. The Trustee shall initially serve as Certificate Registrar for
the purpose of registering Certificates and transfers and exchanges of
Certificates as herein provided.
Upon surrender for registration of transfer of any Certificate at any
office or agency of the Certificate Registrar maintained for such purpose
pursuant to the foregoing paragraph and, in the case of a Class R Certificate,
upon satisfaction of the conditions set forth below, the Trustee on behalf of
the Trust shall execute, authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Certificates of the same aggregate
Percentage Interest.
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At the option of the Certificateholders, Certificates may be exchanged for
other Certificates in authorized denominations and the same aggregate Percentage
Interests, upon surrender of the Certificates to be exchanged at any such office
or agency. Whenever any Certificates are so sur rendered for exchange, the
Trustee shall execute on behalf of the Trust and authenticate and deliver the
Certificates which the Certificateholder making the exchange is entitled to
receive. Every Certificate presented or surrendered for registration of
transfer or exchange shall (if so required by the Trustee or the Certificate
Registrar) be duly endorsed by, or be accompanied by a written instrument of
transfer satisfactory to the Trustee and the Certificate Registrar duly executed
by, the Holder thereof or his attorney duly authorized in writing.
(b) Except as provided in paragraph (c) below, the Book-Entry Certificates
shall at all times remain registered in the name of the Depository or its
nominee and at all times: (i) registration of such Certificates may not be
transferred by the Trustee except to another Depository; (ii) the Depository
shall maintain book-entry records with respect to the Certificate Owners and
with respect to ownership and transfers of such Certificates; (iii) ownership
and transfers of registration of such Certificates on the books of the
Depository shall be governed by applicable rules established by the Depository;
(iv) the Depository may collect its usual and customary fees, charges and
expenses from its Depository Participants; (v) the Trustee shall deal with the
Depository as representative of the Certificate Owners of the Certificates for
purposes of exercising the rights of Holders under this Agreement, and requests
and directions for and votes of such representative shall not be deemed to be
inconsistent if they are made with respect to different Certificate Owners; (vi)
the Trustee may rely and shall be fully protected in relying upon information
furnished by the Depository with respect to its Depository Participants and
furnished by the Depository Participants with respect to indirect participating
firms and Persons shown on the books of such indirect participating firms as
direct or indirect Certificate Owners; and (vii) the direct participants of the
Depository shall have no rights under this Agreement under or with respect to
any of the Certificates held on their behalf by the Depository, and the
Depository may be treated by the Trustee and its agents, employees, officers and
directors as the absolute owner of the Certificates for all purposes whatsoever.
All transfers by Certificate Owners of Book-Entry Certificates shall be
made in accordance with the procedures established by the Depository Participant
or brokerage firm representing such Certificate Owners. Each Depository
Participant shall only transfer Book-Entry Certificates of Certificate Owners
that it represents or of brokerage firms for which it acts as agent in
accordance with the Depository's normal procedures. The parties hereto are
hereby authorized to execute a letter of representations with the Depository or
take such other action as may be necessary or desirable to register a Book-Entry
Certificate to the Depository. In the event of any conflict between the terms
of any such Letter of Representation and this Agreement the terms of this
Agreement shall control.
(c) If (i)(x) the Depository or the Depositor advises the Trustee in
writing that the Depository is no longer willing or able to discharge properly
its responsibilities as Depository and (y) the Trustee or the Depositor is
unable to locate a qualified successor, (ii) the Depositor, at its sole option,
with the consent of the Trustee, elects to terminate the book-entry system
through the Depository or (iii) after the occurrence of a Master Servicer Event
of Default, the Certificate Owners of each Class of Class A Certificates
representing Percentage Interests aggregating not less than 51% advises the
Trustee and Depository through the Financial Intermediaries and the Depository
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Participants in writing that the continuation of a book-entry system through
the Depository to the exclusion of definitive, fully registered certificates
(the "Definitive Certificates") to Certificate Owners is no longer in the best
interests of the Certificate Owners, then upon surrender to the Certificate
Registrar of each Class of Class A Certificates by the Depository, accompanied
by registration instructions from the Depository for registration, the Trustee
shall, at the Depositor's expense, in the case of (ii) above, or the Seller's
expense, in the case of (i) and (iii) above, execute on behalf of the Trust and
authenticate the Definitive Certificates. Neither the Depositor nor the
Trustee shall be liable for any delay in delivery of such instructions and may
conclusively rely on, and shall be protected in relying on, such instructions.
Upon the issuance of Definitive Certificates, the Trustee, the Certificate
Registrar, the Master Servicer, any Paying Agent and the Depositor shall
recognize the Holders of the Definitive Certificates as Certificateholders
hereunder.
(d) Except with respect to the initial transfer of the Class X or Class R
Certificates by the Depositor, no transfer, sale, pledge or other disposition of
any Class X or Class R Certificate shall be made unless such disposition is
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "1933 Act"), and any applicable state securities laws or is made in
accordance with the 1933 Act and laws. In the event of any such transfer, other
than the transfer of the Tax Matters Person Residual Interest to the Trustee (i)
unless such transfer is made in reliance upon Rule 144A (as evidenced by the
investment letter delivered to the Trustee, in substantially the form attached
hereto as Exhibit K) under the 1933 Act, the Trustee, the Certificate Insurer
and the Depositor shall require a written Opinion of Counsel (which may be in-
house counsel) acceptable to and in form and substance reasonably satisfactory
to the Trustee, the Certificate Insurer and the Depositor that such transfer may
be made pursuant to an exemption, describing the applicable exemption and the
basis therefor, from the 1933 Act or is being made pursuant to the 1933 Act,
which Opinion of Counsel shall not be an expense of the Trustee, the Master
Servicer, the Trust, the Certificate Insurer or the Depositor or (ii) the
Trustee shall require the transferor to execute a transferor certificate (in
substantially the form attached hereto as Exhibit J) and the transferee to
execute an investment letter (in substantially the form attached hereto as
Exhibit K) acceptable to and in form and substance reasonably satisfactory to
the Depositor, the Certificate Insurer and the Trustee certifying to the
Depositor, the Master Servicer, the Trust, the Certificate Insurer and the
Trustee the facts surrounding such transfer, which investment letter shall not
be an expense of the Trustee or the Depositor. The Holder of a Class X or Class
R Certificate desiring to effect such transfer shall, and does hereby agree to,
indemnify the Trustee, the Master Servicer, the Trust, the Certificate Insurer
and the Depositor against any liability that may result if the transfer is not
so exempt or is not made in accordance with such federal and state laws.
No transfer of a Class X or Class R Certificate shall be made unless the
Trustee shall have received either (i) a representation from the transferee of
such Certificate, acceptable to and in form and substance satisfactory to the
Trustee, the Certificate Insurer and the Depositor, (such requirement is
satisfied only by the Trustee's receipt of a representation letter from the
transferee substantially in the form of Exhibit H hereto, as appropriate), to
the effect that such transferee is not an employee benefit plan or arrangement
subject to Section 406 of ERISA or a plan subject to Section 4975 of the Code,
nor a person acting on behalf of any such plan or arrangement nor using the
assets of any such plan or arrangement to effect such transfer or (ii) if the
purchaser is an insurance company, a representation that the purchaser is an
insurance company which is purchasing such Certificates with
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funds contained in an "insurance company general account" (as such term is
defined in Section V(e) of Prohibited Transaction Class Exemption 95-60 ("PTCE
95-60") and that the purchase and holding of such Certificates are covered under
PTCE 95-60 or (iii) in the case of any such Class R Certificate presented for
registration in the name of an employee benefit plan subject to ERISA or a plan
or arrangement subject to Section 4975 of the Code (or comparable provisions of
any subsequent enactments), or a trustee of any such plan or any other person
acting on behalf of any such plan or arrangement or using such plan's or
arrangement's assets, an Opinion of Counsel satisfactory to the Trustee, the
Depositor and the Certificate Insurer which Opinion of Counsel shall not be an
expense of either the Trustee, the Depositor, the Master Servicer, the
Certificate Insurer or the Trust, addressed to the Trustee, to the effect that
the purchase or holding of such Class X or Class R Certificate will not result
in the assets of the Trust being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject the
Trustee to any obligation in addition to those expressly under taken in this
Agreement or to any liability. Notwithstanding anything else to the contrary
herein, any purported transfer of a Class R Certificate to or on behalf of an
employee benefit plan subject to ERISA or to the Code without the delivery to
the Trustee of an Opinion of Counsel satisfactory to the Trustee as described
above shall be void and of no effect.
Each Person who has or who acquires any Ownership Interest in a Class R
Certificate shall be deemed by the acceptance or acquisition of such Ownership
Interest to have agreed to be bound by the following provisions and to have
irrevocably appointed the Depositor or its designee as its attorney-in-fact to
negotiate the terms of any mandatory sale under clause (v) below and to execute
all instruments of transfer and to do all other things necessary in connection
with any such sale, and the rights of each Person acquiring any Ownership
Interest in a Class R Certificate are expressly subject to the following
provisions:
(i) Each Person holding or acquiring any Ownership Interest in a
Class R Certificate shall be a Permitted Transferee and shall promptly
notify the Trustee of any change or impending change in its status as a
Permitted Transferee.
(ii) No Person shall acquire an Ownership Interest in a Class R
Certificate unless such Ownership Interest is a pro rata undivided
interest.
(iii) In connection with any proposed transfer of any Ownership
Interest in a Class R Certificate, the Trustee shall as a condition to
registration of the transfer, require delivery to it, in form and substance
satisfactory to it, of each of the following:
A. an affidavit in the form of Exhibit I hereto from the
proposed transferee to the effect that such transferee is a
Permitted Transferee and that it is not acquiring its Ownership
Interest in the Class R Certificate that is the subject of the
proposed transfer as a nominee, trustee or agent for any Person who
is not a Permitted Transferee; and
B. a covenant of the proposed transferee to the effect that
the proposed transferee agrees to be bound by and to abide by the
transfer restrictions applicable to the Class R Certificates.
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(iv) Any attempted or purported transfer of any Ownership Interest
in a Class R Certificate in violation of the provisions of this Section
shall be absolutely null and void and shall vest no rights in the purported
transferee. If any purported transferee shall, in violation of the
provisions of this Section, become a Holder of a Class R Certificate, then
the prior Holder of such Class R Certificate that is a Permitted Transferee
shall, upon discovery that the registration of transfer of such Class R
Certificate was not in fact permitted by this Section, be restored to all
rights as Holder thereof retroactive to the date of registration of
transfer of such Class R Certificate. The Trustee shall be under no
liability to any Person for any registration of transfer of a Class R
Certificate that is in fact not permitted by this Section or for making any
distributions due on such Class R Certificate to the Holder thereof or
taking any other action with respect to such Holder under the provisions of
this Agreement so long as the Trustee received the documents specified in
clause (iii). The Trustee shall be entitled to recover from any Holder of
a Class R Certificate that was in fact not a Permitted Transferee at the
time such distributions were made all distributions made on such Class R
Certificate. Any such distributions so recovered by the Trustee shall be
distributed and delivered by the Trustee to the prior Holder of such Class
R Certificate that is a Permitted Transferee.
(v) If any Person other than a Permitted Transferee acquires any
Ownership Interest in a Class R Certificate in violation of the
restrictions in this Section, then the Trustee shall have the right but not
the obligation, without notice to the Holder of such Class R Certificate or
any other Person having an Ownership Interest therein, to notify the
Depositor to arrange for the sale of such Class R Certificate. The
proceeds of such sale, net of commissions (which may include commissions
payable to the Depositor or its affiliates in connection with such sale),
expenses and taxes due, if any, will be remitted by the Trustee to the
previous Holder of such Class R Certificate that is a Permitted Transferee,
except that in the event that the Trustee determines that the Holder of
such Class R Certificate may be liable for any amount due under this
Section or any other provisions of this Agreement, the Trustee may withhold
a corresponding amount from such remittance as security for such claim.
The terms and conditions of any sale under this clause (v) shall be
determined in the sole discretion of the Trustee and it shall not be liable
to any Person having an Ownership Interest in a Class R Certificate as a
result of its exercise of such discretion.
(vi) If any Person other than a Permitted Transferee acquires any
Ownership Interest in a Class R Certificate in violation of the
restrictions in this Section, then the Trustee will provide to the Internal
Revenue Service, and to the persons specified in Sections 860E(e)(3) and
(6) of the Code, information needed to compute the tax imposed under
Section 860E(e)(5) of the Code on transfers of residual interests to
disqualified organizations.
The foregoing provisions of this Section shall cease to apply to transfers
occurring on or after the date on which there shall have been delivered to the
Trustee, in form and substance satisfactory to the Trustee, (i) written
notification from each Rating Agency that the removal of the restrictions on
Transfer set forth in this Section will not cause such Rating Agency to
downgrade its rating of the Certificates and (ii) an Opinion of Counsel to the
effect that such removal will not cause the Trust to fail to qualify as a REMIC.
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(e) No service charge shall be made for any registration of transfer or
exchange of Certificates of any Class, but the Certificate Registrar may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer or exchange of Certificates.
All Certificates surrendered for registration of transfer or exchange shall
be cancelled by the Certificate Registrar and disposed of pursuant to its
standard procedures.
SECTION 5.03. Mutilated, Destroyed, Lost or Stolen Certificates.
-------------------------------------------------
If (i) any mutilated Certificate is surrendered to the Certificate
Registrar or the Certificate Registrar receives evidence to its satisfaction of
the destruction, loss or theft of any Certificate and (ii) there is delivered to
the Trustee, the Depositor and the Certificate Registrar such security or
indemnity as may be required by them to save each of them harmless, then, in the
absence of notice to the Trustee or the Certificate Registrar that such
Certificate has been acquired by a bona fide purchaser, the Trustee shall
execute on behalf of the Trust, authenticate and deliver, in exchange for or in
lieu of any such mutilated, destroyed, lost or stolen Certificate, a new
Certificate of like tenor and Percentage Interest. Upon the issuance of any new
Certificate under this Section, the Trustee or the Certificate Registrar may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee and the Certificate Registrar) in
connection there with. Any duplicate Certificate issued pursuant to this
Section, shall constitute complete and indefeasible evidence of ownership in the
Trust, as if originally issued, whether or not the lost, stolen or destroyed
Certificate shall be found at any time.
SECTION 5.04. Persons Deemed Owners.
---------------------
The Master Servicer, the Depositor, the Trustee, the Certificate Registrar,
the Certificate Insurer, any Paying Agent and any agent of the Master Servicer,
the Depositor, the Certificate Registrar, any Paying Agent or the Trustee may
treat the Person, including a Depository, in whose name any Certificate is
registered as the owner of such Certificate for the purpose of receiving dis
tributions pursuant to Section 4.01 and for all other purposes whatsoever, and
none of the Master Servicer, the Trust, the Trustee nor any agent of any of them
shall be affected by notice to the contrary.
SECTION 5.05. Appointment of Paying Agent.
---------------------------
(a) The Paying Agent (the "Paying Agent") shall make distributions to
Certificateholders from the Distribution Account pursuant to Section 4.01 and
shall report the amounts of such distributions to the Trustee. The duties of
the Paying Agent may include the obligation (i) to withdraw funds from the
Distribution Account pursuant to Section 4.01 and for the purpose of making the
distributions referred to above and (ii) to distribute statements and provide
information to Certificateholders as required hereunder. The Paying Agent
hereunder shall at all times be a corporation duly incorporated and validly
existing under the laws of the United States of America or any state thereof,
authorized under such laws to exercise corporate trust powers and subject to
supervision or examination by federal or state authorities. The Paying Agent
shall initially be the Trustee. The
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Trustee may appoint a successor to act as Paying Agent, which appointment shall
be reasonably satisfactory to the Depositor and the Certificate Insurer.
(b) The Trustee shall cause the Paying Agent (if other than the Trustee) to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee that such Paying Agent shall hold all sums, if any,
held by it for payment to the Certificateholders in trust for the benefit of the
Certificateholders entitled thereto until such sums shall be paid to such
Certificateholders and shall agree that it shall comply with all requirements of
the Code regarding the withholding of payments in respect of Federal income
taxes due from Certificate Owners and otherwise comply with the provisions of
this Agreement applicable to it.
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ARTICLE VI
THE SELLER, THE MASTER SERVICER AND THE DEPOSITOR
SECTION 6.01. Liability of the Seller, the Master Servicer and the
----------------------------------------------------
Depositor.
---------
The Seller and the Master Servicer shall be liable in accordance herewith
only to the extent of the obligations specifically imposed upon and undertaken
by the Seller or Master Servicer, as the case may be, herein. The Depositor
shall be liable in accordance herewith only to the extent of the obligations
specifically imposed upon and undertaken by the Depositor.
SECTION 6.02. Merger or Consolidation of, or Assumption of the Obligations
------------------------------------------------------------
of, the Seller, the Master Servicer or the Depositor.
----------------------------------------------------
Any corporation into which the Seller, the Master Servicer or Depositor may
be merged or consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Seller, the Master Servicer or the
Depositor shall be a party, or any corporation succeeding to the business of the
Seller, the Master Servicer or the Depositor, shall be the successor of the
Seller, the Master Servicer or the Depositor, as the case may be, 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 Master Servicer shall satisfy all the
- -------- -------
requirements of Section 7.02 with respect to the qualifications of a successor
Master Servicer.
SECTION 6.03. Limitation on Liability of the Master Servicer and Others.
---------------------------------------------------------
Neither the Master Servicer nor any of the directors or officers or
employees or agents of the Master Servicer shall be under any liability to the
Trust or the Certificateholders for any action taken or for refraining from the
taking of any action by the Master Servicer in good faith pursuant to this
Agreement, or for errors in judgment; provided, however, that this provision
-------- -------
shall not protect the Master Servicer or any such Person against any liability
which would otherwise be imposed by reason of its willful misfeasance, bad faith
or negligence in the performance of duties of the Master Servicer or by reason
of its reckless disregard of its obligations and duties of the Master Servicer
hereunder; provided, further, that this provision shall not be construed to
-------- -------
entitle the Master Servicer to indemnity in the event that amounts advanced by
the Master Servicer to retire any senior lien exceed Liquidation Proceeds
realized with respect to the related Mortgage Loan. The preceding sentence
shall not limit the obligations of the Master Servicer pursuant to Section 8.05.
The Master Servicer and any director or officer or employee or agent of the
Master Servicer may rely in good faith on any document of any kind prima facie
----- -----
properly executed and submitted by any Person respecting any matters arising
hereunder. The Master Servicer and any director or officer or employee or agent
of the Master Servicer shall be indemnified by the Trust and held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to this Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except as any such loss, liability or expense shall be otherwise reimbursable
pursuant to this Agreement) and any loss, liability or expense incurred by
reason of its willful misfeasance, bad faith or negligence in the performance of
duties hereunder or by reason of its reckless disregard of obligations and
duties
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hereunder. The Master Servicer may with the consent of the Certificate Insurer
undertake any such action which it may deem necessary or desirable in respect
of this Agreement, and the rights and duties of the parties hereto and the
interests of the Certificateholders hereunder. In such event, the reasonable
legal expenses and costs of such action and any liability resulting therefrom
shall be expenses, costs and liabilities of the Trust and the Master Servicer
shall be entitled to be reimbursed therefor only pursuant to Section 3.11(vii).
The Master Servicer's right to indemnity or reimbursement pursuant to this
Section shall survive any resignation or termination of the Master Servicer
pursuant to Section 6.04 or 7.01 with respect to any losses, expenses, costs or
liabilities arising prior to such resignation or termination (or arising from
events that occurred prior to such resignation or termination). This paragraph
shall apply to the Master Servicer solely in its capacity as Master Servicer
hereunder and in no other capacities.
SECTION 6.04. Master Servicer Not to Resign.
-----------------------------
Subject to the provisions of Section 6.02, the Master Servicer shall not
resign from the obli gations and duties hereby imposed on it except (i) upon
determination that the performance of its obligations or duties hereunder are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by it or its subsidiaries or
Affiliates, the other activities of the Master Servicer so causing such a
conflict being of a type and nature carried on by the Master Servicer or its
subsidiaries or Affiliates at the date of this Agreement or (ii) upon
satisfaction of the following conditions: (a) the Master Servicer has proposed a
successor servicer to the Trustee in writing and such proposed successor
servicer is reasonably acceptable to the Trustee; (b) each Rating Agency shall
have delivered a letter to the Trustee prior to the appointment of the successor
servicer stating that the proposed appointment of such successor servicer as
Master Servicer hereunder will not result in the reduction or with drawal of the
then current rating of the Class A Certificates without regard to the Policy;
and (c) such proposed successor servicer is reasonably acceptable to the
Certificate Insurer, as evidenced by a letter to the Trustee; provided, however,
-------- -------
that no such resignation by the Master Servicer shall become effective until
such successor servicer or, in the case of (i) above, the Trustee shall have
assumed the Master Servicer's responsibilities and obligations hereunder or the
Trustee shall have designated a successor servicer in accordance with Section
7.02. Any such resignation shall not relieve the Master Servicer of
responsibility for any of the obligations specified in Sections 7.01 and 7.02 as
obligations that survive the resignation or termination of the Master Servicer.
Any such determination permitting the resignation of the Master Servicer shall
be evidenced by an Opinion of Counsel to such effect delivered to the Trustee
and the Certificate Insurer.
SECTION 6.05. Delegation of Duties.
--------------------
In the ordinary course of business, the Master Servicer at any time may
delegate any of its duties hereunder to any Person, including any of its
Affiliates, who agrees to conduct such duties in accordance with standards
comparable to those set forth in Section 3.01. Such delegation shall not
relieve the Master Servicer of its liabilities and responsibilities with respect
to such duties and shall not constitute a resignation within the meaning of
Section 6.04. The Master Servicer shall provide the Certificate Insurer and the
Trustee with written notice prior to the delegation of any of its duties
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to any Person other than any of the Master Servicer's Affiliates or their
respective successors and assigns.
SECTION 6.06. Indemnification of the Trust by the Master Servicer.
---------------------------------------------------
The Master Servicer shall indemnify and hold harmless the Trust, the
Depositor, the Certificate Insurer and the Trustee and its officers, directors,
agents and employees from and against any loss, liability, expense, damage or
injury suffered or sustained by reason of the Master Servicer's willful
misfeasance, bad faith or negligence in the performance of its activities in
servicing or administering the Mortgage Loans pursuant to this Agreement,
including, but not limited to, any judgment, award, settlement, reasonable fees
of, counsel of its selection and other costs or expenses incurred in connection
with the defense of any actual or threatened action, pro ceeding or claim
related to the Master Servicer's misfeasance, bad faith or negligence. Any such
indemnification shall not be payable from the assets of the Trust. The
provisions of this indemnity shall run directly to and be enforceable by an
injured party subject to the limitations hereof. The provisions of this Section
6.06 shall survive termination of the Agreement or the earlier of the
resignation or removal of the Trustee.
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ARTICLE VII
MASTER SERVICER EVENTS OF DEFAULT
SECTION 7.01. Master Servicer Events of Default.
---------------------------------
(a) If any one of the following events ("Master Servicer Events of
Default") shall occur and be continuing:
(i)(A) The failure by the Master Servicer to make any Monthly
Advance; or (B) any other failure by the Master Servicer to deposit in the
Collection Account or Distribution Account any deposit required to be made
under the terms of this Agreement which continues unremedied for a period
of one Business Day after the date upon which written notice of such
failure shall have been given to the Master Servicer and any Sub-Servicer
by the Trustee or to the Master Servicer and the Trustee by the Certificate
Insurer or by any holder of a Regular Certificate evidencing an aggregate
undivided interest in the Trust of a Percentage Interest of at least 25%;
or
(ii) The failure by the Master Servicer to make any required
Servicing Advance which failure continues unremedied for a period of 30
days, or the failure by the Master Servicer duly to observe or perform, in
any material respect, any other covenants, obligations or agreements of the
Master Servicer as set forth in this Agreement, which failure continues
unremedied for a period of 30 days, after the date on which written notice
of such failure, requiring the same to be remedied, shall have been given
to the Master Servicer and any Sub-Servicer by the Trustee or to the Master
Servicer and the Trustee by the Certificate Insurer or by any holder of a
Regular Certificate evidencing an aggregate undivided interest in the Trust
of a Percentage Interest of at least 25%; or
(iii) The entry against the Master Servicer of a decree or order by
a court or agency or supervisory authority having jurisdiction in the
premises for the appointment of a trustee, conservator, receiver or
liquidator in any insolvency, conservatorship, receivership, readjustment
of debt, marshalling of assets and liabilities or similar proceed ings, or
for the winding up or liquidation of its affairs, and the continuance of
any such decree or order unstayed and in effect for a period of 60
consecutive days;
(iv) The Master Servicer shall voluntarily go into liquidation,
consent to the appointment of a conservator or receiver or liquidator or
similar person in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings of or relating to the Master
Servicer or of or relating to all or substantially all of its property, or
a decree or order of a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a conservator,
receiver, liquidator or similar person in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Master Servicer and such decree or order shall have remained in
force undischarged, unbonded or unstayed for a period of 60 days; or the
Master Servicer shall admit in writing its inability to pay its
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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;
(v) So long as the Seller is an Affiliate of the Master Servicer,
any failure of the Seller, to repurchase, or substitute an Eligible
Substitute Mortgage Loan for, any Mortgage Loan as required by Sections
2.02, 2.04 and 2.06; or
(vi) The occurrence of an event of default under the Insurance
Agreement.
(b) Then, and in each and every such case, so long as a Master Servicer
Event of Default shall not have been remedied within the applicable grace
period, (x) with respect solely to clause (i)(A) above, if such Monthly Advance
is not made by 4:00 P.M., New York time, on the second Business Day following
written notice to the Master Servicer of such event the Trustee shall terminate
all of the rights and obligations of the Master Servicer under this Agreement
and the Trustee, or a successor servicer appointed in accordance with Section
7.02, shall immediately make such Monthly Advance and assume, pursuant to
Section 7.02, the duties of a successor Master Servicer and (y) in the case of
(i)(B), (ii), (iii), (iv), (v) and (vi) above, the Trustee shall, at the
direction of the Certificate Insurer or the Holders of each Class of Class A
Certificates evidencing Percentage Interests aggregating not less than 51% with
the consent of the Certificate Insurer, by notice then given in writing to the
Master Servicer (and to the Trustee if given by Holders of Certificates),
terminate all of the rights and obligations of the Master Servicer as servicer
under this Agreement. Any such notice to the Master Servicer shall also be
given to each Rating Agency, the Seller, the Depositor and the Certificate
Insurer. On or after the receipt by the Master Servicer of such written notice,
all authority and power of the Master Servicer under this Agreement, whether
with respect to the Certificates or the Mortgage Loans or otherwise, shall pass
to and be vested in the Trustee pursuant to and under this Section; and, without
limitation, the Trustee is hereby authorized and empowered to execute and
deliver, on behalf of the Master Servicer, as attorney-in-fact or otherwise, any
and all documents and other instruments, and to 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 of each Mortgage
Loan and related documents or otherwise. The Master Servicer agrees to
cooperate with the Trustee in effecting the termination of the responsibilities
and rights of the Master Servicer hereunder, in cluding, without limitation, the
transfer to the Trustee for the administration by it of all cash amounts that
shall at the time be held by the Master Servicer and to be deposited by it in
the Collection Account, the Distribution Account, the Policy Payments Account,
any REO Account of any Servicing Account, or that have been deposited by the
Master Servicer in such accounts or thereafter received by the Master Servicer
with respect to the Mortgage Loans. All reasonable costs and expenses
(including attorneys' fees) incurred in connection with transferring the
Mortgage Files to the successor Master Servicer and amending this Agreement to
reflect such succession as Master Servicer pursuant to this Section shall be
paid by the predecessor Master Servicer (or if the predecessor Master Servicer
is the Trustee, the initial Master Servicer) upon presentation of reasonable
documentation of such costs and expenses.
The Master Servicer hereby covenants and agrees to act as the Master
Servicer under this Agreement for an initial term, commencing on the Closing
Date and ending on March 30, 1998, which
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term shall be extendable by the Certificate Insurer for successive terms of
three calendar months thereafter, until the termination of the Master
Servicer's obligations and responsibilities pursuant to Article X. Each such
notice of extension (a "Servicer Extension Notice") shall be delivered by the
Certificate Insurer to the Trust, the Trustee, the Master Servicer and any
Sub-Servicer. The Master Servicer hereby agrees that, upon its receipt of any
such Servicer Extension notice, the Master Servicer shall become bound for the
duration of the term covered by such Servicer Extension Notice to continue as
the Master Servicer subject to and in accordance with the other provisions of
this Agreement. The Trustee agrees that if as of the fifteenth (15th) day
prior to the last day of any term of the Master Servicer the Trustee shall not
have received any Servicer Extension Notice from the Certificate Insurer, the
Trustee will within five (5) days thereafter, give written notice of such
non-receipt to the Trust, the Certificate Insurer, the Master Servicer and any
Sub-Servicer. The failure of the Certificate Insurer to deliver a Servicer
Extension Notice by the end of a calendar term shall result in the termination
of the Master Servicer. The foregoing provision of this paragraph shall not
apply to the Trustee in the event the Trustee succeeds to the rights and
obligations of the Master Servicer and the Trustee shall continue in such
capacity until the earlier of the termination of this Agreement pursuant to
Article X or the appointment of a successor master servicer.
SECTION 7.02. Trustee to Act; Appointment of Successor.
----------------------------------------
(a) On and after the time the Master Servicer receives a notice of
termination pursuant to Section 7.01 or 6.04, the Trustee shall be the
successor in all respects to the Master Servicer in its capacity as servicer
under this Agreement and the transactions set forth or provided for herein and
shall be subject to all the responsibilities, duties and liabilities relating
thereto placed on the Master Servicer by the terms and provisions hereof
arising on and after its succession. As compensation therefor, the Trustee
shall be entitled to such compensation as the Master Servicer would have been
entitled to hereunder if no such notice of termination had been given. Not
withstanding the above, (i) if the Trustee is unwilling to act as successor
Servicer or (ii) if the Trustee is legally unable so to act, the Trustee shall
appoint or petition a court of competent jurisdiction to appoint, any
established housing and home finance institution, bank or other mortgage loan
or home equity loan servicer having a net worth of not less than $50,000,000 as
the successor to the Master Servicer hereunder in the assumption of all or any
part of the responsibilities, duties or liabilities of the Master Servicer
hereunder; provided that any such successor Master Servicer shall be
--------
acceptable to the Certificate Insurer, as evidenced by the
Certificate Insurer's prior written consent, which consent shall not be
unreasonably withheld and provided, further, that the appointment
-------- -------
of any such successor Master Servicer will not result in the qualification,
reduction or withdrawal of the ratings assigned to the Certificates by the
Rating Agencies as evidenced by a letter to such effect from the Rating
Agencies. Pending appointment of a successor to the Master Servicer hereunder,
unless the Trustee is prohibited by law from so acting, the Trustee shall act
in such capacity as hereinabove provided. In connection with such appointment
and assumption, the successor shall be entitled to receive compensation out of
payments on Mortgage Loans in an amount equal to the compensation which the
Master Servicer would otherwise have received pur suant to Section 3.17 (or
such lesser compensation as the Trustee and such successor shall agree). The
appointment of a successor Master Servicer shall not affect any liability of
the predecessor Master Servicer which may have arisen under this Agreement
prior to its termination as Master Servicer to pay any deductible under an
insurance policy pursuant to Section 3.13 or to indemnify the Trustee pursuant
to Section 6.06), nor shall any successor Master Servicer
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be liable for any acts or omissions of the predecessor Master Servicer or for
any breach by such Master Servicer of any of its representations or warranties
contained herein or in any related document or agreement. The Trustee and such
successor shall take such action, consistent with this Agreement, as shall be
necessary to effectuate any such succession.
(b) [Reserved]
(c) Any successor, including the Trustee, to the Master Servicer as
servicer shall during the term of its service as servicer (1) continue to
service and administer the Mortgage Loans for the benefit of Certificateholders,
(ii) maintain in force a policy or policies of insurance covering errors and
omissions in the performance of its obligations as Servicer hereunder and a
fidelity bond in respect of its officers, employees and agents to the same
extent as the Master Servicer is so required pursuant to Section 3.22.
SECTION 7.03. Waiver of Defaults.
------------------
The Certificate Insurer or the Majority Certificateholders with the consent
of the Certificate Insurer may, on behalf of all Certificateholders, waive any
events permitting removal of the Master Servicer as servicer pursuant to this
Article VII, provided, however, that the Majority Certificate holders may not
-------- -------
waive a default in making a required distribution on a Certificate without the
consent of the Holder of such Certificate. Upon any waiver of a past default,
such default shall cease to exist and any Master Servicer 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 thereto except to the extent expressly so waived.
Notice of any such waiver shall be given by the Trustee to the Rating Agencies.
SECTION 7.04. Notification to Certificateholders.
----------------------------------
(a) Upon any termination or appointment of a successor to the Master
Servicer pursuant to this Article VII or Section 6.04, the Trustee shall give
prompt written notice thereof to the Certificateholders at their respective
addresses appearing in the Certificate Register, the Certificate Insurer and
each Rating Agency.
(b) Not later than 60 days after the occurrence of any event which
constitutes or which, with the notice or a lapse of time or both, would
constitute a Master Servicer Event of Default for five Business Days after a
Responsible Officer of the Trustee receives actual knowledge of the occurrence
of such an event, the Trustee shall transmit by mail to all Certificateholders
notice of such occurrence unless such Master Servicer Event of Default shall
have been waived or cured.
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ARTICLE VIII
THE TRUSTEE
SECTION 8.01. Duties of Trustee.
-----------------
The Trustee, prior to the occurrence of a Master Servicer Event of Default
and after the curing of all Master Servicer Events of Default which may have
occurred, undertakes to perform such duties and only such duties as are
specifically set forth in this Agreement. If a Master Servicer Event of Default
has occurred (which has not been cured) of which a Responsible Officer has
knowledge, the Trustee shall exercise such of the rights and powers vested in it
by this Agreement, and use the same degree of care and skill in their exercise,
as a prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
The Trustee, upon receipt of all resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments furnished to the
Trustee which are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether they
conform to the requirements of this Agreement.
No provision of this Agreement shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act or
its own misconduct; provided, however, that:
-------- -------
(i) prior to the occurrence of a Master Servicer Event of Default,
and after the curing of all such Master Servicer Events of Default which
may have occurred, the duties and obligations of the Trustee shall be
determined solely by the express provisions of this Agreement, the Trustee
shall not be liable except for the performance of such duties and
obligations as are specifically set forth in this Agreement, no implied
covenants or obliga tions shall be read into this Agreement against the
Trustee and, in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Agreement;
(ii) the Trustee shall not be personally liable for an error of
judgment made in good faith by a Responsible Officer of the Trustee, unless
it shall be proved that the Trustee was negligent in ascertaining or
investigating the facts related thereto;
(iii) the Trustee shall not be personally liable with respect to
any action taken, suffered or omitted to be taken by it in good faith in
accordance with the consent or direction of the Certificate Insurer or in
accordance with the direction of the Holders of Class A Certificates
evidencing Percentage Interests aggregating not less than 51% relating to
the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising or omitting to exercise any trust
or power conferred upon the Trustee, under this Agreement; and
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(iv) the Trustee shall not be charged with knowledge of any failure
by the Master Servicer to comply with the obligations of the Master
Servicer referred to in clauses (i) and (ii) of Section 7.01 unless a
Responsible Officer of the Trustee at the Corporate Trust Office obtains
actual knowledge of such failure or the Trustee receives written notice of
such failure from the Master Servicer, the Certificate Insurer or the
Holders of Class A Certificates evidencing Percentage Interests aggregating
not less than 51%.
The Trustee shall not be required to expend or risk its own funds or
otherwise incur financial liability in the performance of any of its duties
hereunder, or in the exercise of any of its rights or powers, if there is
reasonable ground for believing that the repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it, and
none of the provisions contained in this Agreement shall in any event require
the Trustee to perform, or be responsible for the manner of performance of, any
of the obligations of the Master Servicer under this Agreement, except during
such time, if any, as the Trustee shall be the successor to, and be vested with
the rights, duties, powers and privileges of, the Master Servicer in accordance
with the terms of this Agreement.
SECTION 8.02. Certain Matters Affecting the Trustee.
-------------------------------------
(a) Except as otherwise provided in Section 8.01:
(i) the Trustee may request and rely upon, and shall be protected in
acting or refraining from acting upon, any resolution, Officer's
Certificate, certificate of auditors or any other certificate, statement,
instrument, opinion, report, notice, request, consent, order, appraisal,
bond or other paper or document reasonably believed by it to be genuine and
to have been signed or presented by the proper party or parties;
(ii) the Trustee may consult with counsel and any Opinion of Counsel
shall be full and complete authorization and protection in respect of any
action taken or suffered or omitted by it hereunder in good faith and in
accordance with such Opinion of Counsel;
(iii) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Agreement, or to institute,
conduct or defend any litigation here under or in relation hereto, at the
request, order or direction of any of the Certificate holders, pursuant to
the provisions of this Agreement, unless such Certificateholders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby; the
right of the Trustee to perform any discretionary act enumerated in this
Agreement shall not be construed as a duty, and the Trustee shall not be
answerable for other than its negligence or willful misconduct in the
performance of any such act; nothing contained herein shall, however,
relieve the Trustee of the obligations, upon the occurrence of a Master
Servicer Event of Default (which has not been cured) of which a Responsible
Officer has knowledge, to exercise such of the rights and powers vested in
it by this Agreement, and to use the same degree of care and skill in their
exercise as a prudent man would exercise or use under the circumstances in
the conduct of his own affairs;
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(iv) the Trustee shall not be personally liable for any action
taken, suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon it
by this Agreement;
(v) prior to the occurrence of a Master Servicer Event of Default
and after the curing of all Master Servicer Events of Default which may
have occurred, the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval,
bond or other paper or documents, unless requested in writing to do so by
the Certificate Insurer or Holders of Certificates evidencing Percentage
Interests aggregating not less than 51%; provided, however, that if the
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payment within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation
is, in the opinion of the Trustee, not reasonably assured to the Trustee by
the security afforded to it by the terms of this Agreement, the Trustee may
require reasonable indemnity against such cost, expense or liability as a
condition to such proceeding. The reasonable expense of every such
examination shall be paid by the Master Servicer or, if paid by the
Trustee, shall be reimbursed by the Master Servicer upon demand. Nothing
in this clause (v) shall derogate from the obligation of the Master
Servicer to observe any applicable law prohibiting disclosure of
information regarding the Mortgagors;
(vi) the Trustee shall not be accountable, shall have no liability
and makes no representation as to any acts or omissions hereunder of the
Master Servicer until such time as the Trustee may be required to act as
Master Servicer pursuant to Section 7.02;
(vii) the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents or
attorneys or a custodian; and
(viii) The right of the Trustee to perform any discretionary act
enumerated in this Agreement shall not be construed as a duty, and the
Trustee shall not be answerable for other than its negligence or willful
misconduct in the performance of such act.
SECTION 8.03. Trustee Not Liable for Certificates or Mortgage Loans.
-----------------------------------------------------
The recitals contained herein and in the Certificates (other than the
authentication of the Trustee on the Certificates) shall be taken as the
statements of the Seller, and the Trustee assumes no responsibility for the
correctness of the same. The Trustee makes no representations as to the
validity or sufficiency of this Agreement or of the Certificates (other than the
signature and authentication of the Trustee on the Certificates) or of any
Mortgage Loan or related document. The Trustee shall not be accountable for the
use or application by the Master Servicer, or for the use or application of any
funds paid to the Master Servicer in respect of the Mortgage Loans or deposited
in or withdrawn from the Collection Account by the Master Servicer. The Trustee
shall at no time have any responsibility or liability for or with respect to the
legality, validity and enforceability of any Mortgage or any Mortgage Loan, or
the perfection and priority of any Mortgage or the maintenance of any such
perfection and priority, or for or with respect to the sufficiency of the Trust
or its ability to generate the payments to be distributed to Certificateholders
under this Agreement, including, without
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limitation: the existence, condition and ownership of any Mortgaged Property;
the existence and enforceability of any hazard insurance thereon (other than if
the Trustee shall assume the duties of the Master Servicer pursuant to Section
7.02); the validity of the assignment of any Mortgage Loan to the Trustee or of
any intervening assignment; the completeness of any Mortgage Loan; the
performance or enforcement of any Mortgage Loan (other than if the Trustee
shall assume the duties of the Master Servicer pursuant to Section 7.02); the
compliance by the Depositor, the Seller or the Master Servicer with any
warranty or representation made under this Agreement or in any related document
or the accuracy of any such warranty or representation prior to the Trustee's
receipt of notice or other discovery of any non-compliance therewith or any
breach thereof; any investment of monies by or at the direction of the Master
Servicer or any loss resulting therefrom, it being understood that the Trustee
shall remain responsible for any Trust property that it may hold in its
individual capacity; the acts or omissions of any of the Master Servicer (other
than if the Trustee shall assume the duties of the Master Servicer pursuant to
Section 7.02), any Sub-Servicer or any Mortgagor; any action of the Master
Servicer (other than if the Trustee shall assume the duties of the Master
Servicer pursuant to Section 7.02), or any Sub- Servicer taken in the name of
the Trustee; the failure of the Master Servicer or any Sub-Servicer to act or
perform any duties required of it as agent of the Trustee hereunder; or any
action by the Trustee taken at the instruction of the Master Servicer (other
than if the Trustee shall assume the duties of the Master Servicer pursuant to
Section 7.02); provided, however, that the foregoing shall
-------- -------
not relieve the Trustee of its obligation to perform its duties under this
Agreement, including, without limitation, the Trustee's duty to review the
Mortgage Files pursuant to Section 2.01(d). The Trustee shall have no
responsibility for filing any financing or continuation statement in any public
office at any time or to otherwise perfect or maintain the perfection of any
security interest or lien granted to it hereunder (unless the Trustee shall
have become the successor Master Servicer).
SECTION 8.04. Trustee May Own Certificates.
----------------------------
The Trustee in its individual or any other capacity may become the owner or
pledgee of Certificates with the same rights as it would have if it were not
Trustee and may transact any banking and trust business with the Seller, the
Master Servicer or the Depositor.
SECTION 8.05. Master Servicer to Pay Trustee's Fees and Expenses.
--------------------------------------------------
The Master Servicer covenants and agrees to pay to the Trustee from time to
time out of the Servicing Fee or out of other funds, and the Trustee shall be
entitled to, reasonable compen sation (which shall not be limited by any
provision of law in regard to the compensation of a trustee of an express trust)
for all services rendered by it in the execution of the trusts hereby created
and in the exercise and performance of any of the powers and duties hereunder of
the Trustee, and the Master Servicer will pay or reimburse, except as provided
in Section 11.01(g), the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any of the provisions of this Agreement (including the reasonable compensation
and the expenses and disbursements of its counsel and of all persons not
regularly in its employ) except any such expense, disbursement or advance as may
arise from its negligence or bad faith or which is the responsibility of
Certificateholders hereunder. In addition, except as provided in Section
11.01(g), the Master Servicer covenants and agrees to indemnify the Trustee and
its officers, directors, employees and agents from, and hold it harmless
against, any and all losses, liabilities, damages,
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claims or expenses (i) incurred in connection with any legal action relating to
this Agreement or the Certificates, other than any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence of the
Trustee in the performance of its duties hereunder or by reason of the
Trustee's reckless disregard of obligations and duties hereunder or (ii)
resulting from any error in any tax or information return prepared by the
Master Servicer. This section shall survive termination of this Agreement or
the resignation or removal of any Trustee hereunder.
SECTION 8.06. Eligibility Requirements for Trustee.
------------------------------------
The Trustee hereunder shall at all times be a corporation duly incorporated
and validly existing under the laws of the United States of America or any state
thereof, authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000 and a minimum long-term
debt rating of Baa3 by Moody's and a short-term rating of at least A-1 by S&P,
and subject to supervision or examination by federal or state authority. If
such corporation publishes reports of condition at least annually, pursuant to
law or to the requirements of the aforesaid supervising or examining authority,
then for the purposes of this Section 8.06, the combined capital and surplus of
such corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. The principal office
of the Trustee (other than the initial Trustee) shall be in a state with respect
to which an Opinion of Counsel has been delivered to such Trustee at the time
such Trustee is appointed Trustee to the effect that the Trust will not be a
taxable entity under the laws of such state. In case at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section
8.06, the Trustee shall resign immediately in the manner and with the effect
specified in Section 8.07.
SECTION 8.07. Resignation or Removal of Trustee.
---------------------------------
The Trustee may at any time resign and be discharged from the trusts hereby
created by giving written notice thereof to the Depositor, the Master Servicer,
the Certificate Insurer and each Rating Agency. Upon receiving such notice of
resignation, the Depositor shall promptly appoint a successor Trustee (approved
in writing by the Certificate Insurer) by written instrument, in duplicate, one
copy of which instrument shall be delivered to the resigning Trustee and one
copy to the successor Trustee. If no successor Trustee shall have been so
appointed and having accepted appointment within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
If at any time the Trustee shall cease to be eligible in accordance with
the provisions of Section 8.06 and shall fail to resign after written request
therefor by the Depositor or the Certificate Insurer, or if at any time the
Trustee shall be legally unable to act, or shall be adjudged a bankrupt or
insolvent, or a receiver of the Trustee or of its property shall be appointed,
or any public officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation, conservation or
liquidation, then the Depositor, the Master Servicer or the Certificate
Insurer may remove the Trustee. If the Depositor, the Master Servicer or the
Certificate Insurer removes the Trustee under the authority of the immediately
preceding sentence, the Depositor shall promptly appoint a successor Trustee
(approved in writing by the Certificate Insurer) by written instrument, in
duplicate, one copy of which instrument shall be delivered to the Trustee so
removed and one copy to the successor trustee.
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In the event a Certificate Insurer Default has occurred and is continuing,
the Holders of Certificates evidencing Percentage Interests aggregating over 50%
of all Class A Certificates may remove the Trustee by written instrument or
instruments delivered to the Master Servicer, the Depositor and the Trustee; the
Depositor shall thereupon use its best efforts to appoint a successor trustee in
accordance with this Section.
Any resignation or removal of the Trustee and appointment of a successor
Trustee pursuant to any of the provisions of this Section 8.07 shall not become
effective until acceptance of appointment by the successor Trustee as provided
in Section 8.08.
SECTION 8.08. Successor Trustee.
-----------------
Any successor Trustee appointed as provided in Section 8.07 shall execute,
acknowledge and deliver to the Depositor, the Master Servicer and to its
predecessor Trustee and the Certificate Insurer an instrument accepting such
appointment hereunder, and thereupon the resignation or removal of the
predecessor Trustee shall become effective and such successor Trustee, without
any further act, deed or conveyance, shall become fully vested with all the
rights, powers, duties and obligations of its predecessor hereunder, with like
effect as if originally named as Trustee. The Depositor, the Master Servicer
and the predecessor Trustee shall execute and deliver such instruments and do
such other things as may reasonably be required for fully and certainly vesting
and confirming in the successor Trustee all such rights, powers, duties and
obligations.
No successor Trustee shall accept appointment as provided in this Section
8.08 unless at the time of such acceptance such successor Trustee shall be
eligible under the provisions of Section 8.06 and the appointment of such
successor Trustee shall not result in a downgrading of the Class A Certificates
by either Rating Agency, as evidenced by a letter from each Rating Agency.
Upon acceptance of appointment by a successor Trustee as provided in this
Section 8.08, the Master Servicer shall mail notice of the succession of such
Trustee hereunder to all Holders of Certificates at their addresses as shown in
the Certificate Register and to each Rating Agency. If the Master Servicer
fails to mail such notice within 30 days after acceptance of appointment by the
successor Trustee, the successor Trustee shall cause such notice to be mailed at
the expense of the Master Servicer.
Notwithstanding anything to the contrary contained herein, so long as no
Certificate Insurer Default has occurred and is continuing, the appointment of
any successor Trustee pursuant to any provision of this Agreement will be
subject to the prior written consent of the Certificate Insurer.
SECTION 8.09. Merger or Consolidation of Trustee.
----------------------------------
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to the business of the Trustee, shall be the successor of
the Trustee hereunder, provided such corporation shall be eligible under the
provisions
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of Section 8.06, 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.
SECTION 8.10. Appointment of Co-Trustee or Separate Trustee.
---------------------------------------------
Notwithstanding any other provisions of this Agreement, at any time, for
the purpose of meeting any legal requirements of any jurisdiction in which any
part of the Trust or any Mortgaged Property may at the time be located, the
Depositor and the Trustee acting jointly shall have the power and shall execute
and deliver all instruments to appoint one or more Persons approved by the
Trustee and the Certificate Insurer to act as co-trustee or co-trustees, jointly
with the Trustee, or separate trustee or separate trustees, of all or any part
of the Trust, and to vest in such Person or Persons, in such capacity and for
the benefit of the Certificateholders, such title to the Trust, or any part
thereof, and, subject to the other provisions of this Section 8.10, such
powers, duties, obligations, rights and trusts as the Master Servicer and the
Trustee may consider necessary or desirable. Any such co-trustee or separate
trustee shall be subject to the written approval of the Master Servicer. If the
Master Servicer shall not have joined in such appointment within 15 days after
the receipt by it of a request so to do, or in the case a Master Servicer Event
of Default shall have occurred and be continuing, the Trustee alone shall have
the power to make such appointment. No co-trustee or separate trustee hereunder
shall be required to meet the terms of eligibility as a successor trustee under
Section 8.06 and no notice to Certificateholders of the appointment of any co-
trustee or separate trustee shall be required under Section 8.08. The Master
Servicer shall be responsible for the fees of any co-trustee or separate trustee
appointed hereunder.
Every separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(1) all rights, powers, duties and obligations conferred or
imposed upon the Trustee shall be conferred or imposed upon and exercised
or performed by the Trustee and such separate trustee or co-trustee jointly
(it being understood that such separate trustee or co-trustee is not
authorized to act separately without the Trustee joining in such act),
except to the extent that under any law of any jurisdiction in which any
particular act or acts are to be performed (whether as Trustee hereunder or
as successor to the Master Servicer hereunder), the Trustee shall be
incompetent or unqualified to perform such act or acts, in which event such
rights, powers, duties and obligations (including the holding of title to
the Trust or any portion thereof in any such jurisdiction) shall be
exercised and performed singly by such separate trustee or co-trustee, but
solely at the direction of the Trustee;
(2) no trustee hereunder shall be held personally liable by
reason of any act or omission of any other trustee hereunder; and
(3) the Master Servicer and the Trustee acting jointly may at
any time accept the resignation of or remove any separate trustee or
co-trustee except that following the occurrence of a Master Servicer Event
of Default, the Trustee acting alone may accept the resignation or remove
any separate trustee or co-trustee.
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Any notice, request or other writing given to the Trustee shall be deemed
to have been given to each of the then separate trustees and co-trustees, as
effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article VIII. Each separate trustee and co-trustee, upon its acceptance
of the trusts conferred, shall be vested with the estates or property specified
in its instrument of appointment, either jointly with the Trustee or separately,
as may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee and a copy thereof given to the
Depositor and the Master Servicer and the Certificate Insurer.
Any separate trustee or co-trustee may, at any time, constitute the
Trustee, its agent or attorney-in-fact, with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Trustee, to the extent permitted by law, without the appointment of a new or
successor Trustee.
SECTION 8.11. Limitation of Liability.
-----------------------
The Certificates are executed by the Trustee, not in its individual
capacity but solely as Trustee of the Trust, in the exercise of the powers and
authority conferred and vested in it by the Trust Agreement. Each of the
undertakings and agreements made on the part of the Trustee in the Certificates
is made and intended not as a personal undertaking or agreement by the Trustee
but is made and intended for the purpose of binding only the Trust.
SECTION 8.12. Trustee May Enforce Claims Without Possession of
------------------------------------------------
Certificates.
------------
All rights of action and claims under this Agreement or the Certificates
may be prosecuted and enforced by the Trustee with the prior written consent of
the Certificate Insurer without the possession of any of the Certificates or the
production thereof in any proceeding relating thereto, and such proceeding
instituted by the Trustee shall be brought in its own name or in its capacity as
Trustee. Any recovery of judgment shall, after provision for the payment of the
reasonable compensation, expenses, disbursement and advances of the Trustee, its
agents and counsel, be for the ratable benefit or the Certificateholders in
respect of which such judgment has been recovered.
SECTION 8.13. Suits for Enforcement.
---------------------
In case a Master Servicer Event of Default or other default by the Master
Servicer or the Depositor hereunder shall occur and be continuing, the Trustee
with the prior written consent of the Certificate Insurer, in its discretion,
may proceed to protect and enforce its rights and the rights of the
Certificateholders and the Certificate Insurer under this Agreement by a suit,
action or proceeding in equity or at law or otherwise, whether for the specific
performance of any covenant or agreement contained in this Agreement or in aid
of the execution of any power granted in this Agreement or for the enforcement
of any other legal, equitable or other remedy, as the Trustee, being advised by
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counsel, shall deem most effectual to protect and enforce any of the rights of
the Trustee, the Certificateholders and the Certificate Insurer.
SECTION 8.14. Trustee to File Securities Exchange Act Reports.
-----------------------------------------------
The Trustee shall, on behalf of the Trust Fund, prepare, sign and file with
the Securities and Exchange Commission any and all reports, statements and
information respecting the Trust which the Depositor determines are required to
be filed with the Securities and Exchange Commission pursuant to Sections 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, each such report,
statement and information to be filed on or prior to the required filing date
for such report, statement or information.
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ARTICLE IX
CERTAIN MATTERS REGARDING THE CERTIFICATE INSURER
SECTION 9.01. Rights of the Certificate Insurer To Exercise Rights of
-------------------------------------------------------
Class A Certificateholders.
--------------------------
Each of the Depositor, the Master Servicer and the Trustee, and by
accepting its Certificate, each Class A Certificateholder, agrees that unless a
Certificate Insurer Default has occurred and is continuing, the Certificate
Insurer shall have the right to exercise all rights of the Class A
Certificateholder under this Agreement (except as provided in clause (1) of the
second paragraph of Section 12.01) without any further consent of the Class A
Certificateholders, including, without limitation:
(a) the right to direct foreclosures upon Mortgage Loans upon failure
of the Master Servicer to do so;
(b) the right to require the Seller to repurchase or substitute for,
or to require the Master Servicer to purchase, Mortgage Loans pursuant to
Section 2.03;
(c) the right to give notices of breach or to terminate the rights and
obligations of the Master Servicer as Master Servicer pursuant to Section
7.01;
(d) the right to direct the actions of the Trustee during the
continuance of a Master Servicer Event of Default pursuant to Sections 7.01
and 7.02;
(e) the right to consent to or direct any waivers of Master Servicer
Events of Default pursuant to Section 7.03;
(f) the right to direct the Trustee to investigate certain matters
pursuant to Section 8.02(a)(v); and
(g) the right to remove the Trustee pursuant to Section 8.07 hereof.
So long as no Certificate Insurer Default shall have occurred and be
continuing, the consent of the Certificate Insurer shall be deemed to also
constitute the consent of the requisite percent of Certificateholders required
by this Agreement in respect of such action or matter.
In addition, each Class A Certificateholder agrees that, unless a
Certificate Insurer Default has occurred and is continuing, the rights
specifically set forth above may be exercised by the Class A Certificateholders
only with the prior written consent of the Certificate Insurer.
SECTION 9.02. Trustee To Act Solely with Consent of the Certificate
-----------------------------------------------------
Insurer.
-------
Unless a Certificate Insurer Default has occurred and is continuing, the
Trustee shall not:
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(a) agree to any amendment pursuant to Section 12.01;
(b) undertake any litigation pursuant to Section 8.02(a)(iii);
(c) terminate the Master Servicer pursuant to Section 7.01; or
(d) terminate any Sub-Servicing Agreement pursuant to Section 3.03;
without the prior written consent of the Certificate Insurer which consent shall
not be unreasonably withheld. The Trustee and the Master Servicer shall provide
such information as may be reason ably requested by and shall otherwise
cooperate with all reasonable requests of the Certificate Insurer with respect
to the Mortgage Loans or the Certificates; provided, that, such information is
--------
within the control of or reasonably accessible to such party without undue
expenses.
SECTION 9.03. Trust Fund and Accounts Held for Benefit of the Certificate
-----------------------------------------------------------
Insurer.
-------
The Trustee shall hold the Trust Fund and the Mortgage Files for the
benefit of the Certificateholders and the Certificate Insurer and all references
in this Agreement (including, without limitation, in Sections 2.01 and 2.02) and
in the Certificates to the benefit of Holders of the Certificates shall be
deemed to include the Certificate Insurer. The Trustee shall cooperate in all
reasonable respects with any reasonable request by the Certificate Insurer for
action to preserve or enforce the Certificate Insurer's rights or interests
under this Agreement and the Certificates.
The Master Servicer hereby acknowledges and agrees that it shall service
and administer the Mortgage Loans and any REO Properties, and shall maintain the
Collection Account and any REO Account, for the benefit of the
Certificateholders and for the benefit of the Certificate Insurer, and all
references in this Agreement (including, without limitation, in Sections 3.01
and 3.10) to the benefit of or actions on behalf of the Certificateholders shall
be deemed to include the Certificate Insurer. Unless a Certificate Insurer
Default has occurred and is continuing, the Master Servicer shall not terminate
any Sub-Servicing Agreements without cause without the prior consent of the
Certificate Insurer. Unless a Certificate Insurer Default has occurred and is
continuing, neither the Master Servicer nor the Depositor shall undertake any
litigation pursuant to Section 6.03 (other than litigation to enforce their
respective rights hereunder) without the prior consent of the Certificate
Insurer.
SECTION 9.04. Claims Upon the Policy; Policy Payments Account.
-----------------------------------------------
(a) If, by the close of business on the third Business Day prior to a
Distribution Date, the Trustee determines that a Deficiency Amount for any
Distribution Date is greater than zero, then the Trustee shall give notice to
the Certificate Insurer by telephone or telecopy of the amount of such
Deficiency Amount. Such notice of such Deficiency Amount shall be confirmed in
writing in the form set forth as Exhibit A to the Endorsement of the Policy, to
the Certificate Insurer and the Fiscal Agent (as defined in the Policy), if any,
at or before 10:00 a.m., New York time, on the second Business Day prior to such
Distribution Date. Following receipt by the Certificate Insurer of such notice
in such form, the Certificate Insurer or the Fiscal Agent will pay any amount
payable under the Policy on the later to occur of (i) 12:00 noon, New York time,
on the second Business Day following such receipt
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and (ii) 12:00 noon, New York time, on the Distribution Date to which such
deficiency relates, as provided in the Endorsement to the Policy.
(b) The Trustee shall establish a separate special purpose trust account
for the benefit of Holders of the Class A Certificates and the Certificate
Insurer referred to herein as the "Policy Payments Account" over which the
Trustee shall have exclusive control and sole right of withdrawal. The Trustee
shall deposit any amount paid under the Policy in the Policy Payments Account
and distribute such amount only for purposes of payment to Holders of Class A
Certificates of the Guaranteed Distribution for which a claim was made and such
amount may not be applied to satisfy any costs, expenses or liabilities of the
Master Servicer, the Trustee or the Trust Fund. Amounts paid under the Policy
shall be transferred to the Distribution Account in accordance with the next
succeeding paragraph and disbursed by the Trustee to Holders of Class A
Certificates in accordance with Section 4.01(b) or Section 10.01, as applicable.
It shall not be necessary for such payments to be made by checks or wire
transfers separate from the checks or wire transfers used to pay the Guaranteed
Distribution with other funds available to make such payment. However, the
amount of any payment of principal of or interest on the Class A Certificates to
be paid from funds transferred from the Policy Payments Account shall be noted
as provided in paragraph (c) below in the Certificate Register and in the
statement to be furnished to Holders of the Class A Certificates and Residual
Certificates pursuant to Section 4.02. Funds held in the Policy Payments
Account shall not be invested.
On any Distribution Date with respect to which a claim has been made under
the Policy, the amount of any funds received by the Trustee as a result of any
claim under the Policy, to the extent required to make the Guaranteed
Distribution on such Distribution Date, shall be withdrawn from the Policy
Payments Account and deposited in the Distribution Account and applied by the
Trustee, together with the other funds to be withdrawn from the Distribution
Account pursuant to Section 4.01(b) or Section 10.01, as applicable, directly to
the payment in full of the Guaranteed Distribution due on the Class A
Certificates. Funds received by the Trustee as a result of any claim under the
Policy shall be deposited by the Trustee in the Policy Payments Account and used
solely for payment to the Holders of the Class A Certificates and may not be
applied to satisfy any costs, expenses or liabilities of the Master Servicer,
the Trustee or the Trust Fund. Any funds remaining in the Policy Payments
Account on the first Business Day following a Distribution Date shall be
remitted to the Certificate Insurer, pursuant to the instructions of the
Certificate Insurer, by the end of such Business Day.
(c) The Trustee shall keep a complete and accurate record of the amount of
interest and principal paid in respect of any Class A Certificate from moneys
received under the Policy. The Certificate Insurer shall have the right to
inspect such records at reasonable times during normal business hours upon one
Business Day's prior written notice to the Trustee.
(d) The Trustee shall promptly notify the Certificate Insurer and Fiscal
Agent of any proceeding or the institution of any action, of which a Responsible
Officer of the Trustee has actual knowledge, seeking the avoidance as a
preferential transfer under applicable bankruptcy, insolvency, receivership or
similar law (a "Preference Claim") of any distribution made with respect
to the Class A Certificates. Each Class A Certificateholder, by its purchase of
Class A Certificates, the Master
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Servicer and the Trustee hereby agree that the Certificate Insurer (so long as
no Certificate Insurer Default has occurred and is continuing) may at any time
during the continuation of any proceeding relating to a Preference Claim direct
all matters relating to such Preference Claim, including, without limitation,
(i) the direction of any appeal of any order relating to such Preference Claim
and (ii) the posting of any surety, supersedeas or performance bond pending any
such appeal. In addition and without limitation of the foregoing, the
Certificate Insurer shall be subrogated to the rights of the Master Servicer,
the Trustee and each Class A Certificateholder in the conduct of any such
Preference Claim, including, without limitation, all rights of any party to an
adversary proceeding action with respect to any court order issued in connection
with any such Preference Claim.
SECTION 9.05. Effect of Payments by the Certificate Insurer; Subrogation.
----------------------------------------------------------
Anything herein to the contrary notwithstanding, any payment with respect
to principal of or interest on any of the Class A Certificates which is made
with moneys received pursuant to the terms of the Policy shall not be considered
payment of such Class A Certificates from the Trust Fund and shall not result in
the payment of or the provision for the payment of the principal of or interest
on such Class A Certificates within the meaning of Section 4.01. The Depositor,
the Master Servicer and the Trustee acknowledge, and each Holder by its
acceptance of a Certificate agrees, that without the need for any further action
on the part of the Certificate Insurer, the Depositor, the Master Servicer, the
Trustee or the Certificate Registrar (a) to the extent the Certificate Insurer
makes payments, directly or indirectly, on account of principal of or interest
on any Class A Certificates to the Holders of such Certificates, the Certificate
Insurer will be fully subrogated to the rights of such Holders to receive such
principal and interest from the Trust Fund and (b) the Certificate Insurer shall
be paid such principal and interest but only from the sources and in the manner
provided herein for the payment of such principal and interest.
The Trustee and the Master Servicer shall cooperate in all respects with
any reasonable request by the Certificate Insurer for action to preserve or
enforce the Certificate Insurer's rights or interests under this Agreement
without limiting the rights or affecting the interests of the Holders as
otherwise set forth herein.
SECTION 9.06. Notices to the Certificate Insurer.
----------------------------------
All notices, statements, reports, certificates or opinions required by this
Agreement to be sent to any other party hereto or to any of the
Certificateholders shall also be sent to the Certificate Insurer.
SECTION 9.07. Third-Party Beneficiary.
-----------------------
The Certificate Insurer shall be a third-party beneficiary of this
Agreement, entitled to enforce the provisions hereof as if a party hereto.
SECTION 9.08. Trustee to Hold the Policy.
--------------------------
The Trustee will hold the Policy in trust as agent for the Holders of the
Class A Certificates for the purpose of making claims thereon and distributing
the proceeds thereof. Neither the Policy
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nor the amounts paid on the Policy will constitute part of the Trust Fund or
assets of the REMIC created by this Agreement. Each Holder of Class A
Certificates, by accepting its Class A Certificates, appoints the Trustee as
attorney-in-fact for the purpose of making claims on the Policy.
SECTION 9.09. Termination of the Master Servicer.
----------------------------------
Notwithstanding anything this Agreement to the contrary, the Certificate
Insurer may terminate the Master Servicer at such time as permitted under any
separate agreements between them so long as no Certificate Insurer Default has
occurred and is continuing.
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ARTICLE X
TERMINATION
SECTION 10.01. Termination.
-----------
(a) The respective obligations and responsibilities of the Seller, the
Master Servicer, the Depositor and the Trustee created hereby (other than the
obligation of the Trustee to make certain payments to Certificateholders after
the final Distribution Date and the obligation of the Master Servicer to send
certain notices as hereinafter set forth) shall terminate upon written notice to
the Trustee of the later of (A) payment in full of all amounts owing to the
Certificate Insurer unless the Certificate Insurer shall otherwise consent and
(B) the earliest of (i) the Distribution Date on which the Certificate Principal
Balance of the Class A Certificates has been reduced to zero, (ii) the final
payment or other liquidation of the last Mortgage Loan and REO Property in the
Trust, (iii) the optional purchase by the Master Servicer of the Mortgage Loans
as described below and (iv) the Distribution Date in December 2027.
Notwithstanding the foregoing, in no event shall the trust created hereby
continue beyond the expiration of 21 years from the death of the last survivor
of the descendants of Joseph P. Kennedy, the late ambassador of the United
States to the Court of St. James's, living on the date hereof.
The Master Servicer may, at its option, terminate this Agreement on any
date on which the aggregate Stated Principal Balance of the Mortgage Loans on
such date is less than 5% of the Maximum Collateral Amount, by purchasing, on
the next succeeding Distribution Date, all of the outstanding Mortgage Loans and
REO Properties at a price equal to the sum of the outstanding Stated Principal
Balance of the Mortgage Loans and accrued and unpaid interest thereon at the
weighted average of the Loan Rates through the end of the Due Period preceding
the final Distribution Date together with all amounts due and owing to the
Certificate Insurer (the "Termination Price").
In connection with any such purchase pursuant to the preceding paragraph,
the Master Servicer shall deposit in the Distribution Account all amounts then
on deposit in the Collection Account (less amounts permitted to be withdrawn by
the Master Servicer pursuant to Section 3.03), which deposit shall be deemed to
have occurred immediately preceding such purchase.
Any such purchase shall be accomplished by deposit of the Termination Price
into the Distribution Account on the Determination Date before such Distribution
Date.
(b) Notice of any termination, specifying the Distribution Date (which
shall be a date that would otherwise be a Distribution Date) upon which the
Certificateholders may surrender their Certificates to the Trustee for payment
of the final distribution and cancellation, shall be given promptly by the
Trustee to the Certificate Insurer and by letter to Class A Certificateholders
mailed not earlier than the 15th day and not later than the 25th day of the
month next preceding the month of such final distribution provided that the
Trustee has received any such notice pursuant to Section 10.01(a) specifying (1)
the Distribution Date upon which final distribution of the Class A Certificates
will be made upon presentation and surrender of Class A Certificates at the
office or agency of the Trustee therein designated, (2) the amount of any such
final distribution and (3) that the Record Date other-
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wise applicable to such Distribution Date is not applicable, distributions being
made only upon presentation and surrender of the Class A Certificates at the
office or agency of the Trustee therein specified.
(c) Upon presentation and surrender of the Class A Certificates, the
Trustee shall cause to be distributed to the holders of Class A Certificates on
the Distribution Date for such final distribution, in proportion to the
Percentage Interests of their respective Class A Certificates and to the extent
that funds are available for such purpose, an amount equal to the amount
required to be distributed to holders of Class A Certificates in accordance with
the provisions of Section 4.01 for such Distribution Date. On the final
Distribution Date, the Trustee will withdraw from the Distribution Account and
remit to the Certificate Insurer the lesser of (x) the amount available for
distribution on such final Distribution Date, net of any portion thereof
necessary to pay holders of Class A Certificates pursuant to Section 4.01(a) and
any amounts owing to the Trustee in respect of the Trustee Fee and (y) the
unpaid amounts due and owing to the Certificate Insurer pursuant to Section
4.01(a).
(d) In the event that all of the Class A Certificateholders shall not
surrender their Class A Certificates for final payment and cancellation on or
before such final Distribution Date, the Trustee shall promptly following such
date cause all funds in the Distribution Account not distributed in final
distribution to Class A Certificateholders to be withdrawn therefrom and
credited to the remaining Class A Certificateholders by depositing such funds in
a separate escrow account for the benefit of such Class A Certificateholders and
the Master Servicer (if the Master Servicer has exercised its right to purchase
the Mortgage Loans) or the Trustee (in any other case) shall give a second
written notice to the remaining Class A Certificateholders to surrender their
Class A Certificates for cancellation and receive the final distribution with
respect thereto. If within nine months after the second notice all the
Certificates shall not have been surrendered for cancellation, the Class R
Certificateholder shall be entitled to all unclaimed funds and other assets
which remain subject hereto and the Trustee upon transfer of such funds shall be
discharged of any responsibility for such funds and the Certificateholders shall
look to the Class R Certificateholder for payment.
(e) No such termination shall be permitted without the prior written
consent of the Certificate Insurer if it would result in a draw under the Policy
or amounts would remain unpaid under the Insurance Agreement.
SECTION 10.02. Additional Termination Requirements.
-----------------------------------
(a) In the event that the Master Servicer exercises its purchase option as
provided in Section 10.01, the Trust shall be terminated in accordance with the
following additional requirements, unless the Trustee shall have been furnished
with an Opinion of Counsel to the effect that the failure of the Trust to comply
with the requirements of this Section will not (i) result in the imposition of
taxes on "prohibited transactions" of the Trust as defined in Section 860F of
the Code or (ii) cause the Trust to fail to qualify as a REMIC at any time that
any Class A Certificates are outstanding:
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(i) Within 90 days prior to the final Distribution Date, the Servicer shall
adopt and the Trustee shall sign a plan of complete liquidation of the
REMIC meeting the requirements of a "Qualified Liquidation" under Section
860F of the Code and any regulations thereunder;
(ii) At or after the time of adoption of such a plan of complete
liquidation and at or prior to the final Distribution Date, the Trustee
shall sell all of the assets of the Trust to the Master Servicer for cash;
and
(iii) At the time of the making of the final payment on the
Certificates, the Trustee shall distribute or credit, or cause to be
distributed or credited (A) to each Class of Class A Certificateholders the
related Class A Principal Balance, plus one month's interest thereon at the
Class A Pass-Through Rate, (B) to the Certificate Insurer, all amounts
owing to the Certificate Insurer under this Agreement and the Insurance
Agreement and (C) to the Class R Certificateholders, all cash on hand after
such payment to the Class A Certificateholders and the Certificate Insurer
(other than cash retained to meet claims) and the Trust shall terminate at
such time.
(b) By their acceptance of the Class A Certificates, the Holders thereof
hereby agree to appoint the Trustee as their attorney in fact to: (i) adopt such
a plan of complete liquidation (and the Certificateholders hereby appoint the
Trustee as their attorney in fact to sign such plan) as appropriate or upon the
written request of the Certificate Insurer and (ii) to take such other action in
connection therewith as may be reasonably required to carry out such plan of
complete liquidation all in accordance with the terms hereof.
(c) The Trustee shall, upon retirement of the Class A Certificates, furnish
to the Certificate Insurer a notice of such retirement and, upon retirement of
the Class A Certificates and the expiration of the term of the Policy, surrender
the Policy to the Certificate Insurer.
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ARTICLE XI
REMIC PROVISIONS
SECTION 11.01. REMIC Administration.
--------------------
(a) The Trustee shall elect that the Trust Fund (other than the Initial
Interest Coverage Account, the Funding Account, and the Basis Risk Reserve Fund)
be treated as three separate REMICs for federal and any applicable state and
local income tax purposes. The assets of REMIC 1 will consist of all of the
assets constituting the Trust Estate Fund other than the Basis Risk Reserve Fund
and rights of the Holders of the Class A Certificates and Class X Certificates
to distributions there from REMIC 1 will issue classes of interests which will
be the REMIC 1 Regular Interests (which will be uncertificated and will
represent the "regular interests" in REMIC 1) and the Class R2 Interest, which
will be the sole class of "residual interests" in REMIC 1. The Trustee will
hold the REMIC 1 Regular Interests in trust for the benefit of REMIC 2. The
assets of REMIC 2 will consist of the REMIC 1 Regular Interests. REMIC 2 will
issue classes of interests, which will be the REMIC 2 Regular Interests (which
will be uncertificated and will represent the "regular interests" in REMIC 2)
and the Class R3 Interest, which will be the sole class of "residual interests"
in REMIC 2. The assets of REMIC 3 will consist of the REMIC 2 Regular
Interests. REMIC 3 will issue the Class A and Class X (which except for the
Class A Certificates' rights to Excess Basis Risk Shortfall will represent the
"regular interests" in REMIC 3) and the Class R1 Interest, which will be the
sole class of "residual interests" in REMIC 3. The Class R Certificates will
represent beneficial ownership of the Class R1 Interest, Class R2 Interest and
Class R3 Interest. The Owner of the Class R Certificate representing the Tax
Matters Person Residual Interest is hereby designated at any time the largest
Percentage Interest in the Class R Certificates shall be the "tax matters
person" as defined in the REMIC Provisions (the "Tax Matters Person") with
respect to each of REMIC 1, REMIC 2 and REMIC 3.
The Trustee shall treat the Class A Certificates as a regular interest with
a principal balance equal to the sum of the outstanding Certificate Principal
Balance for the Class A Certificates for such Distribution Date plus the
outstanding amount of REMIC Basis Risk Shortfalls for such Distribution Date.
The Trustee shall treat the Class A Certificateholders' rights to receive
payments of Excess Basis Risk Shortfall as an interest rate cap agreement (the
"Cap Agreement") that the Trustee holds separate and apart from the portion of
the Class A Certificates treated as a REMIC regular interest and shall treat the
Class A Certificateholders as owning the portion of the Class A Certificate
treated as a REMIC regular interest issued by REMIC 3 and the Cap Agreement
through a trust treated as a grantor trust under subpart E of part 1 of
subchapter J of Chapter 1 of subtitle A of the Code. The Trustee shall treat
the Cap Agreement as having a value of $10,000 for purposes of determining the
issue price of the regular interests issued by each REMIC and calculating the
income of Class A Certificateholders under the Cap Agreement. Notwithstanding
any other provision of this Agreement, the Basis Risk Reserve Fund shall be
treated as an outside reserve fund within the meaning of Treasury regulation
section 1.860G-2(h) and not an asset of any REMIC created pursuant to this
Agreement, the owners of the Basis Risk Reserve Fund shall be the owner(s) of
the Class X Certificates, and for all federal tax purposes, amounts transferred
by REMIC 3 to the Basis Risk Reserve Fund shall be treated as distributed by
REMIC 3 to the owner(s) of the Class X Certificates and owners of the Class
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X Certificates shall include as income their pro rata share of the income of
such fund including income from the regular interests ownership of which is
represented by the Class X Certificates.
(b) The Closing Date is hereby designated as the "Startup Day" within the
meaning of Section 860G(a)(9) of the Code of each REMIC created pursuant to this
Trust Agreement.
(c) The Trustee, as agent for the Trust Fund's Tax Matters Person, shall
(i) act on behalf of the Trust Fund (including any REMIC created by this
Agreement) in relation to any tax matter or controversy involving the Trust Fund
(including, but not limited to, any administrative or judicial proceedings with
respect to the Trust Fund that involve the Internal Revenue Service or state tax
authorities) and (ii) represent the Trust Fund in any administrative or judicial
proceeding relating to an examination or audit by any governmental taxing
authority with respect thereto. Expenses incurred by the Trustee in so
representing or acting on behalf of the Trust Fund shall be expenses of the
Trust Fund and the Trustee shall be entitled to be reimbursed therefor from the
Collection Account, any such right of reimbursement being prior to the rights of
the Certificateholders to receive any amount in the Collection Account. The
holder of the largest Percentage Interest of the Residual Certificates shall be
designated, in the manner provided under Treasury regulations section 1.860F-
4(d) and temporary Treasury regulations section 301.6231(a)(7)-1T, as the tax
matters person of the Trust Fund. By their acceptance thereof, the holder of
the largest Percentage Interest of the Residual Certificates hereby agrees to
irrevocably appoint the Trustee or an Affiliate as its agent to perform all of
the duties of the tax matters person for the Trust Fund.
(d) The Trustee shall prepare, sign and file all of the Tax Returns in
respect of each REMIC created hereunder and the grantor trust holding the Cap
Agreement. The expenses of preparing and filing such returns shall be borne by
the Trustee without any right of reimbursement therefor. The Master Servicer
shall provide on a timely basis to the Trustee or its designee such information
with respect to the assets of the Trust Fund as is in its possession and
reasonably required by the Trustee to enable it to perform its obligations under
this Article.
(e) The Trustee shall perform on behalf of the Trust Fund all reporting and
other tax compliance duties that are the responsibility of the REMICs under the
Code, the REMIC Provisions or other compliance guidance issued by the Internal
Revenue Service or any state or local taxing authority. Among its other duties,
as required by the Code, the REMIC Provisions or other such compliance guidance,
the Trustee shall provide (i) to any Transferor of a Residual Certificate such
information as is necessary for the application of any tax relating to the
transfer of a Residual Certificate to any Person who is not a Permitted
Transferee, (ii) to the Certificateholders such information or reports as are
required by the Code or the REMIC Provisions including reports relating to
interest, original issue discount and market discount or premium (using the
Prepayment Assumption as required) and (iii) to the Internal Revenue Service the
name, title, address and telephone number of the person who will serve as the
representative of the Trust Fund. The Master Servicer shall provide on a timely
basis to the Trustee such information with respect to the assets of the Trust
Fund, including, without limitation, the Mortgage Loans, as is in its possession
and reasonably required by the Trustee to enable it to perform its obligations
under this subsection. In addition, the Depositor shall provide or cause to be
provided to the Trustee, within ten (10) days after the Closing Date, all
information or data that the Trustee reasonably determines to be relevant for
tax purposes as to the
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valuations and issue prices of the Certificates, including, without limitation,
the price, yield, prepayment assumption and projected cash flow of the
Certificates.
(f) The Trustee shall take such action and shall cause each of the REMICs
created hereunder to take such action as shall be necessary to create or
maintain the status thereof as a REMIC under the REMIC Provisions and the Master
Servicer shall assist the Trustee, to the extent reasonably requested by the
Trustee. The Trustee shall not take any action, cause the Trust Fund to take
any action or fail to take (or fail to cause to be taken) any action that, under
the REMIC Provisions, if taken or not taken, as the case may be, could (i)
endanger the status of the REMICs or (ii) result in the imposition of a tax upon
the Trust Fund and any REMIC created hereunder (including but not limited to the
tax on prohibited transactions as defined in Section 860F(a)(2) of the Code and
the tax on contributions to a REMIC set forth in Section 860G(d) of the Code)
(either such event, an "Adverse REMIC Event") unless the Trustee has received an
Opinion of Counsel, addressed to the Trustee and the Certificate Insurer (at the
expense of the party seeking to take such action but in no event at the expense
of the Trustee) to the effect that the contemplated action will not, with
respect to the REMICs created hereunder, endanger such status or result in the
imposition of such a tax, nor shall the Master Servicer take or fail to take any
action (whether or not authorized hereunder) as to which the Trustee has advised
it in writing that it has received an Opinion of Counsel to the effect that an
Adverse REMIC Event could occur with respect to such action. In addition, prior
to taking any action with respect to the Trust Fund or the assets of the Trust
Fund, or causing the Trust Fund to take any action, which is not expressly
permitted under the terms of this Agreement, the Master Servicer will consult
with the Trustee or its designee, in writing, with respect to whether such
action could cause an Adverse REMIC Event to occur with respect to the Trust
Fund, and the Master Servicer shall not take any such action or cause the Trust
Fund to take any such action as to which the Trustee has advised it in writing
that an Adverse REMIC Event could occur. The Trustee may consult with counsel
to make such written advice, and the cost of same shall be borne by the party
seeking to take the action not permitted by this Agreement, but in no event
shall such cost be an expense of the Trustee. At all times as may be required
by the Code, the Trustee will ensure that substantially all of the assets of
each of the REMICs created hereunder will consist of "qualified mortgages" as
defined in Section 860G(a)(3) of the Code and "permitted investments" as defined
in Section 860G(a)(5) of the Code and may for this purpose conclusively rely
upon the Opinion of Counsel delivered pursuant to Section 2.03(d) hereof.
(g) In the event that any tax is imposed on "prohibited transactions" of
the REMICs created hereunder as defined in Section 860F(a)(2) of the Code, on
the "net income from fore closure property" of the REMIC as defined in Section
860G(c) of the Code, on any contributions to the REMICs after the Startup Day
therefor pursuant to Section 860G(d) of the Code, or any other tax is imposed by
the Code or any applicable provisions of state or local tax laws, such tax shall
be charged (i) to the Trustee pursuant to Section 11.01 hereof, if such tax
arises out of or results from the negligence or willful misconduct of the
Trustee, (ii) to the Master Servicer pursuant to Section 11.01 hereof, if such
tax arises out of or results from a breach by the Master Servicer of any of its
obligations under Article III or this Article XI, or otherwise (iii) against
amounts on deposit in the Distribution Account and shall be paid by withdrawal
therefrom.
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(h) On or before April 15 of each calendar year, commencing April 15, 1998,
the Trustee shall deliver to the Master Servicer and each Rating Agency a
Certificate from a Responsible Officer of the Trustee stating the Trustee's
compliance with this Article XI.
(i) The Trustee and the Master Servicer shall, for federal income tax
purposes, maintain books and records with respect to the Trust Fund on a
calendar year and on an accrual basis. The Closing Date shall be the Start-Up
Date for each REMIC created by this Agreement. The latest possible maturity
date for each REMIC shall be the Distribution Date in December 2027.
(j) Following the Startup Day, the Trustee shall not accept any
contributions of assets to the Trust Fund other than in connection with any
Qualified Substitute Mortgage Loan delivered in accordance with Section 2.03
unless it shall have received an Opinion of Counsel to the effect that the
inclusion of such assets in the REMIC will not cause the REMIC to fail to
qualify as a REMIC at any time that any Certificates are outstanding or subject
the REMIC to any tax under the REMIC Provisions or other applicable provisions
of federal, state and local law or ordinances.
(k) Neither the Trustee nor the Master Servicer shall enter into any
arrangement by which the Trust Fund will receive a fee or other compensation for
services nor permit the REMICs to receive any income from assets other than
"qualified mortgages" as defined in Section 860G(a)(3) of the Code or "permitted
investments" as defined in Section 860G(a)(5) of the Code.
SECTION 11.02. Prohibited Transactions and Activities.
--------------------------------------
None of the Depositor, the Master Servicer, the Seller or the Trustee shall
sell, dispose of or substitute for any of the Mortgage Loans (except in
connection with (i) the foreclosure of a Mortgage Loan, including but not
limited to, the acquisition or sale of a Mortgaged Property acquired by deed in
lieu of foreclosure, (ii) the bankruptcy of the Trust Fund (iii) the termination
of the Trust Fund pursuant to Article X of this Agreement, (iv) a substitution
pursuant to Article III of this Agreement or (v) a purchase of Mortgage Loans
pursuant to Article II or III of this Agreement), nor acquire any assets for the
Trust Fund (other than REO Property acquired in respect of a defaulted Mortgage
Loan), nor sell or dispose of any investments in the Collection Account or the
Distribution Account for gain, nor accept any contributions to the Trust Fund
after the Closing Date (other than a Qualified Substitute Mortgage Loan
delivered in accordance with Section 2.03), unless it has received an Opinion of
Counsel, addressed to the Certificate Insurer and the Trustee (at the expense of
the party seeking to cause such sale, disposition, substitution, acquisition or
contribution but in no event at the expense of the Trustee) that such sale,
disposition, substitution, acquisition or contribution will not (a) affect
adversely the status of the Trust Fund as a REMIC or (b) cause the Trust Fund to
be subject to a tax on "prohibited transactions" or "contributions" pursuant to
the REMIC Provisions.
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ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01. Amendment.
---------
This Agreement may be amended from time to time by the Seller, the Master
Servicer, the Depositor and the Trustee, in each case without the consent of any
of the Certificateholders, but only with the consent of the Certificate Insurer,
(i) to cure any ambiguity, (ii) to correct any defective provisions or to
correct or supplement any provisions herein that may be inconsistent with any
other provisions herein, (iii) to add to the duties of the Master Servicer, (iv)
to add any other provisions with respect to matters or questions arising under
this Agreement or the Policy, as the case may be, which shall not be
inconsistent with the provisions of this Agreement, (v) to add or amend any
provisions of this Agreement as required by any Rating Agency or any other
nationally recognized statistical rating agency in order to maintain or improve
any rating of each Class of Class A Certificates (it being understood that,
after obtaining the ratings in effect on the Closing Date, neither the Trustee,
the Seller, the Depositor nor the Master Servicer is obligated to obtain,
maintain or improve any such rating), (vi) to add or amend any provisions of
this Agreement to such extent as shall be necessary to maintain the
qualification of the Trust as a REMIC or (vii) with the consent of the Sub-
Servicer, to provide for separate servicing of certain Mortgage Loans that may
be sub-performing or non-performing by a special servicer or otherwise so long
as (a) any fees to be paid in respect thereof on any Distribution Date in excess
of the Servicing Fee are paid from the Available Distribution Amount for such
Distribution Date remaining after payment of all amounts due the Class A
Certificateholders and the Certificate Insurer, (b) such servicing will be in
accordance with the terms of this Pooling and Servicing Agreement including,
without limitation, the provisions of Section 3.01, (c) the entity performing
such servicing is acceptable to the Certificate Insurer and, as evidenced in
writing from the Rating Agencies, the appointment of such entity will not result
in a downgrading or withdrawal of the respective ratings then assigned to the
Class A Certificates without regard to the Policy and (d) if such provisions
relating to such separate servicing permit the termination, without cause, of
the entity performing such servicing by 51% Percentage Interest of the Class X
Certificateholders, and the appointment of a successor to such entity by such
Class X Certificateholders, the conditions set forth in clauses (a), (b) and (c)
above shall be required to be satisfied with respect to such appointment;
provided, however, that (x) as evidenced by an Opinion of Counsel (at the
- -------- -------
expense of the requesting party) in each case such action shall not, adversely
affect in any material respect the interest of any Certificateholder and the
Certificate Insurer, (y) in each case, such action is necessary or desirable to
maintain the qualification of the Trust as a REMIC or shall not adversely affect
such qualification and (z) if the opinion called for in clause (x) cannot be
delivered with regard to an amendment pursuant to clause (vi) above, such
amendment is necessary to maintain the qualification of the Trust as a REMIC;
and provided, further, that the amendment shall not be deemed to adversely
-------- -------
affect in any material respect the interests of the Certificateholders and no
Opinion of Counsel to that effect shall be required if the Person requesting the
amendment obtains a letter from the Rating Agency stating that the amendment
would not result in the downgrading or withdrawal of the respective ratings then
assigned to the Class A Certificates.
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This Agreement also may be amended from time to time by the Seller, the
Master Servicer, the Depositor and the Trustee, and the Master Servicer and the
Certificate Insurer may from time to time consent to the amendment of the Policy
with the consent of the Holders of each Class of Class A Certificates which is
affected by such amendment, evidencing Percentage Interests aggregating not less
than 51% of such Class or in the case of an amendment which affects all classes,
evidencing Percentage Interests aggregating not less than 51% of all Classes),
and in the case of an amendment to this Agreement, with the consent of the
Certificate Insurer, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Agreement or of
modifying in any manner the rights of the Certificateholders; provided, however,
-------- -------
that no such amendment shall (1) reduce in any manner the amount of, or delay
the timing of, payments on the Certificates or distributions or payments under
the Policy which are required to be made on any Certificate without the consent
of the Holder of such Certificate or (2) reduce the aforesaid percentage
required to consent to any such amendment, without the consent of the Holders of
all Certificates then outstanding.
Prior to the solicitation of consent of Certificateholders in connection
with any such amendment, the party seeking such amendment shall furnish the
Trustee with an Opinion of Counsel stating whether such amendment would
adversely affect the qualification of the Trust as a REMIC and notice of the
conclusion expressed in such Opinion of Counsel shall be included with any such
solicitation. An amendment made with the consent of all Certificateholders and
executed in accordance with this Section shall be permitted or authorized by
this Agreement notwithstanding that such Opinion of Counsel may conclude that
such amendment would adversely affect the qualification of the Trust as a REMIC.
Prior to the execution of any such amendment, the Trustee shall furnish
written notification of the substance of such amendment to each Rating Agency.
In addition, promptly after the execution of any such amendment made with the
consent of the Certificateholders, the Trustee shall furnish written
notification of the substance of such amendment to each Certificateholder and
fully executed original counterparts of the instruments effecting such amendment
to the Certificate Insurer.
It shall not be necessary for the consent of Certificateholders under this
Section to approve the particular form of any proposed amendment or consent, but
it shall be sufficient if such consent shall approve the substance thereof. The
manner of obtaining such consents and of evidencing the authorization of the
execution thereof by Certificateholders shall be subject to such reasonable
requirements as the Trustee may prescribe.
Prior to the execution of any amendment to this Agreement, the Trustee
shall be entitled to receive and rely upon an Opinion of Counsel stating that
the execution of such amendment is authorized or permitted by this Agreement.
The Trustee may, but shall not be obligated to, enter into any such amendment
which affects the Trustee's own rights, duties or immunities under this
Agreement.
SECTION 12.02. Recordation of Agreement.
------------------------
This Agreement is subject to recordation in all appropriate public offices
for real property records in all the counties or other comparable jurisdictions
in which any or all of the properties
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subject to the Mortgages are situated, and in any other appropriate public
recording office or elsewhere, such recordation to be effected by the Seller,
but only upon written direction of Certificateholders accompanied by an Opinion
of Counsel to the effect that such recordation materially and beneficially
affects the interests of Certificateholders. The Seller requesting such
recordation shall bear all costs and expenses of such recordation. The Trustee
shall have no obligation to ascertain whether such recordation so affects the
interests of the Certificateholders.
SECTION 12.03. Limitation on Rights of Certificateholders.
------------------------------------------
The death or incapacity of any Certificateholder shall not operate to
terminate this Agreement or the Trust, nor entitle such Certificateholder's
legal representatives or heirs to claim an accounting or to take any action or
commence any proceeding in any court for a partition or winding up of the Trust,
nor otherwise affect the rights, obligations and liabilities of the parties
hereto or any of them.
No Certificateholder shall have any right to vote (except as provided in
Sections 7.01, 8.01, 8.02 or 12.01) or in any manner otherwise control the
operation and management of the Trust, or the obligations of the parties hereto,
nor shall anything herein set forth, or contained in the terms of the
Certificates, be construed so as to constitute the Certificateholders from time
to time as partners or members of an association; nor shall any
Certificateholder be under any liability to any third person by reason of any
action taken by the parties to this Agreement pursuant to any provision hereof.
No Certificateholder shall have any right by virtue or by availing itself
of any provisions of this Agreement to institute any suit, action or proceeding
in equity or at law upon or under or with respect to this Agreement, unless such
Holder previously shall have given to the Trustee a written notice of default
and of the continuance thereof, as hereinbefore provided, and unless also the
Holders of Class A Certificates evidencing Percentage Interests aggregating not
less than 51% shall have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee hereunder and shall have
offered to the Trustee such reasonable indemnity as it may require against the
costs, expenses and liabilities to be incurred therein or thereby, and the
Trustee, for 60 days after its receipt of such notice, request and offer of
indemnity, shall have neglected or refused to institute any such action, suit or
proceeding; it being understood and intended, and being expressly covenanted by
each Certificateholder with every other Certificate holder and the Trustee, that
no one or more Holders of Certificates shall have any right in any manner
whatever by virtue or by availing itself or themselves of any provisions of this
Agreement to affect, disturb or prejudice the rights of the Holders of any other
of the Certificates, or to obtain or seek to obtain priority over or preference
to any other such Holder, or to enforce any right under this Agreement, except
in the manner herein provided and for the equal, ratable and common benefit of
all Certificateholders. For the protection and enforcement of the provisions of
this Section, each and every Certificateholder and the Trustee shall be entitled
to such relief as can be given either at law or in equity.
SECTION 12.04. Governing Law.
-------------
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND
131
<PAGE>
REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH
LAWS.
SECTION 12.05. Notices.
-------
(a) All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by certified mail, return receipt requested, to: (a) in the case of the
Depositor, 200 Vesey Street, Three World Financial Center, New York, New York
10285, Attention: Martin P. Harding, (b) in the case of the Seller, 625 The
City Drive, Suite 490, Orange, California 92868, Attention: Blair F. Kenny, (c)
in the case of the Trustee, 3 Park Plaza, Irvine, California 92614, Attention:
Corporate Trust: United PanAm 1997-1, Facsimile: (714) 253-7577, (d) in the case
of the Certificate Insurer, 350 Park Avenue, New York, NY 10022, Attention:
Surveillance Department, Re: United PanAm Mortgage Loan Asset Backed
Certificates, Series 1997-1, (e) in the case of Moody's, Home Mortgage Loan
Monitoring Group, 4th Floor, 99 Church Street, New York, New York 10007, (f) in
the case of Standard & Poor's, 26 Broadway, 15th Floor, New York, New York
10004, Attention: Residential Mortgage Group, and (g) in the case of the Master
Servicer, 1300 South El Camino Real, Suite 320, San Mateo, California 94402,
Attention: Secretary, with a copy to Ocwen Federal Bank, FSB, 1675 Palm Beach
Lakes Boulevard, West Palm Beach, Florida 33401, Attention: Secretary, or, as to
each party, at such other address as shall be designated by such party in a
written notice to each other party. In each case in which a notice or other
communication to the Certificate Insurer refers to a Master Servicer Event of
Default or a claim under the Policy or with respect to which failure on the part
of the Certificate Insurer to respond shall be deemed to constitute consent or
acceptance, then a copy of such notice or other communication should also be
sent to the attention of the General Counsel and the Head-Financial Guaranty
Group and shall be marked to indicate "URGENT MATERIAL ENCLOSED." Any notice
required or permitted to be mailed to a Certificateholder shall be given by
first class mail, postage prepaid, at the address of such Holder as shown in the
Certificate Register. Any notice so mailed within the time prescribed in this
Agreement shall be conclusively presumed to have been duly given, whether or not
the Certificate holder receives such notice. Any notice or other document
required to be delivered or mailed by the Trustee to any Rating Agency shall be
given on a best efforts basis and only as a matter of courtesy and accommodation
and the Trustee shall have no liability for failure to delivery such notice or
document to any Rating Agency.
(b) Notice to S&P, Moody's and the Certificate Insurer. The Trustee and
--------------------------------------------------
the Master Servicer shall each be obligated to use its best efforts promptly to
provide notice, at the expense of the Master Servicer, to S&P, Moody's and the
Certificate Insurer with respect to each of the following of which a Responsible
Officer of the Trustee or Master Servicer, as the case may be, has actual
knowledge:
(i) Any material change or amendment to this Agreement;
(ii) The occurrence of any Master Servicer Event of Default that
has not been cured or waived;
(iii) The resignation or termination of the Master Servicer or
the Trustee;
132
<PAGE>
(iv) The final payment to Holders of the Certificates of any
Class;
(v) Any change in the location of any Account;
(vi) Any event that would result in the inability of the Master
Servicer to make Monthly Advances; and
(vii) The repurchase or substitution of Mortgage Loans
pursuant to or as contemplated by Section 2.03.
(c) In addition, (i) the Trustee shall promptly furnish to each Rating
Agency and the Certificate Insurer copies of the following:
(A) Each annual report to Certificateholders described in Section
4.02; and
(B) Each Statement to Certificateholders described in Section
4.02; and
(ii) The Master Servicer shall promptly furnish to each Rating
Agency and the Certificate Insurer copies of the following:
(A) Each annual statement as to compliance described in Section
3.18;
(B) Each annual independent public accountants' servicing report
described in Section 3.19; and
(C) Each notice delivered pursuant to Section 7.01 which relates
to the fact that the Master Servicer has not made a Monthly Advance.
Any such notice pursuant to this Section shall be in writing and shall be
deemed to have been duly given if personally delivered or mailed by first class
mail, postage prepaid, or by express delivery service to the addresses specified
above for each such Rating Agency.
SECTION 12.06. Severability of Provisions.
--------------------------
If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be for any reason whatsoever held invalid, 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 or of the Certificates or the rights of the Holders thereof.
SECTION 12.07. Assignment.
----------
Notwithstanding anything to the contrary contained herein, except as
provided in Sections 6.02, 6.04 and 6.05, this Agreement may not be assigned by
the Depositor or the Master Servicer
133
<PAGE>
without the prior written consent of the Certificate Insurer and Holders of the
Certificates evidencing Percentage Interests aggregating not less than 66%.
SECTION 12.08. Certificates Nonassessable and Fully Paid.
-----------------------------------------
The parties agree that the Certificateholders shall not be personally
liable for obligations of the Trust, that the beneficial ownership interests
represented by the Certificates shall be non assessable for any losses or
expenses of the Trust or for any reason whatsoever, and that the Certificates
upon execution, authentication and delivery thereof by the Trustee pursuant to
Section 5.01 are and shall be deemed fully paid.
SECTION 12.09. Third-Party Beneficiaries.
-------------------------
This Agreement will inure to the benefit of and be binding upon the parties
hereto, the Certificateholders, the Certificate Owners, the Certificate Insurer
and their respective successors and permitted assigns. Except as otherwise
provided in this Agreement, no other person will have any right or obligation
hereunder.
SECTION 12.10. Intention of the Parties.
------------------------
The parties hereto intend that the transaction set forth herein be a sale
by the Depositor to the Trust or the Seller to the Trust, as applicable, of all
its respective right, title and interest in and to the Mortgage Loans and other
property described herein. In the event the transaction set forth herein is
deemed not to be a sale, the Depositor or the Seller, as applicable, hereby
grants to the Trust a security interest in all of its right, title and interest
in, to and under the Mortgage Loans and other property described above and this
Agreement shall constitute a security agreement under applicable law.
SECTION 12.11. Counterparts.
------------
This Agreement may be executed in any number of counterparts, each of which
so executed shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.
SECTION 12.12. Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
134
<PAGE>
IN WITNESS WHEREOF, the Depositor, the Seller, the Master Servicer and
the Trustee have caused this Agreement to be duly executed by their respective
officers all as of the day and year first above written.
LEHMAN ABS CORPORATION,
as Depositor
By /s/
---------------------------------
Name:
Title:
UNITED PANAM MORTGAGE CORPORATION
as Seller
By /s/
---------------------------------
Name:
Title
PAN AMERICAN BANK, FSB,
as Master Servicer
By /s/
---------------------------------
Name:
Title
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
By /s/
---------------------------------
Name:
Title:
<PAGE>
With respect to its obligations under Section 2.03
Agreed to and Accepted by:
PAN AMERICAN FEDERAL BANK, FSB
By /s/
_________________________________
Name:
Title:
<PAGE>
Exhibit 10.76
[EXECUTION COPY]
================================================================================
LEHMAN ABS CORPORATION,
as Purchaser
and
UNITED PANAM MORTGAGE CORPORATION,
as Seller
MORTGAGE LOAN PURCHASE AGREEMENT
Dated as of December 1, 1997
Adjustable Rate Mortgage Loans
United PanAm Mortgage Loan Trust 1997-1
================================================================================
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
DEFINITIONS 1
Section 1.1 Definitions............................... 1
ARTICLE II
SALE OF MORTGAGE LOANS; PAYMENT OF PURCHASE PRICE....... 2
Section 2.1 Sale of Initial Mortgage Loans............ 2
Section 2.2 Sale of Subsequent Mortgage Loans......... 2
Section 2.3 Obligations of Seller Upon Sale........... 3
Section 2.4 Payment of Purchase Price for the
Mortgage Loans............................ 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH...... 6
Section 3.1 Seller Representations and Warranties
Relating to the Mortgage Loans............ 6
Section 3.2 Representations and Warranties of Seller
and Pan American Bank, FSB................ 6
ARTICLE IV
SELLER'S COVENANTS....................... 8
Section 4.1 Covenants of the Seller................... 8
ARTICLE V
INDEMNIFICATION BY THE SELLER WITH RESPECT TO THE MORTGAGE LOANS 9
Section 5.1 Indemnification.......................... 9
ARTICLE VI
TERMINATION......................... 13
Section 6.1 Termination.............................. 13
ARTICLE VII
MISCELLANEOUS PROVISIONS................... 13
Section 7.1 Amendment................................ 13
Section 7.2 Governing Law............................ 13
Section 7.3 Notices.................................. 13
Section 7.4 Severability of Provisions............... 14
Section 7.5 Counterparts............................. 14
Section 7.6 Further Agreements....................... 14
Section 7.7 Intention of the Parties................. 14
Section 7.8 Successors and Assigns: Assignment of
Purchase Agreement....................... 15
Section 7.9 Survival................................. 15
Schedule I -- Mortgage Loans........................... I-1
</TABLE>
i
<PAGE>
MORTGAGE LOAN PURCHASE AGREEMENT, dated as of December 1, 1997 (the
"Agreement"), between United PanAm Mortgage Corporation (the "Seller") and
Lehman ABS Corporation (the "Purchaser").
W I T N E S S E T H
-------------------
WHEREAS, Pan American Bank, FSB is the owner of (i) the notes or other
evidence of indebtedness (the "Initial Mortgage Notes") so indicated on Schedule
I hereto referred to below, and Related Documents (as defined below)
(collectively, the "Initial Mortgage Loans"); and
WHEREAS, as of the Closing Date, Pan American Bank, FSB will own other
notes or other evidence of indebtedness (the "Subsequent Mortgage Notes") and
the Related Documents (the Subsequent Mortgage Notes and Related Documents,
collectively the "Subsequent Mortgage Loans" and with the Initial Mortgage
Loans, the "Mortgage Loans"); and
WHEREAS, Pan American Bank, FSB wishes to sell, and the Seller wishes
to purchase, the Mortgage Loans; and
WHEREAS, the Seller, as of the Closing Date, will own the mortgages
(the "Mortgages") on the properties (the "Mortgaged Properties") securing such
Mortgage Loans, including rights to (a) any property acquired by foreclosure or
deed in lieu of foreclosure or otherwise and (b) the proceeds of any insurance
policies covering the Mortgage Loans or the Mortgaged Properties or the
obligors on the Mortgage Loans; and
WHEREAS, the parties hereto desire that the Seller sell the Mortgage
Loans to the Purchaser pursuant to the terms of this Agreement; and
WHEREAS, pursuant to the terms of a Pooling and Servicing Agreement
dated as of December 1, 1997 (the "Pooling and Servicing Agreement") among the
Purchaser, as depositor, the Seller, as seller, Pan American Bank, FSB, as
master servicer, and Bankers Trust Company of California, N.A., as trustee (the
"Trustee"), the Purchaser will convey the Mortgage Loans to United PanAm
Mortgage Loan Trust 1997-1 (the "Trust").
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. All Capitalized terms used but not
-----------
defined herein or below shall have the meanings assigned thereto in the Pooling
and Servicing Agreement.
<PAGE>
"Seller Information": The information in the Prospectus Supplement as
------------------
follows: in the fourth and fifth sentences of the third paragraph on the
inside cover page, "SUMMARY-- Seller," "--Master Servicer," "Ocwen Federal
Bank FSB," "--The Mortgage Loans," "--The Index," the first and second
sentences under "RISK FACTORS--Risk of Early Defaults," the first, second
and third sentences under "--Prepayment Considerations," the first sentence
under "--Payments on the Mortgage Loans," the first sentence of "--
Geographic Concentration May Affect Performance," the first and second
sentences under "--Additional Risks Associated with the Mortgage Loans,"
the fifth sentence in the first paragraph under "--Risk of Loan Rates
Reducing the Certificate Rate of the Class A Certificates," "THE MORTGAGE
POOL," "THE MASTER SERVICER," "OCWEN FEDERAL BANK FSB" and the sixth
sentence of the second paragraph under "PREPAYMENT AND YIELD
CONSIDERATIONS--Prepayments."
ARTICLE II
SALE OF MORTGAGE LOANS; PAYMENT OF PURCHASE PRICE
Section 2.1 Sale of Initial Mortgage Loans. Concurrently with the
------------------------------
execution and delivery of this Agreement, Pan American Bank, FSB does hereby
sell, assign, set over, and other wise convey to the Seller, and Seller does
hereby sell, assign, set over, and otherwise convey to the Purchaser, in each
case without recourse, all of its right, title and interest in and to (i) each
Initial Mortgage Loan, including the related Cut-Off Date Principal Balance, all
interest accruing thereon after the Cut-Off Date and all collections in respect
of interest and principal due after the Cut-Off Date; (ii) property which
secured such Initial Mortgage Loan and which has been acquired by foreclosure or
deed in lieu of foreclosure; (iii) its interest in any insurance policies in
respect of the Initial Mortgage Loans; and (iv) all proceeds of any of the
foregoing.
Section 2.2 Sale of Subsequent Mortgage Loans. Pan American
---------------------------------
Bank, FSB covenants and agrees to use its best efforts on the Closing Date to
acquire and sell to the Seller, and Seller consents and agrees to use its best
efforts on the Closing Date to acquire and sell to the Purchaser, and the
Purchaser as assignee of the Purchaser will agree in the Pooling and Servicing
Agreement to purchase, subject to satisfaction of the conditions set forth
therein, the Subsequent Mortgage Loans. On the Closing Date, Pan American Bank,
FSB will sell, assign, set over, and otherwise convey to the Seller, and the
Seller will sell, assign, set over, and otherwise convey to the Purchaser, in
each case without recourse, all of its right, title and interest in and to: (i)
each Subsequent Mortgage Loan, including the related Cut-Off Date Principal
Balance, all interest accruing thereon after the related Cut-Off Date and all
collections in respect of interest and principal due after the related Cut-Off
Date; (ii) property which secured such Subsequent Mortgage Loan and which has
been acquired
2
<PAGE>
by foreclosure or deed in lieu of foreclosure; (iii) its interest in any
insurance policies in respect of the Subsequent Mortgage Loans; and (iv) all
proceeds of any of the foregoing.
Section 2.3 Obligations of Seller Upon Sale. In connection with
-------------------------------
any transfer pursuant to Sections 2.1 or 2.2 hereof, Pan American Bank, FSB and
the Seller each further agrees, at its own expense, on or prior to the Closing
Date, (a) to indicate in its books and records that the Mortgage Loans have been
sold to the Seller or the Purchaser, as applicable, or to the Trustee as
assignee of the Purchaser, as applicable, pursuant to this Agreement and (b) to
deliver to the Seller or the Purchaser and the Trustee, as applicable, a
computer file containing a true and complete list of all such Mortgage Loans
specifying for each such Mortgage Loan, as of the related Cut-Off Date, (i) its
account number and (ii) the Cut-Off Date Principal Balance. Such file, which
forms a part of Exhibit D to the Pooling and Servicing Agreement, shall also be
marked as Schedule I to this Agreement and is hereby incorporated into and made
a part of this Agreement.
In connection with any conveyance by Pan American Bank, FSB or the
Seller, the Seller shall on behalf of the Purchaser deliver to, and deposit with
the Trustee, as assignee of the Purchaser, on or before the Closing Date, the
following documents or instruments with respect to each Mortgage Loan (the
"Related Documents"):
(1) the original Mortgage Note, endorsed in the following form: "Pay
to the order of Bankers Trust Company of California, N.A., as Trustee,
without recourse" or in blank, with all prior and intervening endorsements
showing a complete chain of endorsement from the originator to the Person
so endorsing to the Trustee;
(2) the original Mortgage with evidence of recording thereon, and the
original recorded power of attorney, if the Mortgage was executed pursuant
to a power of attorney, with evidence of recording thereon;
(3) an original Assignment of the Mortgage executed in the following
form: "Bankers Trust Company of California, N.A., as Trustee" or in blank;
(4) the original recorded Assignment or Assignments of the Mortgage
showing a complete chain of assignment from the originator to the Person
assigning the Mortgage to the Trustee as contemplated by the immediately
preceding clause (iii);
(5) the original or copies of each assumption, modification, written
assurance or substitution agreement, if any; and
(6) the original lender's title insurance policy or attorney's opinion
of title or a copy thereof certified as
3
<PAGE>
true and correct by the applicable insurer, together with all endorsements
or riders that were issued with or subsequent to the issuance of such
policy, insuring the priority of the Mortgage as a first lien on the
Mortgaged Property represented therein as a fee interest vested in the
Mortgagor, or in the event such original title policy is unavailable, a
written commitment or uniform binder or preliminary report of title issued
by the title insurance or escrow company or a copy thereof certified by the
title company, with the original policy of title insurance to be delivered
within one year of the Closing Date.
Pan American Bank, FSB confirms to the Seller, and the Seller hereby
confirms to the Trustee that it has made the appropriate entries in its general
accounting records, to indicate that such Mortgage Loans have been transferred
to the Seller or to the Trustee and in the latter instance constitute part of
the Trust in accordance with the terms of the Pooling and Servicing Agreement.
In all instances where the original recorded Mortgage is not delivered
as provided in clause (2) above, the Seller will deliver or cause to be
delivered the original recorded Mortgage and intervening assignments with
evidence of recording thereon, as applicable, to the Trustee, as assignee of the
Purchaser, promptly upon receipt thereof but in no event later than one year
after the Closing Date.
The Purchaser hereby acknowledges its acceptance of all right, title
and interest to the Mortgage Loans and other property, now existing and
hereafter created, conveyed to it pursuant to Section 2.1.
The parties hereto intend that the transaction set forth herein be
sales by Pan American Bank, FSB to the Seller, and by the Seller to the
Purchaser of all Pan American Bank, FSB's or the Seller's right, title and
interest in and to the Mortgage Loans and other property described above. In
the event the transaction set forth herein is deemed not to be a sale, the
Seller hereby grants to the Purchaser a security interest in all of the Seller's
right, title and interest in, to and under the Mortgage Loans and other property
described above, whether now existing or hereafter created, to secure all of the
Seller's obligations hereunder; and this Agreement shall constitute a security
agreement under applicable law. The Seller and the Purchaser shall, to the
extent consistent with this Agreement, take such actions as may be necessary to
ensure that, if this Agreement were deemed to create a security interest in the
Mortgage Loans, such security interest would be deemed to be a perfected
security interest of first priority under applicable law and will be maintained
as such throughout the term of the Pooling and Servicing Agreement.
Section 2.4 Payment of Purchase Price for the Mortgage Loans. (a)
------------------------------------------------
In consideration of the sale of the Initial Mortgage
4
<PAGE>
Loans from the Seller to the Purchaser on the Closing Date, the Purchaser agrees
to pay to the Seller, or to Seller's order, on the Closing Date by transfer of
immediately available funds, an amount equal to the sum of $_____________ (the
"Purchase Price"), net of an expense reimbursement amount of $_________ (the
"Expense Reimbursement Amount"), and to transfer to Pan American Bank, FSB on
the Closing Date the Class X and Class R Certificates. The Expense
Reimbursement Amount shall reimburse the Purchaser for the Purchaser's
Securities and Exchange Commission registration statement fees and the
Purchaser's registration statement administration fees allocable to the Trust.
The Seller shall pay, and be billed directly for, all expenses incurred by the
Purchaser in connection with the issuance of the Certificates, including,
without limitation, printing fees incurred in connection with the prospectus
relating to the Certificates, blue sky registration fees and expenses, fees and
expenses of the Certificate Insurer and its counsel, fees and expenses of
Purchaser's counsel, fees of the rating agencies requested to rate the
Certificates, accountant's fees and expenses and the fees and expenses of the
Trustee and other out-of-pocket costs, if any. If the Purchaser shall deter-
mine that the Expense Reimbursement Amount is not sufficient to reimburse the
Purchaser for all expenses incurred by it that are subject to reimbursement by
the Seller hereunder as described above, the Seller shall promptly reimburse the
Purchaser for such additional amounts upon notice by the Purchaser to the
Seller.
(b) In consideration of the sale of the Subsequent Mortgage Loans
from the Seller to the Trustee as assignee of the Purchaser on the Closing Date,
the Purchaser shall cause the Trustee as its assignee to agree to pay to Pan
American Bank, FSB on the Closing Date by transfer of immediately available
funds in an amount equal to 100% of the aggregate principal balance of the
Subsequent Mortgage Loans transferred or such other amount determined in
accordance with the terms of the Pooling and Servicing Agreement (either such
amount, the "Subsequent Purchase Price").
(c) Within 30 days of the Closing Date, the Seller, at its own
expense, shall record each Assignment of Mortgage in favor of the Trustee as
transferee of the Purchaser pursuant to the Pooling and Servicing Agreement in
the appropriate real property or other records. With respect to any Assignment
of Mortgage as to which the related recording information is unavailable within
the applicable time period set forth above, such Assignment of Mortgage shall be
submitted for recording within 30 days after receipt of such information but in
no event later than one year from the date such Assignment of Mortgage is
otherwise required to be recorded pursuant to this Section 2.4(c). The Trustee
shall be required to retain a copy of each Assignment of Mortgage submitted for
recording. In the event that any such Assignment of Mortgage is lost or
returned unrecorded because of a defect therein, the Seller shall promptly
prepare a substitute Assignment of Mortgage or cure such defect, as the case may
be, and shall be required to submit each such Assignment of Mortgage for
recording. Any failure of the
5
<PAGE>
Seller to comply with this Section shall result in the obligation of the Seller
to repurchase or substitute an Eligible Substitute Mortgage Loan for the related
Mortgage Loan pursuant to the provisions of the Pooling and Servicing
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH
Section 3.1 Seller Representations and Warranties Relating to the
-----------------------------------------------------
Mortgage Loans. Pan American Bank, FSB represents and warrants to the
- --------------
Purchaser that with respect to the Mortgage Loans as of the Closing Date, each
of the representations and warranties contained in Section 2.04(a) of the
Pooling and Servicing Agreement, with the same force and effect as if fully set
forth herein, is true and correct as of the Closing Date.
With respect to the representations and warranties set forth in this
Section 3.1 that are made to the best of the Seller's knowledge or as to which
the Seller has no knowledge, if it is discovered by the Depositor, the Seller,
the Master Servicer, the Certificate Insurer or the Trustee as set forth in the
Pooling and Servicing Agreement that the substance of such representation and
warranty is inaccurate and such inaccuracy materially and adversely affects the
value of the related Mortgage Loan then, notwithstanding the Seller's lack of
knowledge with respect to the substance of such representation and warranty
being inaccurate at the time the representation or warranty was made, such
inaccuracy shall be deemed a breach of the applicable representation or
warranty.
With respect to any breach of a representation or warranty set forth
in this Section 3.1, Pan American Bank, FSB shall cure, repurchase or substitute
in accordance with the Pooling and Servicing Agreement.
It is understood and agreed that the representations and warranties
set forth in this Section 3.1 shall survive delivery of the respective Mortgage
Files to the Trustee on behalf of the Purchaser.
Section 3.2 Representations and Warranties of Seller and Pan
------------------------------------------------
American Bank, FSB. Each of the Seller and Pan American Bank, FSB hereby
- ------------------
represents and warrants to the Purchaser that as of the Closing Date or as of
such date specifically provided herein:
(i) It is a corporation, in the case of the Seller, and a federal
savings bank, in the case of Pan American Bank, FSB, duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has the power and authority to own its assets and to transact
the business in which it is currently engaged. It is duly qualified to do
business and is in
6
<PAGE>
good standing in each jurisdiction in which the character of the business
transacted by it or properties owned or leased by it requires such qualification
and in which the failure so to qualify would have a material adverse effect on
(a) its business, proper ties, assets or condition (financial or other), (b) its
performance of its obligations under this Agreement and the Pooling and Servic-
ing Agreement, (c) the value or marketability of the Mortgage Loans or (d) the
ability to foreclose on the related Mortgaged Properties;
(ii) It has the power and authority to make, execute, deliver and
perform this Agreement and the Pooling and Servicing Agreement and to consummate
all of the transactions contemplated under this Agreement and the Pooling and
Servicing Agreement, and has taken all necessary action to authorize the
execution, delivery and performance of this Agreement. When executed and
delivered, this Agreement will constitute its legal, valid and binding
obligation enforceable in accordance with its terms, except as enforcement of
such terms may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium or similar laws affecting the enforcement of creditors'
rights generally and by the availability of equitable remedies;
(iii) It holds all necessary licenses, certificates and permits from
all government authorities necessary for conducting its business as it is
presently conducted. It is not required to obtain the consent of any other
party or any consent, license, approval or authorization from, or registration
or declaration with, any governmental authority, bureau or agency in connection
with the execution, delivery, performance, validity or enforceability of this
Agreement, except for such consents, licenses, approvals or authorizations, or
registrations or declarations, as shall have been obtained or filed, as the case
may be, prior to the Closing Date;
(iv) The execution, delivery and performance of this Agreement by it
will not conflict with or result in a breach of, or constitute a default under,
any provision of any existing law or regulation or any order or decree of any
court applicable to it or any of its properties or any provision of its Charter
or Articles of Incorporation or Bylaws, or constitute a material breach of, or
result in the creation or imposition of any lien, charge or encumbrance upon
any of its properties pursuant to, any mortgage, indenture, contract or other
agreement to which it is a party or by which it may be bound;
(v) No litigation or administrative proceeding of or before any court,
tribunal or governmental body is currently pending, or to its knowledge
threatened, against it or any of its properties or with respect to this
Agreement or the Certificates which in its opinion has a reasonable likelihood
of resulting in a material adverse effect on the transactions contemplated by
this Agreement;
7
<PAGE>
(vi) No certificate of an officer, statement furnished in writing or
report delivered pursuant to the terms hereof by it contains any untrue
statement of a material fact or omits to state any material fact necessary to
make the certificate, statement or report not misleading;
(vii) The transactions contemplated by this Agreement are in the
ordinary course of the its business;
(viii) It is not insolvent, nor will the Seller be made insolvent by
the transfer of the Mortgage Loans, nor is it aware of any pending insolvency;
(ix) It is not in violation of, and the execution and delivery of this
Agreement by it and its performance and compliance with the terms of this
Agreement will not constitute a violation with respect to, any order or decree
of any court or any order or regulation of any federal, state, municipal or
governmental agency having jurisdiction, which violation would materially and
adversely affect its condition (financial or otherwise) or operations or any of
the Seller's properties or materially and adversely affect the performance of
any of its duties hereunder;
(x) There are no actions or proceedings against, or investigations of it,
pending or, to its knowledge, threatened, before any court, administrative
agency or other tribunal (A) that, if determined adversely, would prohibit it
from entering into this Agreement and the Pooling and Servicing Agreement, (B)
seeking to prevent the consummation of any of the transactions contemplated by
this Agreement or (C) that, if determined adversely, would prohibit or
materially and adversely affect its performance of any of its respective
obligations under, or the validity or enforceability of, this Agreement and the
Pooling and Servicing Agreement;
(xi) It did not sell the Initial Mortgage Loans to the Purchaser or the
Seller with any intent to hinder, delay or defraud any of its creditors; and it
will not be rendered insolvent as a result of the sale of the Initial Mortgage
Loans to the Purchaser;
(xii) It acquired title to the Mortgage Loans in good faith, without
notice of any adverse claim; and
(xiii) The transfer, assignment and conveyance of the Mortgage Notes and
the Mortgages by it pursuant to this Agreement are not subject to the bulk
transfer laws or any similar statutory provisions in effect in any applicable
jurisdiction.
8
<PAGE>
ARTICLE IV
SELLER'S COVENANTS
Section 4.1 Covenants of the Seller. The Seller hereby covenants
-----------------------
that except for the transfer hereunder, the Seller will not sell, pledge, assign
or transfer to any other Person, or grant, create, incur, assume or suffer to
exist any Lien on any Mortgage Loan, or any interest therein; the Seller will
notify the Trustee, as assignee of the Purchaser, of the existence of any Lien
on any Mortgage Loan immediately upon discovery thereof; and the Seller will
defend the right, title and interest of the Trust, as assignee of the Purchaser,
in, to and under the Mortgage Loans, against all claims of third parties
claiming through or under the Seller; provided, however, that nothing in this
-------- -------
Section 4.1 shall prevent or be deemed to prohibit the Seller from suffering to
exist upon any of the Mortgage Loans any Liens for municipal or other local
taxes and other governmental charges if such taxes or governmental charges
shall not at the time be due and payable or if the Seller shall currently be
contesting the validity thereof in good faith by appropriate proceedings and
shall have set aside on its books adequate reserves with respect thereto.
ARTICLE V
INDEMNIFICATION BY THE SELLER WITH RESPECT TO THE MORTGAGE LOANS
Section 5.1 Indemnification. (a) Each of Pan American Bank, FSB
---------------
and the Seller agrees to indemnify and hold harmless the Purchaser, each of its
directors, each of its officers who have signed the Registration Statement, and
each person or entity who controls the Purchaser or any such person, within the
meaning of Section 15 of the Securities Act, against any and all losses, claims,
damages or liabilities, joint and several, as incurred, to which the Purchaser,
or any such person or entity may become subject, under the Securities Act or
otherwise, and will reimburse the Purchaser, each such director and officer and
each such controlling person for any legal or other expenses incurred by the
Purchaser or such controlling person in connection with investigating or
defending any such loss, claims, damages or liabilities, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Prospectus Supplement or any amendment or
supplement to the Prospectus Supplement approved in writing by the Seller or the
omission or the alleged omission to state therein a material fact necessary in
order to make the statements in the Prospectus Supplement or any amendment or
supplement to the Prospectus Supplement approved in writing by the Seller, in
the light of the circumstances under which they were made, not misleading, but
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission relates to the information contained in the
Prospectus Supplement contained in the
9
<PAGE>
Seller Information (except with respect to Pan American Bank, FSB, exclusive of
the information under "SUMMARY--Seller") and other than the information under
the caption "THE CERTIFICATE INSURER" and "DESCRIPTION OF THE CERTIFICATES--
Financial Guaranty Insurance Policy" in the Prospectus Supplement or (ii) any
untrue statement or alleged untrue statement of any material fact contained in
the information on any computer tape furnished to the Purchaser or any affiliate
by or on behalf of the Seller containing information regarding the assets of the
Trust. This indemnity will be in addition to any liability which Pan American
Bank, FSB or the Seller may otherwise have.
(b) The Purchaser agrees to indemnify and hold harmless the Seller
and Pan American Bank, FSB, each of their officers, directors and each person or
entity who controls the Seller or Pan American Bank, FSB, or any such person
against any and all losses, claims, damages or liabilities, joint and several,
to which the Seller or Pan American Bank, FSB, or any such person or entity may
become subject, under the Securities Act or otherwise, and will reimburse the
Seller for any legal or other expenses incurred by the Seller, each such officer
and director and such controlling person in connection with investigating or
defending any such losses, claims, damages or liabilities insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Prospectus Supplement or any amendment or
supplement to the Prospectus Supplement or the omission or the alleged omission
to state therein a material fact necessary in order to make the statements in
the Prospectus Supplement or any amendment or supplement to the Prospectus
Supplement, in the light of the circumstances under which they were made, not
misleading, but only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission other than to the extent such
information relates to the information constituting the Seller Information or
the information under "THE CERTIFICATE INSURER," and "DESCRIPTION OF THE
CERTIFICATES--Financial Guaranty Insurance Policy." This indemnity agreement
will be in addition to any liability which the Purchaser may otherwise have.
(c) Promptly after receipt by any indemnified party under this
Article V of notice of any claim or the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Article V, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
-------- -------
the failure to notify an indemnifying party shall not relieve it from any
liability which it may have under this Article V except to the extent it has
been materially prejudiced by such failure; provided, further, that the failure
-------- -------
to notify any indemnifying party shall not relieve it from any liability which
it may have to any indemnified party otherwise than under this Article V.
10
<PAGE>
If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
wishes, jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
party. After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying party
shall not be liable to the indemnified party under this Article V for any legal
or other expenses subsequently incurred by the indemnified party in connection
with the defense thereof other than reasonable costs of investigation.
Any indemnified party shall have the right to employ separate counsel
in any such action and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless: (i) the employment thereof has been specifically authorized by the
indemnifying party in writing; (ii) such indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party and in the reasonable judgment of such counsel it is
advisable for such indemnified party to employ separate counsel; or (iii) the
indemnifying party has failed to assume the defense of such action and employ
counsel reasonably satisfactory to the indemnified party, in which case, if such
indemnified party notifies the indemnifying party in writing that it elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party, it being understood, however, the
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to local counsel) at any time for all such indemnified parties, which
firm shall be designated in writing by the Purchaser, if the indemnified
parties under this Article V consist of the Purchaser, or by the Seller, if the
indemnified parties under this Article V consist of the Seller.
Each indemnified party, as a condition of the indemnity agreements
contained in Section 5.1(a) and (b), shall use its best efforts to cooperate
with the indemnifying party in the defense of any such action or claim. No
indemnifying party shall be liable for any settlement of any such action
effected without its written consent (which consent shall not be unreasonably
withheld), but if settled with its written consent or if there be a final
judgment for the plaintiff in any such action, the indemnifying party agrees to
indemnify and hold harmless any indemnified party from and against any loss or
liability by reason of such settlement or judgment.
11
<PAGE>
Notwithstanding the foregoing sentence, if at any time an indemnified
party shall have requested an indemnifying party to reimburse the indemnified
party for fees and expenses of counsel for which indemnification is required
pursuant to this Article V, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in this Article is
for any reason held to be unenforceable although applicable in accordance with
its terms, the Seller and Pan American Bank, FSB, on the one hand, and the
Purchaser, on the other, shall contribute to the aggregate losses, liabilities,
claims, damages and expenses of the nature contemplated by said indemnity
agreement incurred by the Seller, Pan American Bank, FSB and the Purchaser in
such proportions as shall be appropriate to reflect the relative benefits
received by the Seller on the one hand and the Purchaser on the other from the
sale of the Mortgage Loans such that the Purchaser is responsible for that
portion represented by the underwriting discount set forth on the cover page of
the Prospectus Supplement, and the Seller or Pan American Bank, FSB, as
applicable, shall be responsible for the balance; provided, however, that no
-------- -------
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. For purposes of this Section,
each person, if any, who controls the Purchaser within the meaning of Section 15
of the 1933 Act shall have the same rights to contribution as the Purchaser and
each director of the Seller or Pan American Bank, FSB, each officer of the
Seller, and each person, if any, who controls the Seller or Pan American Bank,
FSB within the meaning of Section 15 of the 1933 Act shall have the same rights
to contribution as the Seller. Notwithstanding anything in this paragraph (d)
to the contrary, the Purchaser shall not be required to contribute an amount in
excess of the amount of the underwriting discount appearing on the cover page of
the Prospectus Supplement.
(e) The Seller or Pan American Bank, FSB agrees to indemnify and to
hold each of the Purchaser, the Trustee, the Certificate Insurer, each of the
officers and directors of each such entity and each person or entity who
controls each such entity or person and each Certificateholder harmless against
any and all claims, losses, penalties, fines, forfeitures, legal fees and
related costs, judgments, and any other costs, fees and expenses that the
Purchaser, the Trustee, the Certificate Insurer or any such person or entity and
any Certificateholder may sustain in any way (i) related to the failure of such
party to perform its duties in compliance with the terms of this Agreement or
(ii) arising from
12
<PAGE>
a breach by such party of its representations and warranties in Section 3.1 of
this Agreement. The Seller shall immediately notify the Purchaser, the Trustee,
the Certificate Insurer and each Certificateholder if a claim is made by a third
party with respect to this Agreement, such party shall assume the defense of any
such claim and pay all expenses in connection therewith, including reasonable
counsel fees, and promptly pay, discharge and satisfy any judgment or decree
which may be entered against the Purchaser, the Trustee, the Certificate Insurer
or any such person or entity and/or any Certificateholder in respect of such
claim. Pursuant to the Pooling and Servicing Agreement, the Trustee shall
reimburse the Seller in accordance with Section 7.03 of the Pooling and
Servicing Agreement for all amounts advanced by the Seller pursuant to the
preceding sentence except when the claim relates directly to the failure of the
Seller to perform its duties in compliance with the terms of this Agreement.
ARTICLE VI
TERMINATION
Section 6.1 Termination. The respective obligations and
-----------
responsibilities of the Seller, Pan American Bank, FSB and the Purchaser created
hereby shall terminate, except for the Seller's indemnity obligations as
provided herein, upon the termination of the Trust as provided in Article X of
the Pooling and Servicing Agreement.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Amendment. This Agreement may be amended from time to
---------
time by the Seller, Pan American Bank, FSB and the Purchaser, by written
agreement signed by the Seller and the Purchaser.
Section 7.2 Governing Law. This Agreement shall be governed by
-------------
and construed in accordance with the laws of the State of New York and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws.
Section 7.3 Notices. All demands, notices and communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered at or mailed by registered mail, postage prepaid, addressed
as follows:
if to the Seller:
United PanAm Mortgage Corporation
625 The City Drive
Suite 490
Orange, California 92868
13
<PAGE>
Attention: Blair F. Kenny
if to Pan American Bank, FSB:
Pan American Bank, FSB
1300 South El Camino Real, Suite 320
San Mateo, California 94402
Attention: Carol Bucci
or such other address as may hereafter be furnished to the Purchaser in writing
by the Seller or Pan American Bank, FSB.
if to the Purchaser:
Lehman ABS Corporation
Three World Financial Center
New York, NY 10285-0900
Attention: Theodore P. Janulis
or such other address as may hereafter be furnished to the Seller in writing by
the Purchaser.
Section 7.4 Severability of Provisions. If any one or more of
--------------------------
the covenants, agreements, provisions of 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 of
enforceability of the other provisions of this Agreement.
Section 7.5 Counterparts. 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
and such counterparts, together, shall constitute one and the same agreement.
Section 7.6 Further Agreements. The Purchaser and the Seller
------------------
each agree to execute and deliver to the other such additional documents,
instruments or agreements as may be necessary or reasonable and appropriate to
effectuate the purposes of this Agreement or in connection with the issuance of
any Series of Certificates representing interests in the Mortgage Loans.
Section 7.7 Intention of the Parties. It is the intention of the
------------------------
parties that Seller is purchasing and Pan American Bank, FSB is selling, and
that the Purchaser is purchasing, and the Seller is selling, the Mortgage Loans
rather than, in either case, pledging the Mortgage Loans to secure a loan.
Accordingly, the parties hereto each intend to treat the transaction for Federal
income tax purposes and all other purposes as a sale by Pan American Bank, FSB
and a purchase by the Seller, and a sale by the Seller and a purchase by the
Purchaser, of the Mortgage Loans. The Purchaser will have the right to review
the Mortgage Loans and the
14
<PAGE>
related Mortgage Files to determine the characteristics of the Mortgage Loans
which will affect the Federal income tax consequences of owning the Mortgage
Loans and the Seller will cooperate with all reasonable requests made by the
Purchaser in the course of such review.
Section 7.8 Successors and Assigns: Assignment of Purchase
----------------------------------------------
Agreement. This Agreement shall bind and inure to the benefit of and be
- ---------
enforceable by the Seller, the Purchaser and the Trustee. The obligations of
the Seller under this Agreement cannot be assigned or delegated to a third party
without the consent of the Purchaser, which consent shall be at the Purchaser's
sole discretion, except that the Purchaser acknowledges and agrees that the
Seller may assign its obligations hereunder to any Person into which the Seller
is merged or any corporation resulting from any merger, conversion or
consolidation to which the Seller is a party or any Person succeeding to the
business of the Seller. The parties hereto acknowledge that the Purchaser is
acquiring the Mortgage Loans for the purpose of contributing them to a trust
that will issue a Series of Certificates representing undivided interests in
such Mortgage Loans. As an inducement to the Purchaser to purchase the Mortgage
Loans, the Seller acknowledges and consents to the assignment by the Purchaser
to the Trustee of all of the Purchaser's rights against the Seller pursuant to
this Agreement insofar as such rights relate to Mortgage Loans transferred to
such Trustee and to the enforcement or exercise of any right or remedy against
the Seller pursuant to this Agreement by the Trustee under the Pooling and
Servicing Agreement. Such enforcement of a right or remedy by the Trustee shall
have the same force and effect as if the right or remedy had been enforced or
exercised by the Purchaser directly.
Section 7.9 Survival. The representations and warranties set
--------
forth in Sections 3.1 and 3.2 and the provisions of Article V shall survive the
purchase of the Mortgage Loans hereunder.
15
<PAGE>
IN WITNESS WHEREOF, the Seller, the Purchaser and Pan American Bank,
FSB have caused their names to be signed to this Mortgage Loan Purchase
Agreement by their respective officers thereunto duly authorized as of the day
and year first above written.
LEHMAN ABS CORPORATION,
as Purchaser
By: /s/
---------------------------------
Name:
Title:
UNITED PANAM MORTGAGE CORPORATION,
as Seller
By: /s/
---------------------------------
Name:
Title:
PAN AMERICAN BANK, FSB
By: /s/
---------------------------------
Name:
Title:
<PAGE>
Exhibit 10.77
- -------------------------------------------------------------------------------
INSURANCE AND INDEMNITY AGREEMENT
among
FINANCIAL SECURITY ASSURANCE INC.
UNITED PANAM MORTGAGE CORPORATION
PAN AMERICAN BANK, FSB
and
LEHMAN ABS CORPORATION
Dated as of December 1, 1997
Lehman ABS Corporation
$114,425,000 United PanAm Mortgage Loan Asset Backed Certificates
Series 1997-1, Class A
- -------------------------------------------------------------------------------
<PAGE>
INSURANCE AND INDEMNITY AGREEMENT
INSURANCE AND INDEMNITY AGREEMENT, dated as of December 30, 1997,
among FINANCIAL SECURITY ASSURANCE INC. ("FSA"), UNITED PANAM MORTGAGE
CORPORATION (the "Seller"), PAN AMERICAN BANK, FSB (the "Company"; the Seller
and the Company, together, the "Company Parties"), and LEHMAN ABS CORPORATION
(the "Depositor").
INTRODUCTORY STATEMENTS
Pursuant to a Pooling and Servicing Agreement, dated as of December 1,
1997, made by and among the Depositor as depositor, the Seller as seller, the
Company as master servicer and Bankers Trust Company of California, N.A., as
trustee (the "Trustee"), $114,425,000 Lehman ABS Corporation, United PanAm
Mortgage Loan Asset Backed Certificates, Series 1997-1, Class A (the
"Securities") are being issued.
----------
The Company has requested that FSA issue a financial guaranty
insurance policy guarantying certain distributions of the principal of and
interest on the Securities (including any such distributions subsequently
avoided as a preference under applicable bankruptcy law) upon the terms and
subject to the conditions provided herein.
The parties hereto desire to specify the conditions precedent to the
issuance of the Policy by FSA, the payment of premium in respect of the Policy,
the indemnity and reimbursement to be provided to FSA in respect of amounts paid
by FSA under the Policy or otherwise and certain other matters.
In consideration of the premises and of the agreements herein
contained, FSA, the Depositor, the Seller and the Company hereby agree as
follows:
ARTICLE I
DEFINITIONS; LIMITED RECOURSE
Section 1.01. Definitions. Capitalized terms used herein shall have
-----------
the meanings provided in Appendix A hereto or, if not defined in Appendix A
shall have the meanings provided in the Pooling and Servicing Agreement.
Section 1.02. Limited Recourse. Notwithstanding any provision of
----------------
this Agreement to the contrary, the payment obligations of the Company Parties
(other than those set forth in Section 3.02 (other than 3.02(d)(ii)) and Section
3.04) and the Depositor (other than those set forth in Section 3.04) set forth
herein shall be non-recourse obligations and shall be payable only from monies
available for such payment in accordance with the provisions of the Pooling and
Servicing Agreement (except to the extent that any such payment obligation
arises from a failure to perform or default of a Company Party or any affiliate
thereof in accordance with the Pooling and Servicing Agreement or any other
Transaction Document or by reason of gross negligence,
-2-
<PAGE>
willful misconduct or bad faith on the part of a Company Party in the
performance of its duties and obligations thereunder or reckless disregard by a
Company Party of its duties and obligations thereunder). The payment obligations
of each of the Seller and the Company shall be joint and not several. The
payment obligations of the Company Parties and the Depositor shall be several
and not joint.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.01. Representations and Warranties of the Company Parties.
-----------------------------------------------------
Each of the Company Parties represents, warrants and covenants, as of the date
hereof and as of the Date of Issuance, as follows (the following shall be
construed such that each of the Company Parties makes each such representation,
warranty and covenant whether applicable to it or applicable to another Company
Party):
(a) Due Organization and Qualification. The Seller is a corporation,
----------------------------------
duly organized, validly existing and in good standing under the laws of
California. The Company is a federal savings bank, duly organized, validly
existing and in good standing under the laws of the United States. Each of
the Company Parties is in good standing and has obtained all necessary
licenses, permits, charters, registrations and approvals (together,
"Approvals") necessary for the conduct of its business as currently
conducted and as described in the Offering Document and the performance of
its obligations under the Transaction Documents to which it is a party, in
each jurisdiction in which the failure to be so qualified or to obtain such
Approvals would render any Mortgage Loan unenforceable in any respect or,
in any respect, have a material adverse effect upon the Transaction.
(b) Power and Authority. Each Company Party has all necessary power
-------------------
and authority to conduct its business as currently conducted and as
described in the Offering Document, to execute the Transaction Documents to
which it is a party, to deliver and perform its obligations under such
Transaction Documents and to consummate the Transaction.
(c) Due Authorization. The execution, delivery and performance by
-----------------
each Company Party of the Transaction Documents to which it is a party have
been duly authorized by all necessary corporate action on the part of such
Company Party and do not require any additional Approvals or consents or
other action by, or any notice to or filing with, any Person, including,
without limitation, any governmental entity or such Company Party's
stockholders.
(d) Noncontravention. With respect to each Company Party, neither the
----------------
execution and delivery of the Transaction Documents to which it is a party
by such Company Party, the consummation of the transactions contemplated
thereby nor the satisfaction of the terms and conditions of such
Transaction Documents,
-3-
<PAGE>
(i) conflicts with or results in any breach or violation of any
provision of the charter, the articles of incorporation or certificate
of incorporation or the bylaws of such Company Party or any law, rule,
regulation, order, writ, judgment, injunction, decree, determination
or award currently in effect having applicability to such Company
Party or any of its properties, including regulations issued by an
administrative agency or other governmental authority having
supervisory powers over such Company Party,
(ii) constitutes a default by such Company Party under or a
breach of any provision of any loan agreement, mortgage, indenture or other
agreement or instrument to which such Company Party is a party or by which
it or any of its properties is or may be bound or affected, or
(iii) results in or requires the creation of any Lien upon or
in respect of any of such Company Party's assets except as otherwise
expressly contemplated by the Transaction Documents.
(e) Legal Proceedings. There is no action, proceeding or
-----------------
investigation by or before any court, governmental or administrative agency
or arbitrator against or affecting any Company Party, or any properties or
rights of any Company Party or any or all of the Mortgage Loans, pending
or, to the knowledge of any Company Party after reasonable inquiry,
threatened, which, in any case, if decided adversely to a Company Party,
would result in a Material Adverse Change with respect to such Company
Party or any Mortgage Loan.
(f) Valid and Binding Obligations. The Transaction Documents, when
-----------------------------
executed and delivered by the applicable Company Parties, will constitute
the legal, valid and binding obligations of each Company Party that is a
party thereto, enforceable in accordance with their respective terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally or, in the case of the Company, the rights of creditors of
federally insured financial institutions generally, and general equitable
principles.
(g) Financial Statements. The Financial Statements of each of the
--------------------
Company Parties, copies of which have been furnished to FSA, (i) are, as of
the dates and for the periods referred to therein, complete and correct in
all material respects, (ii) present fairly the financial condition and
results of operations of such Company Party as of the dates and for the
periods indicated and (iii) have been prepared in accordance with generally
accepted accounting principles consistently applied, except as noted
therein (subject as to interim statements to normal year-end adjustments).
Since the date of the most recent Financial Statements, there has been no
material adverse change in such financial condition or results of
operations. Except as disclosed in the Financial Statements, no Company
Party is subject to any contingent liabilities or commitments that,
individually or in the aggregate, have a material possibility of causing a
Material Adverse Change in respect of a Company Party.
-4-
<PAGE>
(h) ERISA. No Accumulated Funding Deficiency, whether or not waived,
-----
has occurred with respect to any Plan. No Plan has been terminated, and no
Commonly Controlled Entity has withdrawn from any Multiemployer Plan which
could result in any liability under ERISA of a Commonly Controlled Entity.
No Reportable Event or other event or condition has occurred which could
result in the termination of any Plan by the PBGC. No Plan has an
Underfunding greater than $100,000. The aggregate amount of Underfunding
for all Underfunded Plans does not exceed $100,000. The liability to which
the Commonly Controlled Entities would become subject under ERISA if they
were to withdraw completely from all Multiemployer Plans as of the most
recent valuation date is not in excess of $100,000. The Multiemployer
Plans are neither in Reorganization (as defined in Section 4241 of ERISA)
nor Insolvent (as defined in Section 4245 of ERISA). Each Company Party is
in compliance in all material respects with ERISA and has not incurred and
does not reasonably expect to incur any liabilities to the PBGC (other than
premiums due to the PBGC) in connection with any Plan or Multiemployer
Plan.
(i) Accuracy of Information. None of the Provided Documents contains
-----------------------
any statement of a material fact with respect to any Company Party or the
Mortgage Loans that was untrue or misleading in any material respect when
made. Since the furnishing of the Documents, there has been no change, nor
any development or event reasonably likely to lead to a prospective change
known to any Company Party, that would render any of the Provided Documents
untrue or misleading in any material respect. There is no fact known to
any Company Party which has a material possibility of causing a Material
Adverse Change with respect to any Company Party or the Mortgage Loans.
(j) Compliance with Securities Laws. The Company Information (as
-------------------------------
defined in Section 3.04) contained in the Offering Document does not
contain any untrue statement of material fact and does not omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they
were made, not misleading.
(k) Transaction Documents. Each of the representations and warranties
---------------------
of any of the Company Parties contained in the Transaction Documents is
true and correct in all material respects and each Company Party hereby
makes each such representation and warranty to, and for the benefit of, FSA
as if the same were set forth in full herein.
(l) Good Title; Absence of Liens; Security Interest. The Seller, at
-----------------------------------------------
the same time of transfer of the Mortgage Loans to the Depositor, was the
owner of, and had good and marketable title to, the Mortgage Loans free and
clear of all Liens and Restrictions on Transferability, and had full right,
corporate power and lawful authority to assign, transfer and pledge the
Mortgage Loans. In the event that, in contravention of the intention of
the parties, the transfer of the Mortgage Loans by the Seller to the
Depositor is characterized as other than a sale, the intent of the parties,
as evidenced by the relevant Transaction Documents, is that such transfer
shall be characterized as a secured financing, and the Trustee shall, for
the benefit of the Certificateholders and FSA, have a valid and perfected
first priority security interest in the Mortgage Loans free and clear of
all Liens and
-5-
<PAGE>
Restrictions on Transferability.
(m) Taxes. Each Company Party has filed all federal and state tax
-----
returns which are required to be filed by it and paid all taxes owed by it,
including any assessments received by it, to the extent that such taxes
have become due. Any taxes, fees and other governmental charges payable by
any Company Party in connection with the Transaction, the execution and
delivery of the Related Documents and the issuance of the Securities have
been paid or shall have been paid at or prior to the Date of Issuance.
(n) Solvency; Fraudulent Conveyance. Each Company Party is solvent
-------------------------------
and will not be rendered insolvent by the transactions contemplated by the
Transaction Documents and, after giving effect to such transactions, no
Company Party will be left with an unreasonably small amount of capital
with which to engage in its business. No Company Party intends to incur,
or believes that it has incurred, debts beyond its ability to pay such
debts as they mature. No Company Party contemplates the commencement of
insolvency, bankruptcy, liquidation or consolidation proceedings or the
appointment of a receiver, liquidator, conservator, trustee or similar
official in respect of any Company Party or any assets of any Company
Party. The amount of consideration being received by the Seller upon the
sale of the Mortgage Loans to the Depositor constitutes reasonably
equivalent value and fair consideration for the interest in the Mortgage
Loans evidenced by the Securities. The Seller is not transferring the
Mortgage Loans to the Depositor, as provided in the Transaction Documents,
with any intent to hinder, delay or defraud any of the Seller's creditors.
Section 2.02. Representations and Warranties of the Depositor. The
-----------------------------------------------
Depositor represents, warrants and covenants, as of the date hereof and as of
the Date of Issuance, as follows:
(a) Due Organization and Qualification. The Depositor is a
----------------------------------
corporation, duly organized, validly existing and in good standing under
the laws of Delaware. The Depositor is duly qualified to do business and
is in good standing in each jurisdiction in which the failure to be so
qualified would otherwise have a material adverse effect upon the
Transaction.
(b) Power and Authority. The Depositor has all necessary corporate
-------------------
power and authority to conduct its business as currently conducted and as
described in the Offering Document, to execute, deliver and perform its
obligations under the Transaction Documents to which it is a party and to
consummate the Transaction.
(c) Due Authorization. The execution, delivery and performance of the
-----------------
Transaction Documents to which it is a party by the Depositor have been
duly authorized by all necessary corporate action and do not require any
additional approvals or consents or other action by or any notice to or
filing with any Person, including, without limitation, any governmental
entity or the Depositor's stockholders.
-6-
<PAGE>
(d) Noncontravention. Neither the execution and delivery of the
----------------
Transaction Documents to which it is a party by the Depositor, the
consummation of the transactions contemplated thereby nor the satisfaction
of the terms and conditions of the Transaction Documents to which it is a
party,
(i) conflicts with or results in any breach or violation of any
provision of the certificate of incorporation or bylaws of the
Depositor or any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award currently in effect having
applicability to the Depositor or any of its properties, including
regulations issued by an administrative agency or other governmental
authority having supervisory powers over the Depositor,
(ii) constitutes a default by the Depositor under or a breach of
any provision of any loan agreement, mortgage, indenture or other
agreement or instrument to which the Depositor is a party or by which
it or any of its properties is or may be bound or affected, or
(iii) results in or requires the creation of any Lien upon or in
respect of any of the Depositor's assets except as otherwise expressly
contemplated by the Transaction Documents.
(e) Legal Proceedings. There is no action, proceeding or
-----------------
investigation by or before any court, governmental or administrative agency
or arbitrator against or affecting the Depositor, or any properties or
rights of the Depositor, pending or, to the Depositor's knowledge,
threatened, which, in any case, if decided adversely to the Depositor,
would result in a Material Adverse Change with respect to the Depositor or
any Mortgage Loan.
(f) Valid and Binding Obligations. The Transaction Documents to which
-----------------------------
it is a party, when executed and delivered by the Depositor, will
constitute the legal, valid and binding obligations of the Depositor,
enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general equitable principles. The Securities, when executed, authenticated
and delivered in accordance with the Pooling and Servicing Agreement, will
be validly issued and outstanding and entitled to the benefits of the
Pooling and Servicing Agreement and, together with the Class X and Class R
Certificates, will evidence the entire beneficial ownership interest in the
Trust Fund.
(g) Accuracy of Information. None of the Provided Documents contains
-----------------------
any statement of a material fact with respect to the Depositor or the
Transaction that was untrue or misleading in any material respect when
made. Since the furnishing of the information in the Provided Documents,
there has been no change, nor any development or event involving a
prospective change known to the Depositor, that would render any of the
Provided Documents untrue or misleading in any material respect with
respect to the Depositor or the Transaction. There is no fact known to the
Depositor which has a
-7-
<PAGE>
material possibility of causing a Material Adverse Change with respect to
the Depositor or the Mortgage Loans (other than facts already disclosed to
FSA by the Depositor or which are publicly known).
(h) Compliance With Securities Laws. The offer and sale of the
-------------------------------
Securities comply in all material respects with all requirements of law,
including all registration requirements of applicable securities laws.
Without limitation of the foregoing, and except with respect to the FSA
Information and the Company Information (each as defined in Section 3.04),
the Offering Document does not contain any untrue statement of a material
fact and does not omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The Depositor
makes no representation or warranty with respect to the Company Information
or the FSA Information. The Trust Fund is not required to be registered as
an "investment company" under the Investment Company Act. The Pooling and
Servicing Agreement is not required to be qualified under the Trust
Indenture Act.
(i) Transaction Documents. Each of the representations and warranties
---------------------
of the Depositor contained in the Transaction Documents is true and correct
in all material respects and the Depositor hereby makes each such
representation and warranty to, and for the benefit of, FSA as if the same
were set forth in full herein.
(j) Compliance With Law. No practice, procedure or policy employed or
-------------------
proposed to be employed by the Depositor in the conduct of its business
violates any law, regulation, judgment, agreement, order or decree
applicable to the Depositor which, if enforced, would result in a Material
Adverse Change with respect to the Depositor.
(k) Taxes. The Depositor is not delinquent in the filing of any
-----
federal and state tax returns which are required to be filed and is not
delinquent in the payment of any taxes, including any assessments received
by it, to the extent that such taxes have become due. Any taxes, fees and
other governmental charges payable by the Depositor in connection with the
Transaction, the execution and delivery of the Transaction Documents and
the issuance of the Securities have been paid or shall have been paid at or
prior to the Date of Issuance.
(l) Good Title: Absence of Liens: Security Interest. The Depositor is
-----------------------------------------------
the owner of, and has good and marketable (but not record) title (insofar
as such title was conveyed to it by the Seller) to, the Mortgage Loans free
and clear of all Liens and Restrictions on Transferability which may have
been created by the Depositor, and has full right, corporate power and
lawful authority to assign, transfer and pledge the Mortgage Loans. In the
event that, in contravention of the intention of the parties, the transfer
of the Mortgage Loans by the Depositor to the Trust Fund is characterized
as other than a sale, such transfer shall be characterized as a secured
financing, and the Trustee shall, for the benefit of the Certificateholders
and FSA, have a valid and perfected first priority security interest in the
Mortgage Loans free and clear of all Liens and Restrictions on
Transferability.
-8-
<PAGE>
(m) Solvency; Fraudulent Conveyance. The Depositor is solvent and
-------------------------------
will not be rendered insolvent by the transactions contemplated by the
Transaction Documents and, after giving effect to such transactions, the
Depositor will not be left with an unreasonably small amount of capital
with which to engage in its business. The Depositor does not intend to
incur, or believe that it has incurred, debts beyond its ability to pay
such debts as they mature; provided, however, that the limitations of this
Section 2.02(m) shall not be construed as limiting the ability of the
Depositor to issue collateralized mortgage obligations and asset-backed
securities classified as debt (other than any debt creating recourse
against the Depositor). The Depositor does not contemplate the
commencement of insolvency, bankruptcy, liquidation or consolidation
proceedings or the appointment of a receiver, liquidator, conservator,
trustee or similar official in respect of the Depositor or any of its
assets. The amount of consideration being received by the Depositor upon
the sale of the Securities to the Underwriter constitutes reasonably
equivalent value and fair consideration for the interest in the Mortgage
Loans evidenced by the Securities. The Depositor is not selling the
Securities to the Underwriter, as provided in the Transaction Documents,
with any intent to hinder, delay or defraud any of the Depositor's
creditors.
Section 2.03. Affirmative Covenants of the Company Parties. Each of
--------------------------------------------
the Company Parties hereby agrees that during the Term of the Agreement, unless
FSA shall otherwise expressly consent in writing:
(a) Corporate Existence. Each Company Party shall maintain its
-------------------
corporate existence and shall at all times continue to be duly organized
under the laws of the jurisdiction of its organization or incorporation and
duly qualified and duly authorized (as described in Sections 2.01(a), (b)
and (c) hereof) and shall conduct its business in accordance with the terms
of its articles of incorporation and bylaws.
(b) Compliance With Agreements and Applicable Laws. Each Company
----------------------------------------------
Party shall perform each of its obligations under the Transaction Documents
and shall comply with all material requirements of, and the Securities
shall be offered and sold in accordance with, any law, rule or regulation
applicable to it or thereto, or that are required in connection with its
performance under any of the Transaction Documents.
(c) Financial Statements; Accountants' Reports; Other Information.
-------------------------------------------------------------
Each Company Party shall keep or cause to be kept in reasonable detail
books and records of account of such Company Party's assets and business,
and the Company's books and records shall clearly reflect therein the
transfer of the Mortgage Loans to the Depositor as a sale of the Company's
interest in the Mortgage Loans. Each Company Party shall furnish or cause
to be furnished to FSA:
(i) Annual Financial Statements. As soon as available, and in
---------------------------
any event within 90 days after the close of each fiscal year of each
Company Party, starting with the fiscal year ending December 31, 1998, the
audited balance sheets of such Company Party as of the end of such fiscal
year and the audited statements of income, changes in shareholders' equity
and cash flows of such Company Party for
-9-
<PAGE>
such fiscal year, all in reasonable detail and stating in comparative form
the respective figures for the corresponding date and period in the
preceding fiscal year, prepared in accordance with generally accepted
accounting principles, consistently applied, and accompanied by the
certificate of such Company Party's independent accountants (who shall be a
nationally recognized firm or otherwise acceptable to FSA) and by the
certificate specified in Section 2.03(d) hereof.
(ii) Quarterly Financial Statements. As soon as available, and
------------------------------
in any event within 45 days after the close of each of the first three
quarters of each fiscal year of each Company Party starting with the first
fiscal quarter of 1998, the unaudited balance sheets of such Company Party
as of the end of such quarter and the unaudited statements of income,
changes in shareholders' equity and cash flows of such Company Party for
the portion of the fiscal year then ended, all in reasonable detail and
stating in comparative form the respective figures for the corresponding
date and period in the preceding fiscal year, if any, prepared in
accordance with generally accepted accounting principles, consistently
applied (subject to normal year-end adjustments), and accompanied by the
certificate specified in Section 2.03(d) hereof if such certificate is
required to be provided pursuant to such Section.
(iii) Accountants' Reports. If a Trigger Event has occurred,
--------------------
copies of any reports submitted to any Company Party by its independent
accountants in connection with any examination of the financial statements
of a Company Party, promptly upon receipt thereof.
(iv) Other Information. Promptly upon receipt thereof, copies
-----------------
of all reports statements, certifications, schedules, or other similar
items delivered to or by any Company Party pursuant to the terms of
the Transaction Agreements and, promptly upon request, such other data
as FSA may reasonably request; provided, however, that the Company
Parties shall not be required to deliver any such items if provision
by some other party (who is not a Company Party) to FSA is required
under the Transaction Documents unless such other party wrongfully
fails to deliver such item. Each Company Party shall, upon the
request of FSA, permit FSA or its authorized agents (A) to inspect the
books and records of such Company Party as they may relate to the
Mortgage Loans, the obligations of such Company Party under the
Transaction Documents, the Transaction and, but only following the
occurrence of a Trigger Event, such Company Party's business; (B) to
discuss the affairs, finances and accounts of such Company Party with
the Chief Operating Officer and the Chief Financial Officer of the
such Company Party, no more frequently than annually unless a Trigger
Event has occurred; and (C) upon the occurrence of a Trigger Event, to
discuss the affairs, finances and accounts of such Company Party with
such Company Party's independent accountants, provided that an officer
--------
of such Company Party shall have the right to be present during such
discussions. Such inspections and discussions shall be conducted
during normal business hours and shall not unreasonably disrupt the
business of such Company
-10-
<PAGE>
Party. In addition, each Company shall promptly (but in no case more
than 30 days following issuance or receipt by the Commonly Controlled
Entity) provide to FSA a copy of all correspondence between a Commonly
Controlled Entity and the PBGC, IRS, Department of Labor or the
administrators of a Multiemployer Plan relating to any Reportable
Event or the underfunded status, termination or possible termination
of a Plan or a Multiemployer Plan. The books and records of each
Company Party will be maintained at the address of such Company Party
designated herein for receipt of notices, unless such Company Party
shall otherwise advise the parties hereto in writing.
(v) Each Company Party shall provide or cause to be provided to
FSA an executed original copy of each document executed in connection
with the transaction within 30 days after the date of closing.
All financial statements specified in clauses (i) and (ii) above shall be
furnished in consolidated form for the Company and all Subsidiaries in the
event the Company Parties shall consolidate its financial statements with
its Subsidiaries.
(d) Compliance Certificate. Each Company Party shall deliver to FSA
----------------------
concurrently with the delivery of the financial statements required
pursuant to Section 2.03(c)(i) hereof (and concurrently with the delivery
of the financial statements required pursuant to Section 2.03(c)(ii)
hereof, if a Trigger Event has occurred), a certificate signed by the Chief
Financial Officer of such Company Party stating that:
(i) a review of the Company Party's performance under the
Transaction Documents during such period has been made under such officer's
supervision;
(ii) to the best of such individual's knowledge following
reasonable inquiry, no Trigger Event, Default or Event of Default has
occurred, or if a Trigger Event, Default or Event of Default has occurred,
specifying the nature thereof and, if such Company Party has a right to
cure any such Default or Event of Default pursuant to Section 5.01, stating
in reasonable detail the steps, if any, being taken by such Company Party
to cure such Default or Event of Default or to otherwise comply with the
terms of the agreement to which such Default or Event of Default relates;
and
(iii) the attached financial reports submitted in accordance with
Section 2.03(c)(i) or (ii) hereof, as applicable, are complete and correct
in all material respects and present fairly the financial condition and
results of operations of the Company Party as of the dates and for the
periods indicated, in accordance with generally accepted accounting
principles consistently applied (subject as to interim statements to normal
year-end adjustments).
(e) Notice of Material Events. Each Company Party shall promptly
-------------------------
inform FSA in writing of the occurrence of any of the following:
-11-
<PAGE>
(i) the submission of any claim or the initiation of any legal
process, litigation or administrative or judicial investigation (A) with
respect to a material portion of the Mortgage Loans or (B) in which a
request has been made for certification as a class action (or equivalent
relief) that would involve a material portion of the Mortgage Loans;
(ii) any change in the location of the Company Party's principal
office or any change in the location of the Company Party's books and
records;
(iii) the occurrence of any Trigger Event, Default or Event
of Default; or
(iv) any other event, circumstance or condition that has
resulted, or has a material possibility of resulting, in a Material Adverse
Change in respect of such Company Party.
(f) Further Assurances. Each Company Party shall, upon the request of
------------------
FSA, from time to time, execute, acknowledge and deliver, or cause to be
executed, acknowledged and delivered, within thirty (30) days of such
request, such amendments hereto and such further instruments and take such
further action as may be reasonably necessary to effectuate the intention,
performance and provisions of the Transaction Documents or to protect the
interest of the Trustee, for the benefit of the Certificateholders and FSA,
in the Mortgage Loans, free and clear of all Liens and Restrictions on
Transferability except the Lien in favor of the Trustee, for the benefit of
the Certificateholders and FSA, and the Restrictions on Transferability
imposed by the Pooling and Servicing Agreement. In addition, each Company
Party agrees to cooperate with S&P and Moody's in connection with any
review of the Transaction which may be undertaken by S&P and Moody's after
the date hereof.
(g) Retirement of Securities. Each Company Party shall request that
------------------------
the Trustee, upon retirement of the Securities pursuant to the Pooling and
Servicing Agreement or otherwise, to furnish to FSA a notice of such
retirement, and, upon retirement of the Securities and the expiration of
the term of the Policy, to surrender the Policy to FSA for cancellation.
(h) Third-Party Beneficiary. Each Company Party agrees that FSA shall
-----------------------
have all rights of a third-party beneficiary in respect of the Pooling and
Servicing Agreement and hereby incorporates and restates its
representations, warranties and covenants as set forth therein for the
benefit of FSA, subject to the limitations as to remedies as set forth in
Sections 2.03 and 2.05 of the Pooling and Servicing Agreement (so long as
such Company Party is in compliance with its repurchase obligation
thereunder), as set forth therein.
Section 2.04. Affirmative Covenants of the Depositor. The Depositor
--------------------------------------
hereby agrees that during the Term of the Agreement, unless FSA shall otherwise
expressly consent in writing:
-12-
<PAGE>
(a) Corporate Existence. The Depositor shall maintain its corporate
-------------------
existence and shall at all times continue to be duly organized under the
laws of the state of its incorporation and duly qualified and duly
authorized (as described in Sections 2.02(a), (b) and (c) hereof) and shall
conduct its business in accordance with the terms of its certificate of
incorporation and bylaws as they may be amended from time to time;
provided, however, that no such amendment will result in the inability of
the Depositor to perform under the Transaction Documents to which it is a
party.
(b) Compliance With Agreements and Applicable Laws. The Depositor
----------------------------------------------
shall perform each of its obligations under the Transaction Documents to
which it is a party and shall comply with all material requirements of, and
the Securities shall be offered and sold in accordance with, any law, rule
or regulation applicable thereto, or that are required in connection with
its performance under any of the Transaction Documents to which it is a
party.
(c) Further Assurances. The Depositor shall, upon the request of FSA,
------------------
from time to time, execute, acknowledge and deliver, or cause to be
executed, acknowledged and delivered, within thirty (30) days of such
request, such amendments hereto and such further instruments and take such
further action as may be reasonably necessary to effectuate the intention,
performance and provisions of the Transaction Documents or to protect the
interest of the Trustee, for the benefit of the Certificateholders and FSA,
in the Mortgage Loans, free and clear of all Liens and Restrictions on
Transferability except the Lien, if any, in favor of the Trustee, for the
benefit of the Certificateholders and FSA, and the Restrictions on
Transferability imposed by the Pooling and Servicing Agreement. In
addition, the Depositor agrees to cooperate with S&P and Moody's in
connection with any review of the Transaction which may be undertaken by
S&P and Moody's after the date hereof.
(d) Retirement of Securities. The Depositor shall cause the Trustee,
------------------------
upon retirement of the Securities pursuant to the Pooling and Servicing
Agreement or otherwise, to furnish to FSA a notice of such retirement and,
upon retirement of the Securities and the expiration of the term of the
Policy, to surrender the Policy to FSA for cancellation.
(e) Third-Party Beneficiary. The Depositor agrees that FSA shall have
-----------------------
all rights of a third-party beneficiary in respect of the Transaction
Documents to which it is a party and hereby incorporates and restates its
representations, warranties and covenants as set forth therein for the
benefit of FSA.
Section 2.05. Negative Covenants of the Company Parties. Each Company
-----------------------------------------
Party hereby agrees that during the Term of the Agreement, unless FSA shall
otherwise expressly consent in writing:
(a) Restrictions on Liens. None of the Company Parties shall (i)
---------------------
create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence
-13-
<PAGE>
or existence of any Lien or Restriction on Transferability on the Mortgage
Loans except for the Lien in favor of the Trustee, for the benefit of the
Certificateholders and FSA, and the Restrictions on Transferability imposed
by the Pooling and Servicing Agreement or (ii) sign or file under the
Uniform Commercial Code of any jurisdiction any financing statement which
names the Company as a debtor, or sign any security agreement authorizing
any secured party thereunder to file such financing statement, with respect
to the Mortgage Loans, except in each case any such instrument solely
securing the rights and preserving the Lien of the Trustee, for the benefit
of the Certificateholders and FSA.
(b) Impairment of Rights. None of the Company Parties shall take any
--------------------
action, or fail to take any action, if such action or failure to take
action may (i) interfere with the enforcement of any rights under the
Transaction Documents that are material to the rights, benefits or
obligations of the Trustee, the Certificateholders or FSA, (ii) result in a
Material Adverse Change in respect of any Mortgage Loan or (iii) impair the
ability of any Company Party to perform its obligations under the
Transaction Documents.
(c) Waiver, Amendments, Etc. None of the Company Parties shall waive,
-----------------------
modify or amend, or consent to any waiver, modification or amendment of,
any of the provisions of any of the Transaction Documents.
(d) Successors. None of the Company Parties shall terminate or
----------
designate, or consent to the termination or designation of, any Sub-
servicer without the prior written consent of FSA.
Section 2.06. Negative Covenants of the Depositor. The Depositor
-----------------------------------
hereby agrees that during the Term of the Agreement, unless FSA shall otherwise
expressly consent in writing:
(a) Restrictions on Liens. The Depositor shall not (i) create or
---------------------
incur or agree to create or incur or consent to cause the creation,
incurrence or existence of any Lien or Restriction on Transferability on
the Mortgage Loans except for the Liens, if any, in favor of the Trustee,
for the benefit of the Certificateholders and FSA, and the Restrictions on
Transferability imposed by the Pooling and Servicing Agreement or (ii) sign
or file under the Uniform Commercial Code of any jurisdiction any financing
statement which names the Depositor as a debtor, or sign any security
agreement authorizing any secured party thereunder to file such financing
statement, with respect to the Mortgage Loans, except in each case any such
instrument solely securing the rights and preserving the Lien of the
Trustee, for the benefit of the Certificateholders and FSA.
(b) Impairment of Rights. The Depositor shall not take any action
--------------------
which may (i) interfere with the enforcement of any rights under the
Transaction Documents that are material to the rights, benefits or
obligations of the Trustee, the Certificateholders or FSA or (ii) impair
the ability of the Depositor to perform its obligations under the
Transaction Documents to which it is a party.
(c) Waiver, Amendments, Etc. The Depositor shall not waive, modify or
-----------------------
-14-
<PAGE>
amend, or consent to any waiver, modification or amendment of, any of the
provisions of any of the Transaction Documents.
ARTICLE III
THE POLICY; REIMBURSEMENT; INDEMNIFICATION
Section 3.01. Issuance of the Policy. FSA agrees to issue the Policy
----------------------
subject to satisfaction of the conditions precedent set forth in Appendix C
hereto.
Section 3.02. Payment of Fees and Premium.
---------------------------
(a) Legal Fees. On the Date of Issuance, the Company shall pay or
----------
cause to be paid legal fees and disbursements incurred by FSA in connection
with the issuance of the Policy, subject to the Premium Letter.
(b) Rating Agency Fees. The initial fees of S&P and Moody's with
------------------
respect to the Securities and the transactions contemplated hereby shall be
paid by the Company in full on the Date of Issuance, or otherwise provided
for to the satisfaction of FSA. All periodic and subsequent fees of S&P or
Moody's with respect to, and directly allocable to, the Securities shall be
for the account of, and shall be billed to, the Company. The fees for any
other rating agency shall be paid by the party requesting such other
agency's rating, unless such other agency is a substitute for S&P or
Moody's in the event that S&P or Moody's is no longer rating the
Securities, in which case the cost for such agency shall be paid by the
Company.
(c) Auditors' Fees. In the event that FSA's auditors are required to
--------------
provide information or any consent in connection with the Offering Document
prepared prior to the Date of Issuance, fees therefor not exceeding $4,000
shall be paid by the Company. The Company shall pay on demand any
additional fees of FSA's auditors payable in respect of any Offering
Document that are incurred after the Date of Issuance. It is understood
that FSA's auditors shall not incur any additional fees in respect of
future Offering Documents except at the request of or with the consent of
the Company.
(d) Premium. In consideration of the issuance by FSA of the Policy,
-------
FSA shall be entitled to receive the Premium as and when due in accordance
with the terms of the Premium Letter (i) in the case of Premium due on or
before the Date of Issuance, directly from the Company and (ii) in the case
of Premium due after the Date of Issuance pursuant to Section 3.25 of the
Pooling and Servicing Agreement. The Premium paid hereunder or under the
Pooling and Servicing Agreement shall be nonrefundable without regard to
whether FSA makes any payment under the Policy or any other circumstances
relating to the Securities or provision being made for payment of the
Securities prior to maturity.
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<PAGE>
Section 3.03. Reimbursement and Additional Payment Obligation. Each
-----------------------------------------------
of the Company Parties jointly agree to pay to FSA the following amounts as and
when incurred:
(a) a sum equal to the total of all amounts paid by FSA under the
Policy;
(b) any and all out-of-pocket charges, fees, costs and expenses which
FSA may reasonably pay or incur, including, but not limited to, attorneys'
and accountants' fees and expenses, in connection with (i) in the event of
payments under the Policy, any accounts established to facilitate payments
under the Policy, to the extent FSA has not been immediately reimbursed on
the date that any amount is paid by FSA under the Policy, or other
administrative expenses relating to such payments under the Policy, (ii)
the enforcement, defense or preservation of any rights in respect of any of
the Transaction Documents, including defending, monitoring or participating
in any litigation or proceeding (including any insolvency or bankruptcy
proceeding in respect of any participant in the Transaction or any
affiliate thereof) relating to any of the Transaction Documents, any party
to any of the Transaction Documents or the Transaction, (iii) any
amendment, waiver or other action with respect to, or related to, any
Transaction Document whether or not executed or completed, and (iv) any
review or investigation made by FSA in those circumstances where its
approval or consent is sought under any of the Transaction Documents;
(c) interest on any and all amounts described in Section 3.03 or
Section 3.02(d) from the date due to FSA pursuant to the provisions hereof
until payment thereof in full, payable to FSA at the Late Payment Rate per
annum; and
(d) any payments made by FSA on behalf of, or advanced to, the Trust
Fund including, without limitation, any amounts payable by the Trust Fund
pursuant to the Securities or any other Transaction Documents; and any
payments made by FSA as, or in lieu of, any servicing, management, trustee,
custodial or administrative fees payable, in the sole discretion of FSA to
third parties in connection with the Transaction.
Notwithstanding any provision of this Section to the contrary, the payment
obligations set forth herein shall be non-recourse obligations with respect to
each Company Party and shall be payable only from monies available for such
payment in accordance with the provisions of the Pooling and Servicing Agreement
(except to the extent that any such payment obligation arises from a failure to
perform or default of any Company Party or any Affiliate thereof under any
Transaction Document or by reason of negligence, willful misconduct or bad faith
on the part of any Company Party in the performance of its duties and
obligations thereunder or reckless disregard by any Company Party of its duties
and obligations thereunder).
Section 3.04. Indemnification.
---------------
(a) Indemnification by the Company Parties. In addition to any and
--------------------------------------
all rights of reimbursement, indemnification, subrogation and any other rights
pursuant hereto or under law or in equity, each Company Party agrees to pay, and
to protect, indemnify and save harmless,
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FSA and its officers, directors, shareholders, employees, agents and each
Person, if any, who controls FSA within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and all
claims, losses, liabilities (including penalties), actions, suits, judgments,
demands, damages, costs or expenses (including, without limitation, fees and
expenses of attorneys, consultants and auditors and reasonable costs of
investigations) of any nature arising out of or relating to the transactions
contemplated by the Transaction Documents by reason of:
(i) the gross negligence, bad faith, willful misconduct,
misfeasance, malfeasance or theft committed by any director, officer,
employee or agent of any Company Party;
(ii) the breach by any Company Party of any representation,
warranty or covenant under any of the Transaction Documents or the
occurrence, in respect of any Company Party, under any of the Transaction
Documents of any "event of default" or any event which, with the giving of
notice or the lapse of time or both, would constitute any "event of
default"; or
(iii) any untrue statement or alleged untrue statement of a
material fact contained in any Offering Document or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, insofar as such
statements or omissions related to information furnished by the Company
with respect to itself or the Mortgage Loans, it being understood that in
respect of the initial Offering Document such information is limited to the
information in the fourth and fifth sentences of the third paragraph on the
inside cover page, "SUMMARY--Seller," "--Master Servicer," "Ocwen Federal
Bank FSB," "--The Mortgage Loans," "--The Index," the first and second
sentences under "RISK FACTORS--Risk of Early Defaults," the first, second
and third sentences under "--Prepayment Considerations," the first sentence
under "--Payments on the Mortgage Loans," the first sentence of "--
Geographic Concentration May Affect Performance," the first and second
sentences under "--Additional Risks Associated with the Mortgage Loans,"
the fifth sentence in the first paragraph under "--Risk of Loan Rates
Reducing the Certificate Rate of the Class A Certificates," "THE MORTGAGE
POOL," "THE MASTER SERVICER," "OCWEN FEDERAL BANK FSB" and the sixth
sentence of the second paragraph under "PREPAYMENT AND YIELD
CONSIDERATIONS--Prepayments" (such information, the "Company Information").
(b) Indemnification by the Depositor. In addition to any and all
--------------------------------
rights of reimbursement, indemnification, subrogation and any other rights
pursuant hereto or under law or in equity, the Depositor agrees to pay, and to
protect, indemnify and save harmless, FSA and its officers, directors,
shareholders, employees, agents and each Person, if any, who controls FSA within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act from and against any and all claims, losses, liabilities (including
penalties), actions, suits,
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<PAGE>
judgments, demands, damages, costs or expenses (including, without limitation,
fees and expenses of attorneys, consultants and auditors and reasonable costs of
investigations) of any nature arising out of or relating to the transactions
contemplated by the Transaction Documents by reason of:
(i) the gross negligence, bad faith, willful misconduct,
misfeasance, malfeasance or theft committed by any director, officer,
employee or agent of the Depositor;
(ii) the breach by the Depositor of any representation, warranty
or covenant under any of the Transaction Documents; or
(iii) any untrue statement or alleged untrue statement of a
material fact contained in any Offering Document or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such claims arise out of or are based upon any untrue statement or omission
(A) in the Company Information, (B) in the Underwriter Information (as
defined in the Indemnification Agreement), or (C) in information included
in an Offering Document and furnished by FSA in writing expressly for use
therein (all such information so furnished being referred to herein as "FSA
Information"), it being understood that, in respect of the initial Offering
Document, the FSA Information is limited to the information included under
the caption "The Certificate Insurer" and the financial statements of FSA
incorporated by reference therein.
(c) Conduct of Actions or Proceedings. If any action or proceeding
---------------------------------
(including any governmental investigation) shall be brought or asserted against
FSA, any officer, director, shareholder, employee or agent of FSA or any Person
controlling FSA (individually, an "Indemnified Party" and, collectively, the
"Indemnified Parties") in respect of which indemnity may be sought from any
Company Party or the Depositor (the "Indemnifying Party") hereunder, FSA shall
promptly notify the Indemnifying Party in writing, and the Indemnifying Party
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to FSA and the payment of all expenses. An Indemnified Party shall
have the right to employ separate counsel in any such action and to participate
in the defense thereof at the expense of the Indemnified Party; provided,
--------
however, that the fees and expenses of such separate counsel shall be at the
- -------
expense of the Indemnifying Party if (i) the Indemnifying Party has agreed to
pay such fees and expenses, (ii) the Indemnifying Party shall have failed to
assume the defense of such action or proceeding and employ counsel satisfactory
to FSA in any such action or proceeding or (iii) the named parties to any such
action or proceeding (including any impleaded parties) include both the
Indemnified Party and the Indemnifying Party, and the Indemnified Party shall
have been advised by counsel that (A) there may be one or more legal defenses
available to it which are different from or additional to those available to the
Indemnifying Party and (B) the representation of the Indemnifying Party and the
Indemnified Party by the same counsel would be inappropriate or contrary to
prudent practice (in which case, if the Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense of such action or proceeding
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<PAGE>
on behalf of such Indemnified Party, it being understood, however, that the
Indemnifying Party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys at any time for the Indemnified Parties, which
firm shall be designated in writing by FSA). The Indemnifying Party shall not be
liable for any settlement of any such action or proceeding effected without its
written consent to the extent that any such settlement shall be prejudicial to
the Indemnifying Party, but, if settled with its written consent, or if there be
a final judgment for the plaintiff in any such action or proceeding with respect
to which the Indemnifying Party shall have received notice in accordance with
this subsection (c), the Indemnifying Party agrees to indemnify and hold the
Indemnified Parties harmless from and against any loss or liability by reason of
such settlement or judgment.
(d) Contribution. To provide for just and equitable contribution if
------------
the indemnification provided by the Indemnifying Party is determined to be
unavailable for any Indemnified Party (other than due to application of this
Section), each Indemnifying Party shall contribute to the losses incurred by the
Indemnified Party on the basis of the relative fault of the Indemnifying Party,
on the one hand, and the Indemnified Party, on the other hand.
Section 3.05. Subrogation. Subject only to the priority of payment
-----------
provisions of the Pooling and Servicing Agreement, the Depositor and each
Company Party acknowledge that, to the extent of any payment made by FSA
pursuant to the Policy, FSA is to be fully subrogated to the extent of such
payment and any additional interest due on any late payment, to the rights of
the Certificateholders to any moneys paid or payable in respect of the
Securities under the Transaction Documents or otherwise. The Depositor and each
Company Party agree to such subrogation and, further, agree to execute such
instruments and to take such actions as, in the sole judgment of FSA, are
necessary to evidence such subrogation and to perfect the rights of FSA to
receive any moneys paid or payable in respect of the Securities under the
Transaction Documents or otherwise.
ARTICLE IV
FURTHER AGREEMENTS
Section 4.01. Effective Date: Term of Agreement. This Insurance
---------------------------------
Agreement shall take effect on the Date of Issuance and shall remain in effect
until the later of (a) such time as FSA is no longer subject to a claim under
the Policy and the Policy shall have been surrendered to FSA for cancellation
and (b) all amounts payable to FSA and the Certificateholders under the
Transaction Documents and under the Securities have been paid in full; provided,
--------
however, that the provisions of Sections 3.02, 3.03 and 3.04 hereof shall
- -------
survive any termination of this Agreement.
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<PAGE>
Section 4.02. Obligations Absolute.
--------------------
(a) The payment obligations of the Depositor and each Company Party
hereunder shall be absolute and unconditional, and shall be paid strictly in
accordance with this Agreement under all circumstances irrespective of (i) any
lack of validity or enforceability of, or any amendment or other modifications
of, or waiver with respect to, any of the Transaction Documents, the Securities
or the Policy; (ii) any exchange or release of any other obligations hereunder;
(iii) the existence of any claim, setoff, defense, reduction, abatement or other
right which the Depositor or any Company Party may have at any time against FSA
or any other Person; (iv) any document presented in connection with the Policy
proving to be forged, fraudulent, invalid or insufficient in any respect,
including any failure to strictly comply with the terms of the Policy, or any
statement therein being untrue or inaccurate in any respect; (v) any failure of
any Company Party to receive the proceeds from the sale of the Mortgage Loans;
(vi) any breach by the Depositor or any Company Party of any representation,
warranty or covenant contained in any of the Transaction Documents; or (vii) any
other circumstances, other than payment in full, which might otherwise
constitute a defense available to, or discharge of, the Depositor or any Company
Party in respect of any Transaction Document.
(b) The Depositor and each Company Party and any and all others who
are now or may become liable for all or part of the obligations of the Depositor
or any Company Party under this Agreement agree to be bound by this Agreement
and (i) to the extent permitted by law, waive and renounce any and all
redemption and exemption rights and the benefit of all valuation and
appraisement privileges against the indebtedness, if any, and obligations
evidenced by any Transaction Document or by any extension or renewal thereof;
(ii) waive presentment and demand for payment, notices of nonpayment and of
dishonor, protest of dishonor and notice of protest; (iii) waive all notices in
connection with the delivery and acceptance hereof and all other notices in
connection with the performance, default or enforcement of any payment hereunder
except as required by the Transaction Documents; (iv) waive all rights of
abatement, diminution, postponement or deduction, or to any defense other than
payment, or to any right of setoff or recoupment arising out of any breach under
any of the Transaction Documents, by any party thereto or any beneficiary
thereof, or out of any obligation at any time owing to the Depositor or any
Company Party; (v) agree that any consent, waiver or forbearance hereunder with
respect to an event shall operate only for such event and not for any subsequent
event; (vi) consent to any and all extensions of time that may be granted by FSA
with respect to any payment hereunder or other provisions hereof and to the
release of any security at any time given for any payment hereunder, or any part
thereof, with or without substitution, and to the release of any Person or
entity liable for any such payment; and (vii) consent to the addition of any and
all other makers, endorsers, guarantors and other obligors for any payment
hereunder, and to the acceptance of any and all other security for any payment
hereunder, and agree that the addition of any such obligors or security shall
not affect the liability of the parties hereto for any payment hereunder.
(c) Nothing herein shall be construed as prohibiting the Depositor or
any Company Party from pursuing any rights or remedies it may have against any
Person other than FSA in a separate legal proceeding.
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<PAGE>
Section 4.03. Assignments; Reinsurance; Third-Party Rights.
--------------------------------------------
(a) This Agreement shall be a continuing obligation of the parties
hereto and shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. Neither the Depositor
nor any Company Party may assign its rights under this Agreement, or delegate
any of its duties hereunder, without the prior written consent of FSA. Any
assignment made in violation of this Agreement shall be null and void.
(b) FSA shall have the right to give participations in its rights
under this Agreement and to enter into contracts of reinsurance with respect to
the Policy upon such terms and conditions as FSA may in its discretion
determine; provided, however, that no such participation or reinsurance
-------- -------
agreement or arrangement shall relieve FSA of any of its obligations hereunder
or under the Policy.
(c) In addition, FSA shall be entitled to assign or pledge to any bank
or other lender providing liquidity or credit with respect to the Transaction or
the obligations of FSA in connection therewith any rights of FSA under the
Transaction Documents or with respect to any real or personal property or other
interests pledged to FSA, or in which FSA has a security interest, in connection
with the Transaction.
(d) Except as provided herein with respect to participants and
reinsurers, nothing in this Agreement shall confer any right, remedy or claim,
express or implied, upon any Person, including, particularly, any
Certificateholder, other than FSA, against the Depositor or any Company Party,
and all the terms, covenants, conditions, promises and agreements contained
herein shall be for the sole and exclusive benefit of the parties hereto and
their successors and permitted assigns. Neither the Trustee nor any
Certificateholder shall have any right to payment from any premiums paid or
payable hereunder or from any other amounts paid by the Depositor or any Company
Party pursuant to Section 3.02, 3.03 or 3.04 hereof.
Section 4.04. Liability of FSA. Neither FSA nor any of its officers,
----------------
directors or employees shall be liable or responsible for: (a) the use which
may be made of the Policy by the Trustee or for any acts or omissions of the
Trustee in connection therewith or (b) the validity, sufficiency, accuracy or
genuineness of documents delivered to FSA (or its Fiscal Agent) in connection
with any claim under the Policy, or of any signatures thereon, even if such
documents or signatures should in fact prove to be in any or all respects
invalid, insufficient, fraudulent or forged (unless FSA had actual knowledge
thereof). In furtherance and not in limitation of the foregoing, FSA (or its
Fiscal Agent) may accept documents that appear on their face to be in order,
without responsibility for further investigation.
ARTICLE V
EVENTS OF DEFAULT; REMEDIES
Section 5.01. Events of Default. The occurrence of any of the
-----------------
following events
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<PAGE>
shall constitute an Event of Default with respect to each of the Company
Parties, jointly, or the Depositor, severally with the Company Parties,
hereunder:
(a) any representation or warranty made by any Company Party or the
Depositor under any of the Transaction Documents, or in any certificate or
report furnished under any of the Transaction Documents, shall prove to be
untrue or incorrect in any material respect when made; provided, however, that
-------- -------
if such Company Party or the Depositor effectively cures any such defect in any
representation or warranty under any Transaction Document, or certificate or
report furnished under any Transaction Document, within the time period
specified in the relevant Transaction Document as the cure period therefor, such
defect shall not in and of itself constitute an Event of Default hereunder;
(b) (i) any Company Party or the Depositor shall fail to pay when due
any amount payable by such Company Party or the Depositor under any of the
Transaction Documents to which it is a party unless such amounts are paid in
full within any applicable cure period explicitly provided for under the
relevant Transaction Document; (ii) any Company Party or the Depositor shall
have asserted that any of the Transaction Documents to which it is a party is
not valid and binding on the parties thereto; or (iii) any court, governmental
authority or agency having jurisdiction over any of the parties to any of the
Transaction Documents or any property thereof shall find or rule that any
material provision of any of the Transaction Documents is not valid and binding
on the parties thereto;
(c) any Company Party or the Depositor shall fail to perform or
observe any other covenant or agreement contained herein (except for the
obligations described under clause (b) above) and such failure shall continue
for a period of 30 days after written notice given it; provided, however, that,
-------- -------
if such failure shall be of a nature that it cannot be cured within 30 days,
such failure shall not constitute an Event of Default hereunder if within such
30-day period such Company Party or the Depositor, as the case may be, shall
have given notice to FSA of corrective action it proposes to take, which
corrective action is agreed in writing by FSA to be satisfactory and such
Company Party or the Depositor, as the case may be, shall thereafter pursue such
corrective action diligently until such default is cured;
(d) any demand for payment shall be made under the Policy;
(e) any Company Party or the Depositor shall fail to pay its debts
generally as they come due, or shall admit in writing its inability to pay its
debts generally, or shall make a general assignment for the benefit of
creditors, or shall institute any proceeding seeking to adjudicate itself
insolvent or seeking a liquidation, or shall take advantage of any insolvency
act, or shall commence a case or other proceeding naming itself as debtor under
the United States Bankruptcy Code or similar law, domestic or foreign, or a case
or other proceeding shall be commenced against any Company Party or the
Depositor under the United States Bankruptcy Code or similar law, domestic or
foreign, or any proceeding shall be instituted against any Company Party or the
Depositor seeking liquidation of its assets and such Company Party or the
Depositor, as the case may be, shall fail to take appropriate action resulting
in the withdrawal or dismissal of such proceeding within 90 days or there shall
be appointed, or any Company Party or the
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<PAGE>
Depositor, as the case may be, shall consent to, or acquiesce in, the
appointment of a receiver, liquidator, conservator, trustee or similar official
in respect of such Company Party or the Depositor or the whole or any
substantial part of its properties or assets or any Company Party or the
Depositor shall take any corporate action in furtherance of any of the
foregoing;
(f) the occurrence of a Performance Test Violation; and
(g) the occurrence of an "event of default" under any of the
Transaction Documents.
Section 5.02. Remedies: Waivers. (a) Upon the occurrence of an Event
-----------------
of Default, FSA may exercise any one or more of the rights and remedies set
forth below:
(i) exercise any rights and remedies available under the
Transaction Documents in its own capacity or in its capacity as the Person
entitled to exercise the rights of the Certificateholders in respect of the
Securities; or
(ii) take whatever action at law or in equity that may appear
necessary or desirable in its judgment to enforce performance of any
obligation of such Company Party or the Depositor under the Transaction
Documents.
(b) Unless otherwise expressly provided, no remedy herein conferred
upon or reserved is intended to be exclusive of any other available remedy, but
each remedy shall be cumulative and shall be in addition to other remedies given
under the Transaction Documents or existing at law or in equity. No delay or
failure to exercise any right or power accruing under any Transaction Document
upon the occurrence of any Event of Default or otherwise shall impair any such
right or power or shall be construed to be a waiver thereof, but any such right
and power may be exercised from time to time and as often as may be deemed
expedient. In order to entitle FSA to exercise any remedy reserved to FSA in
this Article, it shall not be necessary to give any notice, other than such
notice as may be expressly required in this Article.
(c) If any proceeding has been commenced to enforce any right or
remedy under this Agreement and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to FSA, then and in
every such case the parties hereto shall, subject to any determination in such
proceeding, be restored to their respective former positions hereunder, and,
thereafter, all rights and remedies of FSA shall continue as though no such
proceeding had been instituted.
(d) FSA shall have the right, to be exercised in its complete
discretion, to waive any covenant, Default or Event of Default by a writing
setting forth the terms, conditions and extent of such waiver signed by FSA and
delivered to the applicable Company Party or the Depositor. Any such waiver may
only be effected in writing duly executed by FSA, and no other course of conduct
shall constitute a waiver of any provision hereof. Unless such writing
expressly provides to the contrary, any waiver so granted shall extend only to
the specific event or occurrence so waived and not to any other similar event or
occurrence.
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<PAGE>
ARTICLE VI
MISCELLANEOUS
Section 6.01. Amendments. Etc. This Agreement may be amended,
----------------
modified or terminated only by written instrument or written instruments signed
by the parties hereto. No act or course of dealing shall be deemed to
constitute an amendment, modification or termination hereof.
Section 6.02. Notices. All demands, notices and other communications
-------
to be given hereunder shall be in writing (except as otherwise specifically
provided herein) and shall be mailed by registered mail or personally delivered
or telecopied to the recipient as follows:
(a) To FSA: Financial Security Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Surveillance Department
Re: United PanAm Mortgage Loan Asset Backed
Certificates, Series 1997-1
Confirmation: (212) 826-0100
Telecopy Nos.: (212) 339-3518, (212) 339-3529
(in each case in which notice or other communication to
FSA refers to an Event of Default, a claim on the
Policy or with respect to which failure on the part of
FSA to respond shall be deemed to constitute consent or
acceptance, then a copy of such notice or other
communication should also be sent to the attention of
each of the General Counsel and the Head--Financial
Guaranty Group and shall be marked to indicate "URGENT
MATERIAL ENCLOSED.")
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<PAGE>
(b) To the Seller: United PanAm Mortgage Corp.
625 The City Drive, Suite 490
Orange, California 92868
Attention: Blair F. Kenny
Confirmation: (714) 621-3522
Telecopy No.: (714) 621-3830
(c) To the Master
Servicer: Pan American Bank, FSB
1300 South El Camino Real, Suite 320
San Mateo, California 94402
Attention: Carol Bucci
Confirmation: (650) 345-1800
Telecopy No.: (650) 345-0323
(d) To the Depositor: Lehman ABS Corporation
Three World Financial Center
New York, New York 10285
Attention: Martin P. Harding
Telecopy No.: (212) 526-0017
A party may specify an additional or different address or addresses by
writing mailed or delivered to the other party as aforesaid. All such notices
and other communications shall be effective upon receipt.
Section 6.03. Payment Procedure. In the event of any payment by FSA
-----------------
for which it is entitled to be reimbursed or indemnified as provided above, each
Company Party and the Depositor agrees to accept the voucher or other evidence
of payment as prima facie evidence of the propriety thereof and the liability
therefor to FSA. All payments to be made to FSA under this Agreement shall be
made to FSA in lawful currency of the United States of America in immediately
available funds to the account number provided in the Premium Letter before 1:00
p.m. (New York, New York time) on the date when due or as FSA shall otherwise
direct by written notice to the Company or the Depositor. In the event that the
date of any payment to FSA or the expiration of any time period hereunder occurs
on a day which is not a Business Day, then such payment or expiration of time
period shall be made or occur on the next succeeding Business Day with the same
force and effect as if such payment was made or time period expired on the
scheduled date of payment or expiration date. Payments to be made to FSA under
this Agreement shall bear interest at the Late Payment Rate from the date when
due to the date paid.
Section 6.04. Severability. In the event that any provision of this
------------
Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, the parties hereto agree that such holding shall not invalidate or
render unenforceable any other provision hereof. The parties hereto further
agree that the holding by any court of competent jurisdiction that any remedy
pursued by any party hereto is unavailable or unenforceable shall not affect in
any way the ability of such party to pursue any other remedy available to it.
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<PAGE>
Section 6.05. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 6.06. Consent to Jurisdiction. (a) THE PARTIES HERETO HEREBY
-----------------------
IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF NEW YORK AND ANY COURT IN THE STATE OF NEW YORK LOCATED
IN THE CITY AND COUNTY OF NEW-YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN
ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND TO OR IN CONNECTION WITH
ANY OF THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREUNDER OR
FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND THE PARTIES HERETO HEREBY
IRREVOCABLY AND UNCONDITIONALLY AGREE THAT ALL CLAIMS IN RESPECT OF ANY SUCH
ACTION OR PROCEEDING MAY BE HEARD OR DETERMINED IN SUCH NEW YORK STATE COURT OR,
TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. THE PARTIES HERETO AGREE
THAT A FINAL JUDGMENT IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE
AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY
OTHER MANNER PROVIDED BY LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE
PARTIES HERETO HEREBY WAIVE AND AGREE NOT TO ASSERT BY WAY OF MOTION, AS A
DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, THAT THE SUIT,
ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE
SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THE TRANSACTION DOCUMENTS OR THE
SUBJECT MATTER THEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURTS.
(b) To the extent permitted by applicable law, the parties hereto
shall not seek and hereby waive the right to any review of the judgment of any
such court by any court of any other nation or jurisdiction which may be called
upon to grant an enforcement of such judgment.
(c) Each Company Party and the Depositor hereby irrevocably appoints
and designates CT Corporation System, whose address is 1633 Broadway, New York,
New York 10019, as its true and lawful attorney and duly authorized agent for
acceptance of service of legal process. Each Company Party and the Depositor
agrees that service of such process upon such Person shall constitute personal
service of such process upon it.
(d) Nothing contained in the Agreement shall limit or affect FSA's
right to serve process in any other manner permitted by law or to start legal
proceedings relating to any of the Transaction Documents against any Company
Party or the Depositor or its property in the courts of any jurisdiction.
Section 6.07. Consent of FSA. In the event that FSA's consent is required
--------------
under any of the Transaction Documents, the determination whether to grant or
withhold such consent shall be
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<PAGE>
made by FSA in its sole discretion without any implied duty towards any other
Person, except as otherwise expressly provided therein.
Section 6.08. Counterparts. This Agreement may be executed in
------------
counterparts by the parties hereto, and all such counterparts shall constitute
one and the same instrument.
Section 6.09. Trial by Jury Waived. EACH PARTY HERETO HEREBY WAIVES,
--------------------
TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION
WITH ANY OF THE TRANSACTION DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREUNDER. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT IT
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THE TRANSACTION
DOCUMENTS TO WHICH IT IS A PARTY BY, AMONG OTHER THINGS, THIS WAIVER.
Section 6.10. Limited Liability. No recourse under any Transaction
-----------------
Document shall be had against, and no personal liability shall attach to, any
officer, employee, director, affiliate or shareholder of any party hereto, as
such, by the enforcement of any assessment or by any legal or equitable
proceeding, by virtue of any statute or otherwise in respect of any of the
Transaction Documents, the Securities or the Policy, it being expressly agreed
and understood that each Transaction Document is solely a corporate obligation
of each party hereto, and that any and all personal liability, either at common
law or in equity, or by statute or constitution, of every such officer,
employee, director, affiliate or shareholder for breaches by any party hereto of
any obligations under any Transaction Document is hereby expressly waived as a
condition of and in consideration for the execution and delivery of this
Agreement.
Section 6.11. Entire Agreement. This Agreement, the Premium Letter
----------------
and the Policy set forth the entire agreement between the parties with respect
to the subject matter thereof, and this Agreement supersedes and replaces any
agreement or understanding that may have existed between the parties prior to
the date hereof in respect of such subject matter.
Section 6.12. Punitive and Consequential Damages. Nothing in this
----------------------------------
Agreement shall be construed to allow FSA to recover punitive or consequential
damages from any Company Party or the Depositor, provided however, that this
Section shall not limit indemnification of FSA for damages (however
characterized) actually recovered from FSA by third parties.
-27-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement, all as of the day and year first above written.
FINANCIAL SECURITY ASSURANCE INC.
By: /s/
-----------------------------
Authorized Officer
UNITED PANAM MORTGAGE CORPORATION
By: /s/
-----------------------------
Name:
---------------------------
Title:
--------------------------
PAN AMERICAN BANK, FSB
By: /s/
-----------------------------
Name:
---------------------------
Title:
--------------------------
LEHMAN ABS CORPORATION
By: /s/
-----------------------------
Name:
---------------------------
Title:
--------------------------
-28-
<PAGE>
APPENDIX A
DEFINITIONS
"Accumulated Funding Deficiency" shall have the meaning provided in
------------------------------
Section 412 of the Code and Section 302 of ERISA, whether or not waived.
"Business Day" means any day other than (i) a Saturday or Sunday, or
------------
(ii) a day on which banking institutions in the State of California, the State
of New York, the State of Florida or in the city in which the Corporate Trust
Office of the Trustee is located, are authorized or obligated by law or
executive order to be closed.
"Certificateholders" means registered holders of Securities.
------------------
"Closing Date" means December 30, 1997.
------------
"Code" means the Internal Revenue Code of 1986, including, unless the
----
context otherwise requires, the rules and regulations thereunder, as amended
from time to time.
"Commission" means the Securities and Exchange Commission.
----------
"Commonly Controlled Entity" means the Company and each entity,
--------------------------
whether or not incorporated, which is affiliated with the Company pursuant to
Section 414(b), (c), (m) or (o) of the Code.
"Company" means Pan American Bank, FSB.
-------
"Company Information" has the meaning set forth in Section
-------------------
3.04(a)(iii) of this Insurance Agreement.
"Company Parties" means the Seller and the Company.
---------------
"Date of Issuance" means the date on which the Policy is issued as
----------------
specified therein.
"Default" means any event which results, or which with the giving of
-------
notice or the lapse of time or both would result, in an Event of Default.
"ERISA" means the Employee Retirement Income Security Act of 1974,
-----
including, unless the context otherwise requires, the rules and regulations
thereunder, as amended from time to time.
"Event of Default" means any event of default specified in Section
----------------
5.01 of this Insurance Agreement.
"Expiration Date" means the final date of the Term of the Policy, as
---------------
specified in
-29-
<PAGE>
the Policy.
"FSA" means Financial Security Assurance Inc., a New York stock
---
insurance company, its successors and assigns.
"Financial Statements" means, with respect to the Company, the balance
--------------------
sheets, income statements and supporting schedules of the Company, dated as of
September 1997, the full financial statements of the Company, dated as of June
1997, and the internal profitability analysis of the real estate lending
division of the Company, dated as of March 1997; and with respect to the Seller,
the audited balance sheets of the Seller, dated as of July 1, 1997.
"Fiscal Agent" means the Fiscal Agent, if any, designated pursuant to
------------
the terms of the Policy.
"Indemnification Agreement" means the Indemnification Agreement, dated
-------------------------
as of December 22, 1997, among FSA, the Seller, the Company, the Depositor and
the Underwriter, as the same may be amended from time to time.
"Insurance Agreement" means this Insurance and Indemnity Agreement
-------------------
dated as of December 1, 1997, among FSA, the Seller, the Company and the
Depositor, as the same may be amended from time to time.
"Investment Company Act" means the Investment Company Act of 1940,
----------------------
including, unless the context otherwise requires, the rules and regulations
thereunder, as amended from time to time.
"IRS" means the Internal Revenue Service.
---
"Late Payment Rate" means the lesser of (a) the then applicable
-----------------
highest rate of interest on the Securities and (b) the maximum rate permissible
under applicable usury or similar laws limiting interest rates. The Late
Payment Rate shall be computed on the basis of the actual number of days elapsed
over a year of 360 days.
"Lien" means, as applied to the property or assets (or the income or
----
profits therefrom) of any Person, in each case whether the same is consensual or
nonconsensual or arises by contract, operation of law, legal process or
otherwise: (a) any mortgage, lien, pledge, attachment, charge, lease,
conditional sale or other title retention agreement, or other security interest
or encumbrance of any kind; or (b) any arrangement, express or implied, under
which such property or assets are transferred, sequestered or otherwise
identified for the purpose of subjecting or making available the same for the
payment of debt or performance of any other obligation in priority to the
payment of the general, unsecured creditors of such Person.
"Material Adverse Change" means, (a) in respect of any Person, a
-----------------------
material adverse change in the ability of such Person to perform its obligations
under any of the Transaction Documents to which it is a party and (b) in respect
of any Mortgage Loan, a material adverse
-30-
<PAGE>
change in (i) the value or marketability of such Mortgage Loan or (ii) the
probability that amounts now or hereafter due in respect of such Mortgage Loan
will be collected in full.
"Moody's" means Moody's Investors Service, Inc., a Delaware
-------
corporation, and any successor thereto, and, if such corporation shall for any
reason no longer perform the functions of a securities rating agency, "Moody's"
shall be deemed to refer to any other nationally recognized rating agency
designated by FSA.
"Mortgage Documents" means the Mortgage Notes, Mortgages, assignments
------------------
of Mortgages and other related documents required to be delivered to the Trustee
pursuant to Section 2.01 of the Pooling and Servicing Agreement.
"Mortgage Loan" has the meaning provided in the Pooling and Servicing
-------------
Agreement.
"Mortgage Loan Purchase Agreement" means the Mortgage Loan Purchase
--------------------------------
Agreement, dated as of December 22, 1997, among the Seller as seller, the
Depositor as purchaser and the Company, as the same may be amended from time to
time.
"Multiemployer Plan" means a multiemployer plan (within the meaning of
------------------
Section 4001(a)(3) of ERISA) in respect of which a Commonly Controlled Entity
makes contributions or has liability.
"Offering Document" means the Prospectus, dated December 22, 1997, as
-----------------
supplemented by the Prospectus Supplement, dated December 15, 1997, of the
Depositor in respect of the Securities and any amendment or supplement thereto
and any other offering document in respect of the Securities that makes
reference to the Policy.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
----
agency, corporation or instrumentality of the United States to which the duties
and powers of the Pension Benefit Guaranty Corporation are transferred.
"Performance Test Violation" means a Servicer Termination Delinquency
--------------------------
Test Violation, a Servicer Termination Loss Test Violation or a Servicer
Termination Rolling Loss Test Violation.
"Person" means an individual, joint stock company, trust,
------
unincorporated association, joint venture, corporation, business or owner trust,
partnership or other organization or entity (whether governmental or private).
"Plan" means any pension plan (other than a Multiemployer Plan)
----
covered by Title IV of ERISA, which is maintained by a Commonly Controlled
Entity or in respect of which a Commonly Controlled Entity has liability.
"Policy" means the financial guaranty insurance policy, including any
------
endorsements
-31-
<PAGE>
thereto, issued by FSA with respect to the Securities, substantially in the form
attached as Annex I to this Agreement.
"Pooling and Servicing Agreement" means the Pooling and Servicing
-------------------------------
Agreement, dated as of December 1, 1997, among the Depositor, the Seller, the
Company and the Trustee, on behalf of FSA and the Certificateholders, pursuant
to which the Securities are to be issued and the Mortgage Loans are to be
serviced and administered, as the same may be amended from time to time.
"Premium" means the premium payable in accordance with Section 3.02 of
-------
this Insurance Agreement.
"Premium Letter" means the side letter between FSA and the Company
--------------
dated the date hereof in respect of the premium payable by the Company in
consideration of the issuance of the Policy.
"Prospectus" means the form of prospectus, as supplemented, relating
----------
to the Securities, as first filed with the Commission pursuant to Rule 424 under
the Securities Act.
"Provided Documents" means the Transaction Documents and any
------------------
documents, agreements, instruments, schedules, certificates, statements, cash
flow schedules, number runs or other writings or data furnished to FSA by or on
behalf of the Company with respect to itself or the Transaction.
"Registration Statement" means the registration statement on Form S-3
----------------------
(No. 333-39649), including a form of prospectus, relating to the Securities, as
amended to the date hereof.
"Reportable Event" means any of the events set forth in Section
----------------
4043(b) of ERISA or the regulations thereunder.
"Restrictions on Transferability" means, as applied to the property or
-------------------------------
assets (or the income or profits therefrom) of any Person, in each case whether
the same is consensual or nonconsensual or arises by contract, operation of law,
legal process or otherwise, any material condition to, or restriction on, the
ability of such Person or any transferee therefrom to sell, assign, transfer or
otherwise liquidate such property or assets in a commercially reasonable time
and manner or which would otherwise materially deprive such Person or any
transferee therefrom of the benefits of ownership of such property or assets.
"Securities" means $114,425,000 Lehman ABS Corporation, United PanAm
----------
Mortgage Loan Asset Backed Certificates, Series 1997-1, Class A, issued pursuant
to the Pooling and Servicing Agreement.
"Securities Act" means the Securities Act of 1933, including, unless
--------------
the context otherwise requires, the rules and regulations thereunder, as amended
from time to time.
-32-
<PAGE>
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
including, unless the context otherwise requires, the rules and regulations
thereunder, as amended from time to time.
"Seller" means United PanAm Mortgage Corporation.
------
"Servicer Termination Delinquency Test Violation" occurs, with respect
-----------------------------------------------
to any Distribution Date, if the average Stated Principal Balance of Mortgage
Loans in the Trust Fund more than 60 days delinquent, in foreclosure or
converted to REO Properties over the prior three Collection Periods (or, with
respect to the first Distribution Date, over the prior Collection Period, or
with respect to the second Distribution Date, over the prior two Collection
Periods), each computed as of the last day of the related Collection Period,
exceeds 14% of the aggregate Stated Principal Balance of the Mortgage Loans as
of the last day of such period.
"Servicer Termination Loss Test Violation" occurs, with respect to any
----------------------------------------
Distribution Date, if the cumulative Realized Losses in respect of the Trust
Fund since the Cut-off Date exceeds the following percentages of the aggregate
Stated Principal Balance of the Mortgage Loans as of the Cut-off Date for the
following periods set forth below:
Distribution Dates Cumulative Loss Percentage
------------------ --------------------------
1/st/ through 12/th/ 1.25%
13/th/ through 24/th/ 2.00%
25/th/ through 36/th/ 3.15%
37/th/ through 48/th/ 3.85%
49/th/ and thereafter 4.35%
"Servicer Termination Rolling Loss Test Violation" occurs, with
------------------------------------------------
respect to any Distribution Date, if the aggregate Realized Losses in respect of
the Trust Fund during the preceding twelve Due Periods (or since the Cut-off
Date, on any Distribution Date prior to the twelfth Distribution Date) exceed
1.75% of the aggregate Stated Principal Balance of the Mortgage Loans and REO
Properties as of the first day of such period.
"S&P" means Standard & Poor's Rating Services and any successor
---
thereto, and, if such corporation shall for any reason no longer perform the
functions of a securities rating agency, "S&P" shall be deemed to refer to any
other nationally recognized rating agency designated by FSA.
"Subsidiary" means, with respect to any Person, any corporation of
----------
which a majority of the outstanding shares of capital stock having ordinary
voting power for the election of directors is at the time owned by such Person
directly or through one or more Subsidiaries.
"Term of the Agreement" shall be determined as provided in Section
---------------------
4.01 of this Insurance Agreement.
"Term of the Policy" has the meaning provided in the Policy.
------------------
-33-
<PAGE>
"Transaction" means the transaction contemplated by the Transaction
-----------
Documents, including the transaction described in the Offering Document.
"Transaction Documents" means this Insurance Agreement, the
---------------------
Indemnification Agreement, the Pooling and Servicing Agreement, the Mortgage
Loan Purchase Agreement, the Underwriting Agreement, the Premium Letter and the
Sub-servicing Agreement between the Company and Ocwen Federal Bank FSB.
"Trigger Event" means the occurrence of any one of the following: (a)
-------------
an Event of Default under this Insurance Agreement has occurred and is
continuing, (b) a Performance Test Violation, (c) any legal proceeding or
binding arbitration is instituted with respect to the Transaction, (d) any
governmental or administrative investigation, action or proceeding is instituted
that would, if adversely decided, result in a Material Adverse Change in respect
of the Company or the Depositor or of a material portion of the Mortgage Loans
or (f) FSA pays a claim under the Policy.
"Trustee" means Bankers Trust Company of California, N.A., a national
-------
banking association, as trustee under the Pooling and Servicing Agreement, and
any successor thereto as trustee under the Pooling and Servicing Agreement.
"Trust Fund" has the meaning provided in the Pooling and Servicing
----------
Agreement.
"Trust Indenture Act" means the Trust Indenture Act of 1939,
-------------------
including, unless the context otherwise requires, the rules and regulations
thereunder, as amended from time to time.
"Underfunded Plan" means any Plan that has an Underfunding.
----------------
"Underfunding" means, with respect to any Plan, the excess, if any, of
------------
(a) the present value of all benefits under the Plan (based on the assumptions
used to fund the Plan pursuant to Section 412 of the Code) as of the most recent
valuation date over (b) the fair market value of the assets of such Plan as of
such valuation date.
"Underwriter" means any of Lehman Brothers Inc., or its parents,
-----------
subsidiaries and affiliates and any shareholder, director, officer, employee,
agent or "controlling person" (as such item is used in the Securities Act) of
any of the foregoing.
"Underwriting Agreement" means the Underwriting Agreement between the
----------------------
Underwriter and the Depositor with respect to the offer and sale of the
Securities, as the same may be amended from time to time.
-34-
<PAGE>
APPENDIX B
OPINIONS OF COUNSEL
There shall be delivered to FSA opinions of counsel as follows:
(i) opinions to the effect that the Securities have been duly issued,
and the Transaction Documents have been duly executed and delivered and
constitute legal, valid and binding obligations, enforceable in accordance
with their respective terms;
(ii) opinions as to compliance with applicable securities laws,
including, but not limited to, opinions to the effect that:
(A) to the best of counsel's knowledge, no filing or registration
with or notice to or consent, approval, authorization or order of any court
or governmental authority or agency is required for the consummation of the
Transaction, except such as may be required and have been obtained under
the Securities Act and state securities or "blue sky" laws;
(B) the Registration Statement is effective under the Securities
Act and, to the best of counsel's knowledge and information, no stop order
suspending the effectiveness of the Registration Statement has been issued
under the Securities Act or proceedings therefor initiated or threatened by
the Commission;
(C) the Trust Fund is not required to be registered under the
Investment Company Act; and
(D) the Pooling and Servicing Agreement is not required to be
qualified under the Trust Indenture Act;
(iii) an opinion to the effect that (A) the Trustee is the owner of
the Mortgage Loans, holding good and marketable title thereto; (B) the
Mortgage Loans would not be included as part of the estate of the Seller or
the Depositor in the event of any receivership or insolvency proceedings in
respect of the Seller or the Depositor, as applicable; and (C) the transfer
of the Mortgage Loans by the Seller to the Depositor and by the Depositor
to the Trustee would be characterized by a court of competent jurisdiction
as sales of such Mortgage Loans and not as a borrowing by the Seller or the
Depositor or a relationship of joint ownership, partnership, joint venture
or similar arrangement; and
(iv) an opinion to the effect that (A) the Trust Fund qualifies as a
REMIC for federal income tax purposes; and (B) the Trust Fund will not be
subject to income taxes in the State of New York.
-35-
<PAGE>
APPENDIX C
TO INSURANCE AND INDEMNITY AGREEMENT
CONDITIONS PRECEDENT TO ISSUANCE OF THE POLICY
(a) Payment of Initial Premium and Expenses; Premium Letter. FSA
-------------------------------------------------------
shall have been paid, by or on behalf of the Company; a nonrefundable Premium
and shall have been reimbursed, by or on behalf of the Company, for other fees
and expenses identified in Section 3.02 below as payable at closing and FSA
shall have received a fully executed copy of the Premium Letter.
(b) Transaction Documents. FSA shall have received a copy of each of
---------------------
the Transaction Documents, in form and substance satisfactory to FSA, duly
authorized, executed and delivered by each party thereto. Without limiting the
foregoing, the provisions of the Pooling and Servicing Agreement relating to the
payment to FSA of Premium due on the Policy and the reimbursement to FSA of
amounts paid under the Policy shall be in form and substance acceptable to FSA
in its sole discretion.
(c) Certified Documents and Resolutions. FSA shall have received a
-----------------------------------
copy of (i) the articles of incorporation and bylaws of the Company and the
Seller and (ii) the resolutions of the Company's Board of Directors authorizing
the sale of the Mortgage Loans and the execution, delivery and performance by
the Company of the Transaction Documents and the transactions contemplated
thereby, certified by the Secretary or an Assistant Secretary of the Company
(which certificate shall state that such articles of incorporation, bylaws and
resolutions are in full force and effect without modification on the Date of
Issuance). FSA shall have received a copy of (i) the certificate of
incorporation and bylaws of the Depositor and (ii) the resolutions of the
Depositor's Board of Directors authorizing the transfer of the Mortgage Loans to
the Trust Fund, the issuance of the Securities and the execution, delivery and
performance by the Depositor of the Transaction Documents and the transactions
contemplated thereby, certified by the Secretary or Assistant Secretary of the
Depositor (which certificate shall state that such certificate of incorporation,
bylaws and resolutions are in full force and effect without modification on the
Date of Issuance).
(d) Incumbency Certificate. FSA shall have received a certificate of
----------------------
the Secretary or an Assistant Secretary of both the Company and the Depositor
certifying the name and signatures of the officers of each of the Company and
the Depositor authorized to execute and deliver the Transaction Documents and
that shareholder consent to the execution and delivery of such documents is not
necessary.
(e) Representations and Warranties; Certificate. The representations
-------------------------------------------
and warranties of the Company and the Depositor in this Agreement shall be true
and correct as of the Date of Issuance as if made on the Date of Issuance and
FSA shall have received a certificate of appropriate officers of the Company and
the Depositor to that effect.
(f) Opinions of Counsel. FSA shall have received opinions of counsel
-------------------
-36-
<PAGE>
addressed to FSA, Moody's and S&P in respect of the Company, the Depositor, the
other parties to the Transaction Documents and the Transaction in form and
substance satisfactory to FSA, addressing such matters as FSA may reasonably
request, including without limitation, the items set forth in Appendix B hereto,
and the counsel providing each such opinion shall have been instructed by its
client to deliver such opinion to the addressees thereof.
(g) Approvals, Etc. FSA shall have received true and correct copies
--------------
of all approvals, licenses and consents, if any, including, without limitation,
the approval of the shareholders of each of the Company and the Depositor,
required in connection with the Transaction.
(h) No Litigation, Etc. No suit, action or other proceeding,
------------------
investigation, or injunction or final judgment relating thereto, shall be
pending or threatened before any court or governmental agency in which it is
sought to restrain or prohibit or to obtain damages or other relief in
connection with any of the Transaction Documents or the consummation of the
Transaction.
(i) Legality. No statute, rule, regulation or order shall have been
--------
enacted, entered or deemed applicable by any government or governmental or
administrative agency or court which would make the transactions contemplated by
any of the Transaction Documents illegal or otherwise prevent the consummation
thereof.
(j) Satisfaction of Conditions of Underwriting Agreement. All
----------------------------------------------------
conditions in the Underwriting Agreement to the Underwriter's obligation to
purchase the Securities shall have been satisfied.
(k) Issuance of Ratings. FSA shall have received confirmation that
-------------------
the risk secured by the Policy constitutes an investment grade risk by S&P and
an insurable risk by Moody's and that the Securities, when issued, will be rated
"AAA" by S&P and "Aaa" by Moody's.
(l) Delivery of Mortgage Documents. FSA shall have received evidence
------------------------------
satisfactory to it that: (i) delivery has been made to the Trustee of the
Mortgage Documents required to be so delivered pursuant to Section 2.01 of the
Pooling and Servicing Agreement; and (ii) each Mortgage Note is endorsed as
provided in Section 2.01 of the Pooling and Servicing Agreement.
(m) No Default. No Default or Event of Default shall have occurred.
----------
(n) Additional Items. FSA shall have received such other documents,
----------------
instruments, approvals or opinions requested by FSA as may be reasonably
necessary to effect the Transaction, including but not limited to evidence
satisfactory to FSA that all conditions precedent, if any, in the Transaction
Documents have been satisfied.
-37-
<PAGE>
Exhibit 10.78
================================================================================
INDEMNIFICATION AGREEMENT
among
FINANCIAL SECURITY ASSURANCE INC.
UNITED PANAM MORTGAGE CORPORATION
PAN AMERICAN BANK, FSB
LEHMAN ABS CORPORATION
and
LEHMAN BROTHERS INC.
Dated as of December 22, 1997
Lehman ABS Corporation
$114,425,000 United PanAm Mortgage Loan Asset Backed Certificates
Series 1997-1, Class A
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Definitions........................................................................ 1
-----------
Section 2. Representations, Warranties and Agreements of Financial Security................... 2
----------------------------------------------------------------
Section 3. Representations, Warranties and Agreements of the Underwriter...................... 4
----------------------------------------------------------------
Section 4. Indemnification.................................................................... 5
---------------
Section 5. Indemnification Procedures........................................................ 6
--------------------------
Section 6. Contribution...................................................................... 7
------------
Section 7. Miscellaneous..................................................................... 8
-------------
</TABLE>
EXHIBIT
Exhibit A Opinion of General Counsel
<PAGE>
INDEMNIFICATION AGREEMENT
-------------------------
INDEMNIFICATION AGREEMENT, dated as of December 22, 1997, among
FINANCIAL SECURITY ASSURANCE INC. ("Financial Security"), UNITED PANAM MORTGAGE
CORPORATION (the "Seller"), PAN AMERICAN BANK, FSB (the "Company"), LEHMAN ABS
CORPORATION (the "Depositor") and LEHMAN BROTHERS INC. (the "Underwriter"):
Section 1. Definitions. For purposes of this Agreement, the
-----------
following terms shall have the meanings provided below:
"Agreement" means this Indemnification Agreement, as amended from time
to time.
"Company Party" means any of the Seller or the Company, and its
parent, subsidiaries and affiliates and any shareholder, director, officer,
employee, agent or "controlling person" (as such term is used in the Securities
Act) of any of the foregoing.
"Depositor Party" means any of the Depositor, its parent, subsidiaries
and affiliates and any shareholder, director, officer, employee, agent or
"controlling person" (as such term is used in the Securities Act) of any of the
foregoing.
"Financial Security Agreements" means this Agreement and the Insurance
Agreement.
"Financial Security Information" has the meaning provided in Section
2(g) hereof.
"Financial Security Party" means any of Financial Security, its
parent, subsidiaries and affiliates, and any shareholder, director, officer,
employee, agent or "controlling person" (as such term is used in the Securities
Act) of any of the foregoing.
"Indemnified Party" means any party entitled to any indemnification
pursuant to Section 4 hereof.
"Indemnifying Party" means any party required to provide
indemnification pursuant to Section 4 hereof.
"Insurance Agreement" means the Insurance and Indemnity Agreement,
dated as of December 1, 1997, by and among Financial Security, the Seller, the
Company and the Depositor.
"Losses" means (a) any actual out-of-pocket damages incurred by the
party entitled to indemnification or contribution hereunder, (b) any actual out-
of-pocket costs or actual expenses reasonably incurred by such party, including
reasonable fees or expenses of its counsel and other expenses incurred in
connection with investigating or defending any claim, action or other
-1-
<PAGE>
proceeding which entitle such party to be indemnified hereunder (subject to the
limitations set forth in Section 5 hereof), to the extent not paid, satisfied or
reimbursed from funds provided by any other Person other than an affiliate of
such party (provided that the foregoing shall not create or imply any obligation
to pursue recourse against any such other Person), plus (c) interest on the
amount paid by the party entitled to indemnification or contribution from the
date of such payment to the date of payment by the party who is obligated to
indemnify or contribute hereunder at the statutory rate applicable to judgments
for breach of contract.
"Offering Circular" means the Prospectus Supplement, dated December
22, 1997, including the Prospectus thereto, dated December 15, 1997, relating to
the Securities.
"Offering Document" means the Offering Circular and any amendments or
supplements thereto and any other material or documents delivered by the
Underwriter to any Person in connection with the offer or sale of the
Securities.
"Person" means any individual, partnership, joint venture,
corporation, trust, unincorporated organization or other organization or entity
(whether governmental or private).
"Policy" means the financial guaranty insurance policy delivered by
Financial Security with respect to the Securities.
"Securities" means the Lehman ABS Corporation, $114,425,000 United
PanAm Mortgage Loan Asset Backed Certificates, Series 1997-1, Class A, issued
pursuant to a Pooling and Servicing Agreement, dated as of December 1, 1997,
among the Depositor, the Seller, the Company and Bankers Trust Company of
California, N.A. as trustee.
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
"Underwriting Agreement" means the Underwriting Agreement dated as of
December 19, 1997, between the Depositor and the Underwriter in respect of the
Securities.
"Underwriter Information" has the meaning provided in Section 3(c)
hereof.
"Underwriter Party" means any of the Underwriter, its parent,
subsidiaries and affiliates and any shareholder, director, officer, employee,
agent or "controlling person" (as such term is used in the Securities Act) of
any of the foregoing.
Section 2. Representations, Warranties and Agreements of Financial
-------------------------------------------------------
Security. Financial Security represents, warrants and agrees, as of the date
- --------
hereof and as of the Closing Date, as follows:
(a) Organization, Etc. Financial Security is a stock insurance
-----------------
company duly organized, validly existing, in good standing and authorized to
transact financial guaranty insurance business under the laws of the State of
New York.
-2-
<PAGE>
(b) Authorization, Etc. The Policy and the Financial Security
------------------
Agreements have been duly authorized, executed and delivered by Financial
Security.
(c) Validity, Etc. The Policy and the Financial Security Agreements
-------------
constitute legal, valid and binding obligations of Financial Security,
enforceable against Financial Security in accordance with their terms, subject,
as to the enforcement of remedies, to bankruptcy, insolvency, reorganization,
rehabilitation, moratorium and other similar laws affecting the enforceability
of creditors' rights generally applicable in the event of the bankruptcy or
insolvency of Financial Security and to the application of general principles of
equity and subject, in the case of this Agreement, to principles of public
policy limiting the right to enforce the indemnification provisions contained
herein.
(d) Exemption From Registration. The Policy is exempt from
---------------------------
registration under the Securities Act.
(e) No Conflicts. Neither the execution or delivery by Financial
------------
Security of the Policy or the Financial Security Agreements, nor the performance
by Financial Security of its obligations thereunder, will conflict with any
provision of the certificate of incorporation or the bylaws of Financial
Security nor result in a breach of, or constitute a default under, any material
agreement or other instrument to which Financial Security is a party or by which
any of its property is bound nor violate any judgment, order or decree
applicable to Financial Security of any governmental or regulatory body,
administrative agency, court or arbitrator having jurisdiction over Financial
Security (except that, in the published opinion of the Securities and Exchange
Commission, the indemnification provisions of this Agreement, insofar as they
relate to indemnification for liabilities arising under the Securities Act, are
against public policy as expressed in the Securities Act and are therefore
unenforceable).
(f) Financial Information. The consolidated balance sheets of
---------------------
Financial Security as of December 31, 1996 and December 31, 1995 and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for the fiscal years then ended and the interim consolidated balance sheet
of Financial Security as of September 30, 1997, and the related statements of
income, changes in shareholder's equity and cash flows for the interim period
then ended, furnished by Financial Security for use in the Offering Circular,
fairly present in all material respects the financial condition of Financial
Security as of such dates and for such periods in accordance with generally
accepted accounting principles consistently applied except as noted therein
(subject as to interim statements to normal year-end adjustments) and since the
date of the most current interim consolidated balance sheet referred to above
there has been no change in the financial condition of Financial Security which
would materially and adversely affect its ability to perform its obligations
under the Policy.
(g) Financial Security Information. The information in the Offering
------------------------------
Circular set forth under the caption "The Certificate Insurer" (as revised from
time to time in accordance with the provisions hereof, the "Financial Security
Information") is limited and does not purport to provide the scope of disclosure
required to be included in an offering memorandum. Within such limited scope of
disclosure, however, as of the date of the Offering Circular and as of the
-3-
<PAGE>
date hereof, the Financial Security Information does not contain any untrue
statement of a material fact, or omit to state a material fact necessary to make
the statements contained therein, in light of the circumstances under which they
were made, not misleading.
(h) Additional Information. Financial Security will furnish to the
----------------------
Underwriter, the Company, the Seller or the Depositor, upon request of the
Underwriter, the Company, the Seller or the Depositor, as the case may be,
copies of Financial Security's most recent financial statements (annual or
interim, as the case may be) which fairly present in all material respects the
financial condition of Financial Security as of the dates and for the periods
indicated, in accordance with generally accepted accounting principles
consistently applied except as noted therein (subject, as to interim statements,
to normal year-end adjustments); provided, however, that, if the Underwriter,
the Company, the Seller or the Depositor shall require a manually signed report
or consent of Financial Security's auditors in connection with such financial
statements, such report or consent shall be at the expense of the Underwriter,
the Company, the Seller or the Depositor, as the case may be.
(i) Opinion of Counsel. Financial Security will furnish to the
------------------
Seller, the Depositor, the Underwriter and the Company on the closing date for
the sale of the Securities an opinion of its Associate General Counsel, to the
effect set forth in Exhibit A attached hereto, dated such closing date and
addressed to the Seller, the Depositor, the Underwriter and the Company.
(j) Consents and Reports of Independent Accountants. Financial
-----------------------------------------------
Security will furnish to the Underwriter, the Company, the Seller and the
Depositor, upon request, as comfort from its independent accountants in respect
of its financial condition, (i) at the expense of the Person specified in the
Insurance Agreement, a copy of the Offering Circular, including either a
manually signed consent or a manually signed report of Financial Security's
independent accountants and (ii) the quarterly review letter by Financial
Security's independent accountants in respect of the most recent interim
financial statements of Financial Security.
Nothing in this Agreement shall be construed as a representation or
warranty by Financial Security concerning the rating of its claims-paying
ability by Standard & Poor's Ratings Services or Moody's Investors Service, Inc.
or any other rating agency (collectively, the "Rating Agencies"). The Rating
Agencies, in assigning such ratings, take into account facts and assumptions not
described in the Offering Circular and the facts and assumptions which are
considered by the Rating Agencies, and the ratings issued thereby, are subject
to change over time.
Section 3. Representations, Warranties and Agreements of the
-------------------------------------------------
Underwriter. The Underwriter represents, warrants and agrees, as of the date
- -----------
hereof and as of the Closing Date, as follows:
(a) Compliance With Laws. The Underwriter will comply in all
--------------------
material respects with all legal requirements in connection with offers and
sales of the Securities and make such offers and sales in the manner provided in
the Offering Document.
-4-
<PAGE>
(b) Offering Document. The Underwriter will not use, or distribute
-----------------
to other broker-dealers for use, any Offering Document in connection with the
offer and sale of the Securities unless such Offering Document includes such
information as has been furnished by Financial Security for inclusion therein
and the information therein concerning Financial Security has been approved by
Financial Security in writing or in the immediately succeeding sentence.
Financial Security hereby consents to the Financial Security Information
included in the Offering Circular and the financial statements of Financial
Security incorporated by reference therein. Each Offering Document will include
the following statement: "The Policy is not covered by the property/casualty
insurance security fund specified in Article 76 of the New York Insurance Law".
Each Offering Document including financial information with respect to Financial
Security (unless incorporated by reference therein) prepared in accordance with
generally accepted accounting principals will include the following statement
immediately preceding such financial information: "The New York State Insurance
Department recognizes only statutory accounting practices for determining and
reporting the financial condition and results of operations of an insurance
company, for determining its solvency under the New York Insurance Law, and for
determining whether its financial condition warrants the payment of a dividend
to its stockholders. No consideration is given by the New York State Insurance
Department to financial statements prepared in accordance with generally
accepted accounting principals in making such determinations."
(c) Underwriting Information. All material provided by the
------------------------
Underwriter for inclusion in the Offering Document (as revised from time to
time, the "Underwriter Information"), insofar as such information relates to the
Underwriter, is true and correct in all material respects. In respect of the
Offering Document, the Underwriter Information is limited to the information set
forth in the last paragraph on the cover of the Offering Document, the third
paragraph of page S-3 of the Offering Document and the second paragraph under
the caption "Underwriting" in the Offering Document.
Section 4. Indemnification. (a) Financial Security agrees, upon
---------------
the terms and subject to the conditions provided herein, to indemnify, defend
and hold harmless each Depositor Party, each Company Party and each Underwriter
Party against (i) any and all Losses incurred by them with respect to the offer
and sale of the Securities and resulting from Financial Security's breach of any
of its representations, warranties or agreements set forth in Section 2 hereof
and (ii) any and all Losses to which any Depositor Party, Company Party or
Underwriter Party may become subject, under the Securities Act or otherwise,
insofar as such Losses arise out of or result from an untrue statement of a
material fact contained in any Offering Document or the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or omission was made in the Financial
Security Information included therein in accordance with the provisions hereof.
(b) The Underwriter agrees, upon the terms and subject to the
conditions provided herein, to indemnify, defend and hold harmless each
Financial Security Party against (i) any and all Losses incurred by them with
respect to the offer and sale of the Securities and resulting from the
Underwriter's breach of any of its representations, warranties or agreements
-5-
<PAGE>
set forth in Section 3 hereof and (ii) any and all Losses to which any Financial
Security Party may become subject, under the Securities Act or otherwise,
insofar as such Losses arise out of or result from an untrue statement of a
material fact contained in any Offering Document or the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or omission was made in the Underwriter
Information included therein.
(c) Upon the incurrence of any Losses for which a party is entitled to
indemnification hereunder, the Indemnifying Party shall reimburse the
Indemnified Party promptly upon establishment by the Indemnified Party to the
Indemnifying Party of the Losses incurred.
Section 5. Indemnification Procedures. Except as provided below
--------------------------
in Section 6 with respect to contribution or in Section 7(e), the
indemnification provided herein by an Indemnifying Party shall be the exclusive
remedy of any and all Indemnified Parties for the breach of a representation,
warranty or agreement hereunder by an Indemnifying Party; provided, however,
that each Indemnified Party shall be entitled to pursue any other remedy at law
or in equity for any such breach so long as the damages sought to be recovered
shall not exceed the Losses incurred thereby resulting from such breach. In the
event that any action or regulatory proceeding shall be commenced or claim
asserted which may entitle an Indemnified Party to be indemnified under this
Agreement, such party shall give the Indemnifying Party written or telegraphic
notice of such action or claim reasonably promptly after receipt of written
notice thereof. The Indemnifying Party shall be entitled to participate in and,
upon notice to the Indemnified Party, assume the defense of any such action or
claim in reasonable cooperation with, and with the reasonable cooperation of,
the Indemnified Party. The Indemnified Party will have the right to employ its
own counsel in any such action in addition to the counsel of the Indemnifying
Party, but the fees and expenses of such counsel will be at the expense of such
Indemnified Party, unless (a) the employment of counsel by the Indemnified Party
at its expense has been authorized in writing by the Indemnifying Party, (b) the
Indemnifying Party has not in fact employed counsel to assume the defense of
such action within a reasonable time after receiving notice of the commencement
of the action, or (c) the named parties to any such action or proceeding
(including any impleaded parties) include both the Indemnifying Party and one or
more Indemnified Parties, and the Indemnified Parties shall have been advised by
counsel that there may be one or more legal defenses available to them which are
different from or additional to those available to the Indemnifying Party (it
being understood, however, that the Indemnifying Party shall not, in connection
with any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys at any time for all
Depositor Parties, one such firm for all Underwriter Parties, one such firm for
all Company Parties and one such firm for all Financial Security Parties, as the
case may be, which firm shall be designated in writing by the Depositor in
respect of the Depositor Parties, by the Underwriter in respect of the
Underwriter Parties, by the Company in respect of the Company Parties and by
Financial Security in respect of the Financial Security Parties), in each of
which cases the fees and expenses of counsel will be at the expense of the
Indemnifying Party and all such fees and expenses will be reimbursed promptly as
they are incurred. The Indemnifying Party shall not be liable for any
settlement of any such claim or
-6-
<PAGE>
action unless the Indemnifying Party shall have consented thereto or be in
default in its obligations hereunder. Any failure by an Indemnified Party to
comply with the provisions of this Section shall relieve the Indemnifying Party
of liability only if such failure is prejudicial to the position of the
Indemnifying Party and then only to the extent of such prejudice.
Section 6. Contribution. (a) To provide for just and equitable
------------
contribution if the indemnification provided by any Indemnifying Party is
determined to be unavailable for any Indemnified Party (other than due to
application of this Section), each Indemnifying Party shall contribute to the
Losses arising from any breach of any of its representations, warranties or
agreements contained in this Agreement in such proportion as is appropriate to
reflect the relative fault of each of the parties as set forth in Section 6(b)
below; provided, however, that an Indemnifying Party shall in no event be
required to contribute to all Indemnified Parties an aggregate amount in excess
of the Losses incurred by such Indemnified Parties resulting from the breach of
representations, warranties or agreements contained in this Agreement.
(b) The relative fault of each Indemnifying Party, on the one hand,
and of each Indemnified Party, on the other, shall be determined by reference
to, among other things, whether the breach of, or alleged breach of, any
representations, warranties or agreements contained in this Agreement relates to
information supplied by, or action within the control of, the Indemnifying Party
or the Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such breach.
(c) The parties agree that Financial Security shall be solely
responsible for the Financial Security Information, the Underwriter shall be
solely responsible for the Underwriter Information, the Seller and the Company
shall be solely responsible for the Company Information, and that, as and to the
extent provided in the Insurance Agreement, the balance of the Offering Document
shall be the responsibility of the Seller and the Company, jointly and not
severally, and of the Depositor, severally and not jointly with the Seller and
the Company.
(d) Notwithstanding anything in this Section 6 to the contrary, an
Underwriter Party shall not be required to contribute an amount in excess of the
amount by which the Underwriter's Compensation, which shall be deemed to be the
percentage of the total price of the Securities underwritten by such Underwriter
set forth as the Underwriting Discount on the cover page of the Offering
Document relating to the Class of Certificates offered thereby, exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
hereunder in respect of such untrue statement or omission.
(e) No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(f) Upon the incurrence of any Losses entitled to contribution
hereunder, the contributor shall reimburse the party entitled to contribution
promptly upon establishment by the party entitled to contribution to the
contributor of the Losses incurred.
-7-
<PAGE>
(g) The provisions relating to contribution set forth in this Section
6 do not limit the rights of any party to indemnification under Section 4.
Section 7. Miscellaneous.
-------------
(a) Notices. All notices and other communications provided for under
-------
this Agreement shall be delivered to the address set forth below or to such
other address as shall be designated by the recipient in a written notice to the
other party or parties hereto.
If to Financial Security: Financial Security Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Surveillance Department
Re: United PanAm Mortgage Loan Asset Backed
Certificates, Series 1997-1
If to the Seller: United PanAm Mortgage Corporation
625 The City Drive, Suite 490
Orange, California 92868
Attention: Blair F. Kenny
Confirmation: (714) 621-3522
Telecopy No.: (714) 621-3830
If to the Company: Pan American Bank, FSB
1300 South El Camino Real, Suite 320
San Mateo, California 94402
Attention: Carol Bucci
Confirmation: (650) 345-1800
Telecopy No.: (650) 345-0323
If to the Depositor: Lehman ABS Corporation
Three World Financial Center
New York, New York 10285
Attention: Martin P. Harding
Telecopy No.: (212) 526-0017
If to the Underwriter: Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Attention: Martin P. Harding
Telecopy No.: (212) 526-0017
(b) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York.
-8-
<PAGE>
(c) Assignments. This Agreement may not be assigned by any party
-----------
without the express written consent of each other party. Any assignment made in
violation of this Agreement shall be null and void.
(d) Amendments. Amendments of this Agreement shall be in writing
----------
signed by each party hereto.
(e) Survival, Etc. The indemnity and contribution agreements
-------------
contained in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Indemnifying
Party, (ii) the issuance of the Securities or (iii) any termination of this
Agreement or the Policy. The indemnification provided in this Agreement will be
in addition to any liability which the parties may otherwise have and shall in
no way limit any obligations of the Seller, the Company, the Depositor,
Financial Security or the Underwriter under the Underwriting Agreement or the
Insurance Agreement, as applicable.
(f) Counterparts. This Agreement may be executed in counterparts by
------------
the parties hereto, and all such counterparts shall constitute one and the same
instrument.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date first above written.
FINANCIAL SECURITY ASSURANCE INC.
By: /s/
---------------------------------
Authorized Officer
UNITED PANAM MORTGAGE CORPORATION
By: /s/
---------------------------------
Name:
-------------------------------
Title:
-----------------------------
PAN AMERICAN BANK, FSB
By: /s/
---------------------------------
Name:
------------------------------
Title:
------------------------------
LEHMAN ABS CORPORATION
By: /s/
---------------------------------
Name:
-------------------------------
Title:
------------------------------
LEHMAN BROTHERS INC.
By: /s/
--------------------------------
Name:
------------------------------
Title:
------------------------------
<PAGE>
EXHIBIT A
---------
OPINION OF GENERAL COUNSEL
Based upon the foregoing, I am of the opinion that:
1. Financial Security is a stock insurance company duly organized,
validly existing and authorized to transact financial guaranty insurance
business under the laws of the State of New York.
2. The Policy and the Agreements have been duly authorized, executed
and delivered by Financial Security.
3. The Policy and the Agreements constitute valid and binding
obligations of Financial Security, enforceable against Financial Security in
accordance with their terms, subject, as to the enforcement of remedies, to
bankruptcy, insolvency, reorganization, rehabilitation, moratorium and other
similar laws affecting the enforceability of creditors' rights generally
applicable in the event of the bankruptcy or insolvency of Financial Security
and to the application of general principles of equity and subject, in the case
of the Indemnification Agreement, to principles of public policy limiting the
right to enforce the indemnification provisions contained therein insofar as
they relate to indemnification for liabilities arising under applicable
securities laws.
4. The Policy is exempt from registration under the Securities Act
of 1933, as amended (the "Act").
5. Neither the execution or delivery by Financial Security of the
Policy or the Agreements, nor the performance by Financial Security of its
obligations thereunder, will conflict with any provision of the certificate of
incorporation or the by-laws of Financial Security or, to the best of my
knowledge, result in a breach of, or constitute a default under, any agreement
or other instrument to which Financial Security is a party or by which it or any
of its property is bound or, to the best of my knowledge, violate any judgment,
order or decree applicable to Financial Security of any governmental or
regulatory body, administrative agency, court or arbitrator having jurisdiction
over Financial Security (except that in the published opinion of the Securities
and Exchange Commission the indemnification provisions of the Indemnification
Agreement, insofar as they relate to indemnification for liabilities arising
under the Act, are against public policy as expressed in the Act and are
therefore unenforceable).
In addition, please be advised that I have reviewed the description of
Financial Security under the caption "The Certificate Insurer" in the Prospectus
Supplement dated December 22, 1997 (the "Offering Document") of the Depositor
with respect to the Securities. The information provided in the Offering
Document with respect to Financial Security is limited and does not purport to
provide the scope of disclosure required to be included in an offering
memorandum. Within such limited scope of disclosure, however, there has not come
to my attention any information which would cause me to believe that the
description of Financial
-1-
<PAGE>
Security referred to above, as of the date of the Offering Document or as of the
date of this opinion, contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (except that I express no opinion with respect to any
financial statements or other financial information contained or referred to
therein).
-2-
<PAGE>
Exhibit 10.79
SUBSERVICING AGREEMENT
THIS SUBSERVICING AGREEMENT, dated effective as of December 1, 1997,
is entered into between Pan American Bank, FSB (the "Master Servicer") and Ocwen
Federal Bank FSB (the "Subservicer").
WHEREAS, the Master Servicer has entered into that certain Pooling and
Servicing Agreement, dated as of December 1, 1997 (the "Pooling and Servicing
Agreement"), among the Master Servicer, Lehman ABS Corporation, as Depositor,
United PanAm Mortgage Corp., as Seller, and Bankers Trust Company of California,
N.A., as Trustee;
WHEREAS, each of the Master Servicer and the Subservicer desire that
the Subservicer perform certain servicing functions on behalf of the Master
Servicer with respect to the Mortgage Loans to be serviced by the Master
Servicer pursuant to the Pooling and Servicing Agreement;
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
Section 1. Definitions. All capitalized words and terms in this
--------- -----------
Agreement not otherwise defined herein shall have the respective meanings
ascribed thereto in the Pooling and Servicing Agreement.
Section 2. Subservicing of Mortgage Loans. The Subservicer hereby
--------- ------------------------------
agrees to perform all obligations of the Master Servicer under the Pooling and
Servicing Agreement with respect to the servicing of the Mortgage Loans,
including, without limitation, making such advances with respect to such
Mortgage Loans as are required under the Pooling and Servicing Agreement, and to
observe, and perform the duties of the Master Servicer (in its capacity as
master servicer) in accordance with, the provisions of the Pooling and Servicing
Agreement relating to sub-servicing of the Mortgage Loans, including, without
limitation, Section 3.08 of the Pooling and Servicing Agreement.
Notwithstanding the foregoing, the Subservicer shall (i) have no responsibility
relating to (a) a Master Servicer Event of Default which is not directly caused
by a Subservicer Event of Default, (b) the repurchase, or substitution of a
Mortgage Loan, (c) the Master Servicer's obligations to pay the Trustee's fees
and/or expenses, under Section 8.05 of the Pooling and Servicing Agreement or
otherwise, (d) the payment of the Termination Price, (e) any obligations of
United PanAm Mortgage Corporation under the Pooling and Servicing Agreement or
any other agreement, or (f) any other obligation of the Master Servicer not
related to the servicing of the Mortgage Loans or REO Properties, and (ii) not
clear and terminate the Collection Account without the prior written consent of
the Master Servicer.
Section 4. Subservicer Not to Resign. The Subservicer shall not
--------- -------------------------
resign from the obligations and duties hereby imposed on it except upon
determination that the performance of its obligations or duties hereunder are no
longer permissible under applicable law or are in material
1
<PAGE>
conflict by reason of applicable law with any other activities carried on by it
or its subsidiaries or affiliates, the other activities of the Subservicer so
causing such a conflict being of a type and nature carried on by the Subservicer
or its subsidiaries or affiliates at the date of this Agreement; provided,
however, that no such resignation by the Subservicer shall become effective
until the Trustee with the consent of the Certificate Insurer shall have
designated a successor subservicer acceptable to the Rating Agencies, as
evidenced by a letter to the effect that the ratings then assigned to the
Certificates will not be lowered or withdrawn, without taking into account the
benefit of the Policy, or the Certificate Insurer shall have otherwise consented
to the resignation of the Subservicer. Any such determination by the Subservicer
shall be evidenced by an Opinion of Counsel to such effect delivered to the
Master Servicer, the Trustee and the Certificate Insurer.
Section 5. Subservicer Events of Default; Termination.
--------- ------------------------------------------
(a) If any one of the following events ("Subservicer Events of Default")
shall occur and be continuing:
(i) (A) The failure by the Subservicer to make any Monthly Advance;
or (B) any other failure by the Subservicer to deposit in the Collection Account
or Distribution Account any deposit required to be made under the terms of this
Agreement which continues unremedied for a period of one Business Day after the
date upon which written notice of such failure shall have been given to the
Subservicer by the Master Servicer or Trustee or to the Subservicer, the Master
Servicer and the Trustee by the Certificate Insurer or by any holder of a
Regular Certificate evidencing an aggregate undivided interest in the Trust of a
Percentage Interest of at least 25%; or
(ii) The failure by the Subservicer to make any required Servicing
Advance which failure continues unremedied for a period of 30 days, or the
failure by the Subservicer duly to observe or perform, in any material respect,
any other covenants, obligations or agreements of the Subservicer as set forth
in this Agreement, which failure continues unremedied for a period of 30 days,
after the date on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Subservicer by the Master Servicer or
Trustee or to the Subservicer, Master Servicer and the Trustee by the
Certificate Insurer or by any holder of a Regular Certificate evidencing an
aggregate undivided interest in the Trust of a Percentage Interest of at least
25%; or
(iii) The entry against the Subservicer of a decree or order by a
court or agency or supervisory authority having jurisdiction in the premises for
the appointment of a trustee, conservator, receiver or liquidator in any
insolvency, conservatorship, receivership, readjustment of debt, marshaling of
assets and liabilities or similar proceedings, or for the winding up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or
(iv) The Subservicer shall voluntarily go into liquidation, consent to
the appointment of a conservator or receiver or liquidator or similar person in
any insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to the Subservicer or of or relating to all
or substantially all of its property, or a decree or order of a court
2
<PAGE>
or agency or supervisory authority having jurisdiction in the premises for the
appointment of a conservator, receiver, liquidator or similar person in any
insolvency, 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 Subservicer and such decree or order shall have
remained in force undischarged, unbonded or unstayed for a period of 60 days; or
the Subservicer 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.
(b) then, and in each and every such case, so long as a Subservicer Event
of Default shall not have been remedied within the applicable grace period, (x)
subject to the succeeding paragraph, with respect solely to clause (i)(A) above,
if such Monthly Advance is not made by 4:00 P.M., New York time, on the second
Business Day following written notice to the Subservicer of such event the
Master Servicer shall terminate all of the rights and obligations of the
Subservicer under this Agreement, and (y) in the case of (i)(B), (ii), (iii) and
(iv) above , the Master Servicer shall, at the direction of the Trustee or
Certificate Insurer or the Holders of each Class of Class A Certificates
evidencing Percentage Interests aggregating not less than 51% with the consent
of the Certificate Insurer, by notice then given in writing to the Subservicer
and to the Master Servicer (and to the Trustee if given by Holders of
Certificates), terminate all of the rights and obligations of the Subservicer as
subservicer under this Agreement. Any such notice to the Subservicer shall also
be given to each Rating Agency, the Depositor and the Certificate Insurer. On
or after the receipt by the Subservicer of such written notice, all authority
and power of the Subservicer under this Agreement, whether with respect to the
Certificates or the Mortgage Loans or otherwise, shall pass to and be vested in
the Master Servicer pursuant to and under this section; and, without limitation,
the Master Servicer is hereby authorized and empowered to execute and deliver,
on behalf of the Subservicer, as attorney-in-fact or otherwise, any and all
documents and other instruments, and to 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 of each Mortgage
Loan and related documents or otherwise. The Subservicer agrees to cooperate
with the Master Servicer and/or Trustee in effecting the termination of the
responsibilities and rights of the Subservicer hereunder, including, without
limitation, the transfer to the Trustee for the administration by it of all cash
amounts that shall at the time be held by the Subservicer and to be deposited by
it in the Collection Account, or that have been deposited by the Subservicer in
the Collection Account or thereafter received by the Subservicer with respect to
the Mortgage Loans. All reasonable costs and expenses (including attorneys'
fees) incurred in connection with transferring the Mortgage Files to the
successor servicer occasioned by a Subservicer Event of Default to reflect such
succession as servicer pursuant to this Section shall be paid by the Subservicer
upon presentation of reasonable documentation of such costs and expenses.
Section 6. Termination Relating to a Termination of the Master
--------- ---------------------------------------------------
Servicer. In connection with the termination of the Subservicer occasioned by a
- --------
termination of the Master Servicer under the Pooling and Servicing Agreement or
occasioned by any event other than a Subservicer Event of Default, the
Subservicer shall be entitled to payment of all of Subservicer's reasonable
third party costs and expenses (including, without limitation, any reasonable
attorneys' fees
3
<PAGE>
and fees associated with the transfer of servicing and the sending of "goodbye"
letters); provided, however, in no event shall such amounts be taken out of the
Collection Account nor shall the Trustee, the Certificate Insurer or any
successor servicer (other than Master Servicer) be liable for any such fees and
the Subservicer shall look solely to the Master Servicer for payment of such
fees. The Subservicer hereby covenants and agrees to act as the Subservicer
under this Agreement for an initial term, commencing on the Closing Date and
ending on March 30, 1998, which term shall be extendable by the Certificate
Insurer for successive terms of three calendar months thereafter, until the
termination of the Subservicer's obligations and responsibilities pursuant to
Article X of the Pooling and Servicing Agreement. A Servicer Extension Notice
sent by the Certificate Insurer with respect to the Master Servicer under
Section 7.01(b) of the Pooling and Servicing Agreement shall be deemed to
automatically serve as an extension of the Subservicer's term hereunder. The
Subservicer hereby agrees that, upon its receipt of any such Servicer Extension
Notice, the Subservicer shall become bound for the duration of the term covered
by such Servicer Extension Notice to continue as the Subservicer subject to and
in accordance with the other provisions of this Agreement.
Section 7. Assignment. The Subservicer shall not assign its
--------- ----------
rights or delegate its duties and obligations except to the extent that (and
subject to the same conditions under which) the Master Servicer may do so with
respect to its rights, duties and/or obligations under Section 3.21 of the
Pooling and Servicing Agreement.
Section 8. Subservicing Compensation. As monthly compensation for
--------- -------------------------
its activities hereunder, the Subservicer shall be entitled to retain with
respect to each Mortgage Loan and any calendar month an amount equal to one
month's interest (or in the event of any payment of interest which accompanies a
Principal Prepayment in full made by the Mortgage during such calendar month,
interest for the number of days covered by such payment of interest) at the rate
of [Material omitted pursuant to a request for confidential treatment and filed
separately with the Securities and Exchange Commission.] per annum on the same
principal amount on which the payment of interest due for such Mortgage Loan
during such calendar month accrues. The Subservicer shall be entitled to retain
additional servicing compensation in the form of [Material omitted pursuant to a
request for confidential treatment and filed separately with the Securities and
Exchange Commission.] and any other service-related fees to the extent collected
from Mortgagors.
Section 9. Representations, Warranties and Covenants. The
--------- -----------------------------------------
Subservicer hereby represents, warrants and covenants to the Master Servicer
that as of the Closing Date or as of such date specifically provided herein:
(i) The Subservicer is duly organized, validly existing and in
good standing as a federal savings bank under the laws of the United States
and is and will remain in compliance with the laws of each state in which
any Mortgaged Property is located to the extent necessary to ensure the
enforceability of each Mortgage Loan and the servicing of the Mortgage Loan
in accordance with the terms of this Agreement;
4
<PAGE>
(ii) The Subservicer has the full power and authority to conduct
its business as presently conducted by it and to execute, deliver and
perform, and to enter into and consummate, all transactions contemplated by
this Agreement. The Subservicer has duly authorized the execution,
delivery and performance of this Agreement, has duly executed and delivered
this Agreement, and this Agreement, assuming due authorization, execution
and delivery by the Master Servicer, constitutes a legal, valid and binding
obligation of the Subservicer, enforceable against it in accordance with
its terms except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting the
enforcement of creditors' rights generally and by general principles of
equity;
(iii) The execution and delivery of this Agreement by the
Subservicer and the performance of and compliance with the terms of this
Agreement will not (a) violate the Subservicer's charter or by-laws or any
law, rule, regulation, order, judgment, award, administrative
interpretation, injunction, writ, decree or the like affecting the
Subservicer or by which the Subservicer is bound or (b) result in a breach
of or constitute a default under any indenture or other material agreement
to which the Subservicer is a party or by which the Subservicer is bound,
which in the case of either clause (a) or (b) will have a material adverse
effect on the Subservicer's ability to perform its obligations under this
Agreement;
(iv) The Subservicer is an approved servicer for FHLMC or FNMA in
good standing and is a HUD approved mortgagee pursuant to Section 203 of
the National Housing Act; no event has occurred, including but not limited
to a change in insurance coverage, which would make the Subservicer unable
to comply with FHLMC, FNMA or HUD eligibility requirements or which would
require notification to FHLMC, FNMA or HUD;
(v) The Subservicer 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;
(vi) There are no actions or proceedings against, investigations
known to it of, the Subservicer before any court, administrative or other
tribunal (A) that might prohibit its entering into this Agreement, (B)
seeking to prevent the consummation of the transactions contemplated by
this Agreement or (C) that might prohibit or materially and adversely
affect the performance by the Subservicer of its obligations under, or
validity or enforceability of, this Agreement; and
(vii) No consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery and
performance by the Subservicer of, or compliance by the Subservicer with,
this Agreement or the consummation of the transactions contemplated by this
Agreement, except for such consents, approvals, authorizations or orders,
if any, that have been obtained prior to the Closing Date.
Upon discovery by any of the Subservicer of a breach of any of the foregoing
representations, warranties and covenants which materially and adversely affects
the value of any Mortgage Loan or
5
<PAGE>
the interests therein of the Certificateholders and the Certificate Insurer, the
Subservicer shall give prompt written notice (but in no event later than two
Business Days following such discovery) to the Master Servicer, the Trustee and
Certificate Insurer.
Section 10. Notices. All notices and other communications
---------- -------
hereunder shall be in writing and shall be deemed given and received: (a) upon
receipt if delivered personally (unless subject to clause (b)) or if mailed by
registered or certified mail return receipt requested, postage prepaid; (b) at
5:00 p.m. local time on the business day after dispatch if sent by a nationally
recognized overnight courier; or (c) upon the completion of transmission (which
is confirmed by telephone or by a statement generated by the transmitting
machine) if transmitted by telecopy or other means of facsimile which provides
immediate or near immediate transmission to compatible equipment in the
possession of the recipient, in any case to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy number for a
party as will be specified by like notice):
If to Subservicer: Ocwen Federal Bank FSB
The Forum, Suite 1002
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL 33401
Attention: Secretary
Facsimile Number: (561) 681-8177
Confirmation Number: (561) 681-8517
If to Master Servicer: Pan American Bank, FSB
625 The City Drive, Suite 490
Orange, CA 92868
Attention: Blair F. Kenny
Facsimile Number: (714) 621-1131
Confirmation Number: (714) 621-3522 x289
Section 11. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN
---------- -------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS.
Section 12. Assignment. This Agreement may not be assigned by the
---------- ----------
Subservicer without the prior written consent of the Master Servicer, the
Trustee and the Certificate Insurer.
6
<PAGE>
IN WITNESS WHEREOF, each of the undersigned parties has caused this
Agreement to be duly executed by one of its duly authorized officers, all as of
the date first above written.
PAN AMERICAN BANK, FSB
By: /s/
----------------------------------
Name:
---------------------------------
Title:
-------------------------------
OCWEN FEDERAL BANK FSB
By: /s/ Jay B. Goldman
-----------------------------------
Name: Jay B. Goldman
Title: Vice President
7
<PAGE>
Exhibit 10.80
PREMIUM LETTER
--------------
December 30, 1997
Pan American Bank, FSB
1300 South El Camino Real, Suite 320
Orange, California 92868
Re: Policy No. 50660-N, issued by Financial Security Assurance Inc. on
December 30, 1997 in connection with Lehman ABS Corporation, $114,425,000
United PanAm Mortgage Loan Asset Backed Certificates, Series 1997-1, Class
-------------------------------------------------------------
A (the "Securities")
--------------------
Ladies and Gentlemen:
This letter will confirm the agreement among Pan American Bank, FSB
(the "Company") and Financial Security Assurance Inc. ("Financial Security")
that the following nonrefundable payments are to be made in connection with, and
subject to, the closing of the referenced transaction and in consideration of
the issuance by Financial Security of its Financial Guaranty Insurance Policy
No. 50660-N (the "Policy") in respect thereof. The premium paid hereunder
shall be nonrefundable for any reason whatsoever, including the lack of any
payment under the Policy or any other circumstances relating to the Securities
or provision being made for payments of the Securities prior to maturity.
The payments payable pursuant to the terms hereof shall constitute the
"Premium" referred to in Section 3.02 of that certain Insurance and Indemnity
Agreement, dated as of December 1, 1997 (the "Insurance Agreement"), among
Financial Security, the Company, United PanAm Mortgage Corporation (the
"Seller") and the Depositor. This letter is the Premium Letter referred to in
the Insurance Agreement. The obligations of the Company hereunder constitute
obligations of the Company under the Insurance Agreement.
Any capitalized terms used herein and not otherwise defined shall have
the meanings ascribed to them in the Pooling and Servicing Agreement, dated as
of December 1, 1997, among the Depositor, the Seller, the Company and Bankers
Trust Company of California, N.A. (the "Trustee").
1
<PAGE>
EXPECTED CLOSING DATE: December 30, 1997
<TABLE>
<CAPTION>
AMOUNTS PAYABLE AT CLOSING
- ----------------------------------------------------------------------------------
Type of Payment Amount Payee Purpose
==================================================================================
<S> <C> <C> <C>
Federal Funds Wire $21,454.69 Financial Security Initial Premium
Federal Funds Wire 25,040.00 Financial Security Due Diligence Costs
Federal Funds Wire 30,000.00 Financial Security Legal Fees and Disbursements
Federal Funds Wire 4,000.00 Financial Security Auditor's Fees
==================================================================================
Federal Funds Wire $80,494.69 Financial Security Total
==================================================================================
</TABLE>
The amount due on the Closing Date shall include the Premium payable
for the period from the Closing Date through and including the first Payment
Date. The Premium is payable monthly in advance on each Distribution Date,
through (but not including) the Final Distribution Date, by federal funds wire
transfer as specified below. Each such payment shall be equal to 25 basis
points multiplied by the Certificate Principal Balance of the Securities as of
the first day of the month in which such Distribution Date occurs, such product
then divided by 12.
Unless another account is designated to you in writing by the
President or a Managing Director of Financial Security, Federal funds wire
transfers to Financial Security should be made with the following details
specifically stated on the wire instructions:
Bank: The Bank of New York
ABA #021000018
For the Account of:
Financial Security Assurance Inc.
Account Number: 8900297263
Policy Number: 50660-N
2
<PAGE>
IN WITNESS WHEREOF, the parties havve caused their names to be signed
hereto by their respective duly authorized officers as of the date hereof.
FINANCIAL SECURITY ASSURANCE INC.
By: /s/
-------------------------------
Title: Authorized Officer
Acknowledged and Agreed:
PAN AMERICAN BANK, FSB
By: /s/
--------------------------
Name:
------------------------
Title:
-----------------------
3
<PAGE>
Exhibit 10.81
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT dated as of December 30, 1997, among United PanAm
Mortgage Corporation (the "Seller"), Pan American Bank, FSB (the "Master
Servicer" and together with the Seller, the "PanAm Companies") and Lehman
Brothers Inc. (the "Underwriter");
Section 1. Definitions. Capitalized terms not defined above shall have
-----------
the meanings provided below:
"Agreement" means this Indemnification Agreement, as amended from time
to time.
"Class A Certificates" means United PanAm Mortgage Loan Trust 1997-1,
Mortgage Loan Asset-Backed Certificates Series 1997-1, Class A.
"Collateral Information" means the information on any computer tape
furnished to Lehman ABS Corporation or any affiliate thereof by or on behalf of
the PanAm Companies containing informa tion regarding the assets of the Trust.
"PanAm Companies Information" means any information contained in the
Prospectus under the fourth and fifth sentences of the third paragraph on the
inside cover page, "SUMMARY-- Master Servicer," "Ocwen Federal Bank FSB," "--The
Mortgage Loans," "--The Index," the first and second sentences under "RISK
FACTORS--Risk of Early Defaults," the first, second and third sentences under
"--Prepayment Considerations," the first sentence under "--Payments on the
Mortgage Loans," the first sentence of "--Geographic Concen tration May Affect
Performance," the first and second sentences under "--Additional Risks
Associated with the Mortgage Loans," the fifth sentence in the first paragraph
under "--Risk of Loan Rates Reducing the Certificate Rate of the Class A
Certificates," "THE MORTGAGE POOL," "THE MASTER SERVICER," "OCWEN FEDERAL BANK
FSB" and the sixth sentence of the second paragraph under "PREPAYMENT AND YIELD
CONSIDERATIONS--Prepayments."
"United PanAm Information" means any information contained in the
Prospectus under the heading "SUMMARY--Seller."
"Prospectus" means the Prospectus, dated December 15, 1997, and the
related Prospectus Supplement, dated December 22, 1997, relating to the sale of
the Class A Certificates.
"Securities Act" means The Securities Act of 1933, as amended.
1
<PAGE>
Section 2. Indemnification.
---------------
A. Each of the PanAm Companies, jointly and severally, agrees to indemnify
and hold harmless the Underwriter and each person, if any, who controls the
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of the Class A
Certificates), to which the Underwriter or any such controlling person may
become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained in the
Prospectus in the case of the PanAm Companies with respect to the PanAm
Companies Information and in the case of the Seller with respect to the United
PanAm Information, as applicable, or in the case of the PanAm Companies, arising
as a direct result of any untrue statement or alleged untrue statement of a
material fact in the Collateral Information or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading with respect to the information
contained in the PanAm Companies Information, the United PanAm Information or
the Collateral Information, as applicable, and shall reimburse the Underwriter
and each such controlling person promptly upon demand for any legal or other
expenses reasonably incurred by the Underwriter or such controlling person in
connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred.
The foregoing indemnity agreement is in addition to any liability which the
PanAm Companies may otherwise have to the Underwriter or any controlling person
of the Underwriter.
B. Promptly after receipt by any indemnified party under this Agreement
of notice of any claim or the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Agreement, notify the indemnifying party in writing of the
claim or the commencement of that action; provided, however, that the failure to
notify an indemnifying party shall not relieve it from any liabil ity which it
may have under this Agreement except to the extent it has been materially
prejudiced by such failure and, provided further, that the failure to notify any
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under this Agreement.
If any such claim or action shall be brought against an indemnified party,
and it shall notify the indemnifying party thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it wishes, jointly
with any other similarly
2
<PAGE>
notified indemnifying party, to assume the defense thereof with counsel
reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Agreement for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation.
Any indemnified party shall have the right to employ separate counsel in
any such action and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless: (i) the employment there of has been specifically authorized by the
indemnifying party in writing; (ii) such indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party and in the reasonable judgment of such counsel it is
advisable for such indemnified party to employ separate counsel; or (iii) the
indemnifying party has failed to assume the defense of such action and employ
counsel reasonably satisfactory to the indemnified party, in which case, if such
indemnified party notifies the indemnifying party in writing that it elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party, it being understood, however, the
indemnifying party shall not, in connection with any one such action or separate
but sub stantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to local counsel) at any time for all such indemnified parties, which
firm shall be designated in writing by the Underwriter.
Each indemnified party, as a condition of the indemnity agreements
contained in this Agreement, shall use its best efforts to cooperate with the
indemnifying party in the defense of any such action or claim. No indemnifying
party shall be liable for any settlement of any such action effected without its
written consent (which consent shall not be unreasonably withheld), but if
settled with its written consent or if there be a final judgment for the
plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or liability by
reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after
3
<PAGE>
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement.
C. If the indemnification provided for in this Agreement shall for any
reason be unavailable to or insufficient to hold harmless an indemnified party
under this Agreement in respect of any loss, claim, damage or liability, or any
action in respect thereof, referred to therein, then each indemnifying party
shall, in lieu of indemnifying such indemnified party, contribute to the amount
paid or payable by such indemnified party as a result of such loss, claim,
damage or liability, or action in respect thereof, (i) in such proportion as
shall be appropriate to reflect the relative benefits received by the PanAm
Companies, on the one hand and the Underwriter on the other from the offering of
the Class A Certificates or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law or if the indemnified party failed to give
the notice required under this Agreement, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the PanAm Companies, on the one hand and the
Underwriter on the other with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect thereof,
as well as any other relevant equitable considerations.
The relative benefits of the Underwriter and the PanAm Companies shall be
deemed to be in such proportion so that the Underwriter is responsible for that
portion represented by the percentage that the underwriting discount appearing
on the cover page of the Prospectus bears to the public offering price appearing
on the cover page of the Prospectus and the PanAm Companies are responsible for
the balance.
The relative fault of the Underwriter and the PanAm Companies shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the PanAm Companies or by the Underwriter, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission and other equitable
considerations. The parties hereto acknowledge that the only information
contained in the Prospectus that was supplied by the Underwriter is limited to
the information set forth in the last paragraph on the cover of the Prospectus,
the fifth paragraph on page S-3 of the Prospectus and the second paragraph under
the heading "UNDERWRITING" in the Prospectus.
The PanAm Companies and the Underwriter agree that it would not be just and
equitable if contributions pursuant to this Agreement were to be determined by
pro rata allocation or by any
4
<PAGE>
other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Agreement shall be deemed to include, for
purposes of this Agreement, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim.
In no case shall the Underwriter be responsible for any amount in excess of
the amount by which the underwriting discount applicable to the Certificates
purchased by the Underwriter exceeds the amount of any damages that such
Underwriter has otherwise been required to pay in respect of such untrue
statement or omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Section 3. Miscellaneous.
-------------
(a) Notices. All notices and other communications provided for under this
-------
Agreement shall be delivered to the address set forth below or to such other
address as shall be designated by the recipient in a written notice to the other
party hereto.
If to United PanAm Mortgage Corporation:
United PanAm Mortgage Corporation
625 The City Drive, Suite 490
Orange, California 92868
If to Pan American Bank, FSB:
Pan American Bank, FSB
1300 South El Camino Real, Suite 320
San Mateo, California 94402
If to Lehman Brothers Inc.:
Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Attention: Corporate Secretary
(b) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York.
(c) Amendments. Amendments of this Agreement shall be in writing signed by
----------
each party hereto.
5
<PAGE>
(d) Survival, Etc. The indemnity and contribution agreements contained in
--------------
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any indemnified party, (ii) the
issuance of the Class A Certificates or (ii) any termination of this Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date first above written.
UNITED PANAM MORTGAGE CORPORATION
By: /s/
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
PAN AMERICAN BANK, FSB
By: /s/
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
LEHMAN BROTHERS INC.
By: /s/
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
7
<PAGE>
EXHIBIT 10.82
CERTIFICATE AND PREPAYMENT FEE PURCHASE AGREEMENT
-------------------------------------------------
March 26, 1998
Ocwen Partnership, L.P.
c/o Ocwen General, Inc.
1675 Palm Beach Lakes Boulevard
Suite 1675
West Palm Beach, Florida 33401
Ladies and Gentlemen:
Pan American Bank, FSB ("Pan American"), proposes to sell to Ocwen
Partnership, L.P., a Virginia limited partnership and operating entity of Ocwen
Asset Investment Corp., a Virginia corporation treated as a real estate
investment trust pursuant to the Internal Revenue Code of 1986, as amended
("Ocwen LP"), and Ocwen LP proposes to purchase, pursuant to this Certificate
and Prepayment Fee Purchase Agreement (this "Agreement") at and for a purchase
price as set forth herein: (i) the United PanAm Mortgage Loan Asset Backed
Certificates, Series 1997-1 Class X Certificates (the "Certificates"), which are
one of the three (3) classes of certificates, issued pursuant to that certain
Pooling and Servicing Agreement dated as of December 1, 1997 (the "Pooling and
Servicing Agreement") by and among Lehman ABS Corporation, as Depositor
("Depositor"), United PanAm Mortgage Corporation, as Seller, Pan American, as
Master Servicer, and Bankers Trust Company of California, N.A., as Trustee
("Trustee"), and (ii) the Prepayment Fees (as hereinafter defined).
Unless otherwise defined herein, capitalized terms shall have the meaning
ascribed to them in the Pooling and Servicing Agreement. The trust fund created
pursuant to the Pooling and Servicing Agreement (the "Trust Fund") consists
primarily of adjustable rate residential mortgage loans (the "Mortgage Loans")
secured by first liens on one-to-four family residential properties.
In connection with the foregoing purchase by Ocwen LP of the Certificates,
and with the acknowledgment and agreement of Pan American that a substantial and
material inducement to the acquisition by Ocwen LP of the Certificates is Pan
American's simultaneous sale to Ocwen LP of all of Pan American's right, title
and interest in and to the prepayment penalties, prepayment fees and/or
prepayment charges relating to the Mortgage Loans (the "Prepayment Fees"), Pan
American hereby agrees to sell, assign, and convey to Ocwen LP all of Pan
American's right, title to and interest in and to the Prepayment Fees.
1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PAN AMERICAN. Pan
American represents and warrants to, and agrees with, Ocwen LP that as of the
date of this Agreement and as of the Closing Date (as defined in Section 4.(a)
below):
1
<PAGE>
Owen Partnership, L.P.
March 26, 1998
Page 2
(a) Pan American is or will be on the Closing Date the lawful owner of
the entire legal and beneficial interest of the Certificates and the
Prepayment Fees. Pan American has not transferred, sold, assigned,
hypothecated, pledged or conveyed all or any portion of its right, title or
interest in the Certificates or the Prepayment Fees, and has the full right
to sell, transfer, and assign the Certificates and the Prepayment Fees,
free and clear from any and all liens, claims and encumbrances whatsoever.
(b) As the sole owner and holder of the Certificates, no other
Certificateholder or Person (other than the Trustee) will at the Closing
Date be required to consent to the approval of or the conveyance of the
Certificates in accordance with this Agreement.
(c) Upon execution, delivery, and performance of the terms of this
Agreement and the bill of sale (the "Bill of Sale") attached hereto and
made a part hereof for all purposes as Exhibit A, Pan American shall convey
---------
the Certificates and the Prepayment Fees free and clear of any lien,
mortgage, pledge, charge, encumbrance, adverse claim or other security
interest.
(d) The holder of the Certificates is entitled to the benefits of the
Pooling and Servicing Agreement, and the Pooling and Servicing Agreement
has been duly and validly authorized, executed, and delivered, and
constitutes the valid and legally binding obligation of the parties thereto
enforceable in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
or other similar laws affecting rights of creditors of federally insured
financial institutions and by principles of equity (whether considered in a
proceeding or action in equity or at law), and no default has occurred and
is continuing in respect thereof.
(e) The Certificates and the Prepayment Fees shall have been, upon
completion of such assignment to Ocwen LP, assigned in the manner and in
the form required to effect a transfer of ownership of the Certificates and
the Prepayment Fees from Pan American to Ocwen LP.
(f) Pan American is duly organized, validly existing and in good
standing as a federal savings bank under the laws of the United States.
(g) Pan American has the full power and authority to conduct its
business as presently conducted by it and to execute, deliver and perform,
and to enter into and consummate, all transactions contemplated by this
Agreement. Pan American has duly authorized the execution, delivery and
performance of this Agreement, has duly executed and delivered this
Agreement, and this Agreement, assuming due authorization, execution and
delivery by the other signatories, constitutes the legal, valid and binding
obligation of Pan American, enforceable against it in accordance with its
terms except as the enforceability
2
<PAGE>
Owen Partnership, L.P.
March 26, 1998
Page 3
thereof may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting the enforcement of rights of creditors of
federally insured financial institutions and by general principles of
equity.
(h) The execution and delivery of this Agreement by Pan American and
the performance of and compliance by Pan American with the terms of this
Agreement will not (a) violate Pan American's charter or by-laws or any
law, rule, regulation, order, judgment, award, administrative
interpretation, injunction, writ, decree or the like affecting Pan American
or by which Pan American is bound or (b) result in a breach of or
constitute a default under any indenture or other material agreement to
which Pan American is a party or by which Pan American is bound, which in
the case of either clause (a) or (b) will have a material adverse effect on
Pan American's ability to perform its obligations under this Agreement.
(i) There are no actions or proceedings against, investigations known
to it of, Pan American before any court, administrative or other tribunal
(A) that might prohibit its entering into this Agreement, (B) seeking to
prevent the consummation of the transactions contemplated by this Agreement
or (C) that might prohibit or materially and adversely affect the
performance by Pan American of its obligations under, or validity or
enforceability of, this Agreement.
(j) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by Pan American of, or compliance by Pan American with, this
Agreement or the consummation of the transactions contemplated by this
Agreement, except for such consents, approvals, authorizations or orders,
if any, that have been obtained prior to the Closing Date.
(k) No litigation or administrative proceeding of or before any court,
tribunal or government body is currently pending, or to its knowledge
threatened, against the Seller or any of its properties or with respect to
this Agreement, the Certificates or the Prepayment Fees which in its
opinion has a reasonable likelihood of resulting in a material adverse
effect on the transactions contemplated by this Agreement.
(l) Pan American has all licenses necessary to carry on its business
as now being conducted and is licensed, qualified and in good standing in
all states necessary to service each Mortgage Loan in accordance with the
Pooling and Servicing Agreement.
3
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Owen Partnership, L.P.
March 26, 1998
Page 4
(m) All obligations required to be performed by Pan American under the
Pooling and Servicing Agreement prior to the closing of the transactions
contemplated hereunder have been or will, on or prior to such date, be
performed by Pan American.
(n) Subsequent to consummation of the transactions set forth in this
Agreement, Pan American will report the effect of such transactions on its
financial statements and in any other communications to the public or third
parties in accordance with generally accepted accounting principles as a
sale of the Certificates and the Prepayment Fees.
(o) Except as set forth or referenced herein, there are no agreements
between Ocwen LP and Pan American, oral or written, express or implied,
relating to the purchase or sale of the Certificates and the Prepayment
Fees.
(p) With respect to the Mortgage Loans listed on Exhibit B, Pan
---------
American agrees that it shall substitute or repurchase such Mortgage Loans
within thirty days after the Closing Date in accordance with the terms and
provisions of the Pooling and Servicing Agreement.
(q) Pan American agrees that it will continue to cooperate with Ocwen
LP post-closing to attempt to amend the Pooling and Servicing Agreement to
make any income on the Certificates exempt from the Investment Company Act
of 1940.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF OCWEN LP.
(a) Ocwen LP represents and warrants to, and agrees with, Pan American
that:
(i) Ocwen LP is acquiring the Certificates for its own account
and not with a view to or for sale or transfer in connection with any
distribution thereof in any manner that would violate the Securities
Act or any applicable state securities laws.
(ii) Ocwen LP understands that the Certificates have not and
will not be registered under the Securities Act or registered or
qualified under any applicable state securities laws, none of the
Seller, any trustee or any certificate registrar (the "Certificate
Registrar") is obligated to so register or qualify the Certificates
and the Certificates may not be resold or transferred unless they
are (a) registered pursuant to the Securities Act and registered and
qualified pursuant to any applicable state securities laws, or (b)
sold or transferred in transactions which are exempt from such
registration and qualification.
(iii) Ocwen LP will not sell or otherwise transfer any of the
Certificates except in compliance with the Pooling and Servicing
Agreement, provided, however,
4
<PAGE>
Owen Partnership, L.P.
March 26, 1998
Page 5
that for purposes of this provision, a "sale" or "transfer" does not
include any pledge, assignment, transfer, hypothecation or granting
of a security interest in the Certificates in connection with the
acquisition of the Certificates, or thereafter by Ocwen LP or any
successor in interest thereof.
(iv) Neither Ocwen LP nor anyone acting on its behalf has (a)
approached or negotiated with respect to any of the Certificates or
any interest therein with any person other than qualified,
sophisticated, institutional investors in any manner, (b) made any
general solicitation by means of general advertising or in any other
manner, or (c) taken any other action that (in the case of any of the
acts described in clauses (a) through (c) above) would constitute a
distribution of the Certificates under the Securities Act or would
render the disposition of any of the Certificates a violation of
Section 5 of the Securities Act or any state securities law or require
registration or qualification pursuant thereto. Ocwen LP will not
act, nor has it authorized or will it authorize any person to act, in
any manner set forth in the foregoing sentence with respect to the
Certificates.
(v) Ocwen LP has been furnished with certain information
regarding (a) Pan American, (b) the Certificates, (c) the nature,
performance and servicing of the assets for the Trust Fund, (d) the
Pooling and Servicing Agreement, and (e) such other information as
Ocwen LP believed relevant to Ocwen LP's decision to acquire the
Certificates and the Prepayment Fees.
(vi) Ocwen LP is an "accredited investor" as defined in Rule
501(a) under the Securities Act. Ocwen LP has such knowledge and
experience in financial and business matters as to be capable of
evaluating the merits and risks of an investment in the Certificates;
Ocwen LP has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision; and
Ocwen LP is able to bear the economic risks of such an investment and
can afford a complete loss of such investment.
(vii) Ocwen LP is not (a) a "Plan", defined as any employee
benefit plan or other retirement arrangement, including individual
retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which such plans, accounts
or arrangements are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 or the Internal Revenue Code of 1986, as amended (the
"Code"), or (b) any person who is directly or indirectly purchasing
the Certificates on behalf of, as named fiduciary of, as trustee of,
or with assets of a Plan.
5
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Owen Partnership, L.P.
March 26, 1998
Page 6
(viii) The sale of the Certificates to Ocwen LP shall not (a)
cause the assets of the Trust Fund to be regarded as plan assets and
subject to the fiduciary responsibility provisions of ERISA or the
prohibited transaction provisions of the Code, or any federal, state
or local law ("Similar Law") which is, to a material extent, similar
to the foregoing provisions of ERISA or the Code, (b) give rise to a
fiduciary duty under ERISA, Section 4975 of the Code or Similar Law
on the part of any of the parties to the Pooling and Servicing
Agreement or the Certificate and Prepayment Fee Purchase Agreement,
or (c) constitute a prohibited transaction under ERISA or Section
4975 of the Code or Similar Law.
(ix) The Purchase Price (as defined in Section 3 herein) for the
purchase of the Certificates and the Prepayment Fees was negotiated at
arms' length and is at least equal to the fair market value of such
assets on the date of conveyance.
(x) Subsequent to consummation of the transactions set forth in
this Agreement, Ocwen LP will report the effect of such transactions
on its financial statements and in any other communications to the
public or third parties in accordance with generally accepted
accounting principles as a purchase of the Certificates and the
Prepayment Fees.
(xi) Except as set forth or referenced herein, there are no
agreements between Ocwen LP and Pan American, oral or written, express
or implied, relating to the purchase or sale of the Certificates and
the Prepayment Fees.
(xii) Ocwen LP is a duly organized and validly existing limited
partnership under the laws of the Commonwealth of Virginia, with full
power and authority to engage in the transactions contemplated by this
Agreement.
(xiii) This Agreement has been duly and validly authorized,
executed and delivered by Ocwen LP and assuming the valid execution by
Pan American, constitutes its valid and binding agreement enforceable
in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization or other laws relating to or
affecting the enforcement of creditor's rights and by general
principles of equity.
(xiv) The execution and delivery of this Agreement by Ocwen LP
and the performance of and compliance by Ocwen LP with the terms of
this Agreement will not (a) violate Ocwen LP's limited partnership
agreement or any law, rule, regulation, order, judgment, award,
administrative interpretation, injunction, writ, decree or the like
affecting Ocwen LP or by which Ocwen LP is bound or (b) result in a
breach of
6
<PAGE>
Owen Partnership, L.P.
March 26, 1998
Page 7
or constitute a default under any indenture or other material
agreement to which Ocwen LP is a party or by which Ocwen LP is
bound, which in the case of either clause (a) or (b) will have a
material adverse effect on Ocwen LP's ability to perform its
obligations under this Agreement.
(xv) All consents, approvals, and authorizations as required,
and any order of any court or governmental agency or body relating
to the transactions contemplated by this Agreement, required to be
obtained by Ocwen LP, has been or will, prior to the Closing Date,
be obtained by Ocwen LP.
3. PURCHASE AND SALE. Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, (x) Pan
American agrees to sell to Ocwen LP, and Ocwen LP agrees to purchase from Pan
American, all of Pan American's right, title and interest in and to the
Certificates at the purchase price agreed to by Pan American and Ocwen LP as set
forth in Schedule I; and (y) Pan American agrees to sell to Ocwen LP, and Ocwen
LP agrees to purchase from Pan American, all of Pan American's right, title and
interest in and to the Prepayment Fees at the purchase price for the Prepayment
Fees agreed to by Pan American and Ocwen LP as set forth in Schedule I
(collectively, the "Purchase Price").
4. DELIVERY AND PAYMENT OF THE PURCHASE PRICE. Delivery of and payment
of the Purchase Price shall be made in the manner, on the date and at the time
specified herein. The payment of the Purchase Price shall occur as follows:
(a) Ocwen LP shall pay to Pan American the Purchase Price, as set
forth on Schedule I, subject to such adjustments as shall be made in
accordance with this Agreement, upon satisfaction of each and all of the
following conditions, on or before March 26, 1998 (the "Closing Date")
(although it is understood and agreed that the deliverables set forth below
may be delivered within two business days after the Closing Date):
(i) Pan American shall deliver to Ocwen LP all required consents
for the sale and assignment of the Certificates.
(ii) Pan American shall deliver any Opinion of Counsel and
transferor certificate in the form attached as Exhibit J to the
---------
Pooling and Servicing Agreement, as may be required under the terms
and provisions of Section 5.02(d) of the Pooling and Servicing
Agreement.
(iii) Pan American shall deliver to Ocwen LP UCC-1 financing
statements perfecting, or purporting to perfect, Ocwen LP's interest
in the Certificates and the Prepayment Fees conveyed pursuant to this
Agreement.
7
<PAGE>
Owen Partnership, L.P.
March 26, 1998
Page 8
(iv) Pan American shall cause the completion of the transfer of
the Certificates to be effected by the Trustee and the delivery of the
Certificates to Ocwen LP. Delivery of the Certificates shall be made
to Ocwen LP in physical, fully-registered form against payment by
Ocwen LP of the Purchase Price therefor. The Certificates may be re-
registered after the Closing Date in such names and in such authorized
denominations as Ocwen LP may request pursuant to the Pooling and
Servicing Agreement.
5. CONDITIONS TO THE OBLIGATIONS OF THE PARTIES.
(a) The obligations of Ocwen LP to purchase the Certificates and the
Prepayment Fees shall be subject to (i) the accuracy of the representations
and warranties of Pan American contained herein as of the date hereof and
as of the Closing Date; (ii) the performance by Pan American of its
obligations hereunder, (iii) the performance by Pan American of its
obligations under the Pooling and Servicing Agreement, including without
limitation, the obligation of Pan American to deliver letters,
certificates, opinions of counsel, and any other documents pursuant to the
Pooling and Servicing Agreement; and (iv) Pan American's agreement to
transfer the Certificates and the Prepayment Fees in one consolidated
transaction, Pan American agreeing that Ocwen LP would not purchase the
Certificates without the sale by Pan American of the Prepayment Fees, and
vice versa.
(b) The obligation of Pan American to sell the Certificates shall be
subject to (i) the accuracy of the representations and warranties of each
of Ocwen LP contained herein as of the date hereof and as of the Closing
Date and (ii) the performance by of each of Ocwen LP of its obligations
under this Agreement. It is understood and agreed that Ocwen LP is
agreeing hereby to purchase the Certificates and the Prepayment Fees in a
consolidated transaction, subject to the terms and conditions contained
herein.
6. ASSIGNMENT OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
INDEMNIFICATIONS. As of the Closing Date, Pan American assigns to Ocwen LP,
without recourse, representation or warranty by Pan American, Pan American's
right, title and interest as a Certificateholder in and to the representations,
warranties, covenants, indemnifications and obligations of any party to the
Pooling and Servicing Agreement.
7. INTENTIONALLY DELETED.
8. DELIVERIES. Pan American and/or Ocwen LP shall:
8
<PAGE>
Owen Partnership, L.P.
March 26, 1998
Page 9
(a) deliver the following documents or items on the Closing Date (or
within two business days thereafter), such closing to occur at the offices
of Ocwen LP or such other location as the parties may mutually agree upon:
(i) Pan American shall deliver (i) the original Certificates,
assigned to Ocwen LP, completed by the Trustee and evidencing the
transfer to Ocwen LP, and (ii) at least three (3) fully executed and
notarized originals of the Bill of Sale to Ocwen LP.
(ii) Pan American shall deliver evidence satisfactory to Ocwen
LP that any required consent of the Trustee to the transactions
contemplated by this Agreement has been received.
(iii) Pan American shall deliver evidence of Pan American's
undertaking to the Trustee with respect to the costs and expenses of
the transaction.
(iv) Ocwen LP shall deliver an affidavit, substantially in the
form of Exhibit K to the Pooling and Servicing Agreement.
(v) Pan American and/or Ocwen LP shall deliver any item which is
deliverable by such party pursuant to the terms and provisions of
Section 4.(a)(i) through (iv) above.
(vi) Pan American and/or Ocwen LP shall deliver any other
documents or instruments reasonably requested by Pan American and/or
Ocwen LP for the completion of the transaction.
(b) deliver the following items after the Closing Date, such
obligations to survive the Closing Date:
(i) Pan American will deliver to Ocwen LP within three (3)
business days (A) any distributions made on the Certificates after
February 25, 1998 to the extent received by Pan American and (B) any
distributions relating to Prepayment Fees after February 1, 1998 to
the extent received by Pan American.
(ii) Pan American will deliver to Ocwen LP the Premium Recapture
Amount (as set forth on Schedule I) within thirty (30) days after Pan
American repurchases any Mortgage Loan out of the loan pool pursuant
to the Pooling and Servicing Agreement, but only for Mortgage Loans
for which the notice of repurchase is sent on or before June 25, 1998.
9
<PAGE>
Owen Partnership, L.P.
March 26, 1998
Page 10
9. FEES AND EXPENSES. Except as otherwise set forth herein, each of Pan
American and Ocwen LP shall pay its own costs and expenses (including costs and
expenses of its counsel) in connection herewith. Any transfer fees, Trustees
fees, or other expenses, charges or costs to effect the transfer of the
Certificates or the Prepayment Fees shall be paid by Pan American.
10. SECURITY INTEREST. It is the intention of the parties that Ocwen LP
purchase, and Pan American shall sell the Certificates and Prepayment Fees, and
that Pan American shall not be deemed to be issuing a debt instrument of Pan
American, it being the intention of the parties hereto to treat the transaction
for federal income tax and all other purposes as a sale by Pan American and a
purchase by Ocwen LP, of the Certificates and the Prepayment Fees.
Notwithstanding such intention, in the event that the sale of the Certificates
and the Prepayment Fees is deemed by a court of competent jurisdiction to be a
loan, the parties intend that this Agreement shall create such security
interest, and Pan American hereby grants, conveys, sets over, transfers and
assigns unto Ocwen LP, and creates a security interest in, the Certificates and
the Prepayment Fees, and all proceeds therefrom or interests otherwise
appertaining, and this Agreement shall constitute a security agreement under
applicable law for such purposes. Pan American shall execute and deliver, as
required, all uniform commercial code financing statements and other instruments
necessary or advisable to perfect the security interest granted hereby.
11. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and assignees,
and no other person will have any right or obligation hereunder.
12. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of New York.
13. INDEMNIFICATION. Pan American hereby agrees and shall indemnify and
hold Ocwen LP harmless for any claims, liabilities or damages (including,
without limitation, any reasonable attorneys' fees) caused by a breach by Pan
American of its representations, warranties or covenants contained in Section 1.
above. Notwithstanding the foregoing, neither party hereunder shall be liable
to the other for punitive, consequential, indirect or loss-of-profit damages.
14. MISCELLANEOUS.
(a) The parties hereto agree to address in good faith in a mutually
agreeable manner any matters that may arise during the course of the
transactions described herein that are not addressed herein. Pan American
and Ocwen LP agree to execute and deliver after the Closing Date any
additional documents and/or instruments which are necessary or desirable to
further vest Pan American's right, title and interest in the Certificates
and Prepayment Fees in Ocwen LP.
10
<PAGE>
Owen Partnership, L.P.
March 26, 1998
Page 11
(b) Time is of the essence in the observance and performance of this
Agreement.
(c) This Agreement constitutes the entire agreement between the
parties with respect to the transactions contemplated hereby and supersedes
all prior agreements (or contemporaneous oral agreements) of the parties
with respect thereto. This Agreement may be amended only in writing signed
by the party against whom such amendment is sought to be enforced.
(d) If any provision hereof is invalid, illegal or unenforceable, the
remaining provisions shall not be affected or impaired thereby.
(e) No provision of this Agreement shall be construed against or
interpreted to the disadvantage of any party hereto by any court or other
authority by reason of such party having or being deemed to have
structured, dictated or drafted such provision.
(f) This Agreement may be signed in any number of counterparts, each
of which shall be deemed an original, which taken together shall constitute
one and the same instrument.
(g) This Agreement will inure to the benefit of and be binding upon
the parties hereto and their successors and assigns. This Agreement is not
intended to confer on any person other than the parties hereto and their
successors and assigns any rights, obligations, remedies or liabilities.
(h) This Agreement shall not be enforceable unless and until it has
been executed by each of the proposed signatories hereto. If this
agreement is not executed and delivered to Ocwen LP via facsimile on or
before 5:00 p.m., West Palm Beach, Florida time on March 26, 1998, then
this Agreement shall be null, void and of no force or effect whatsoever.
(i) Pan American's representations, warranties, covenants and
indemnities contained herein shall survive the Closing Date.
(j) All notices and other communications hereunder shall be in writing
and shall be deemed given and received: (a) upon receipt if delivered
personally (unless subject to clause (b)) or if mailed by registered or
certified mail return receipt requested, postage prepaid; (b) at 5:00 p.m.
local time on the business day after dispatch if sent by a nationally
recognized overnight courier; or (c) upon the completion of transmission
(which is confirmed by telephone or by a statement generated by the
transmitting machine) if transmitted by telecopy or other means of
facsimile which provides immediate or near immediate transmission to
compatible equipment in the possession of the recipient, in any case to the
11
<PAGE>
Owen Partnership, L.P.
March 26, 1998
Page 12
parties at the following addresses or telecopy numbers (or at such other
address or telecopy number for a party as will be specified by like
notice):
if to the Seller: Pan American Bank, FSB
- ---------------------------------------------- The City Drive, Suite 490
Orange, CA 92868
Attention: Blair F. Kenny
Facsimile: (714) 621-1131
Telephone: (714) 621-3522 x289
with a copy to: Pan American Bank, FSB
- ---------------------------------------------- 1300 S. Camino Real
San Mateo, CA 94402
Attention: Carol Bucci
Facsimile: (650) 345-0323
Telephone: (650) 345-1800 x217
if to Ocwen LP: Ocwen Partnership, L.P.
- ---------------------------------------------- c/o Ocwen General, Inc.
1675 Palm Beach Lakes
Boulevard, Suite 1002
West Palm Beach, Florida 33401
Attention: Secretary
Facsimile: (561) 682-8177
Telephone: (561) 682-8251
[Signature Pages Follow]
12
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Owen Partnership, L.P.
March 26, 1998
Page 13
Assuming the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
letter and your acceptance shall represent a binding agreement between Pan
American and Ocwen LP.
Sincerely,
PAN AMERICAN BANK, FSB
By: /s/
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
ACKNOWLEDGED AND AGREED TO:
OCWEN PARTNERSHIP, L.P.
a Virginia limited partnership
By: Ocwen General, L.P.
a Virginia corporation
general partner
By: /s/
-----------------------------------
Name:
--------------------------------
Title:
--------------------------------
13
<PAGE>
Exhibit 10.83
______________________________________________________________________________
RESIDENTIAL FLOW SERVICING AGREEMENT
BETWEEN
OCWEN FEDERAL BANK FSB,
Servicer
AND
PAN AMERICAN BANK, FSB AND UNITED PANAM MORTGAGE CORPORATION,
Collectively, Owner
PERFORMING AND NON-PERFORMING
RESIDENTIAL MORTGAGE LOANS
______________________________________________________________________________
1
<PAGE>
RESIDENTIAL FLOW SERVICING AGREEMENT
This Residential Flow Servicing Agreement (this "Agreement") dated
effective as of the 10th of November, 1997 by and between Pan American Bank, FSB
and United PanAm Mortgage Corporation (collectively, "Owner") and Ocwen Federal
Bank FSB, a federal savings bank (the "Servicer").
W I T N E S S E T H:
--------------------
WHEREAS, Owner (i) owns certain loans and (ii) may from time to time
originate or buy additional loans for its own account secured by mortgages
and/or deeds of trust;
WHEREAS, Owner and the Servicer desire to set forth the terms and
conditions pursuant to which the Servicer will service and provide default
management services for such mortgage loans and owned real estate, and provide
management and disposition services for the related mortgage loans and owned
real estate;
NOW, THEREFORE, in consideration for the mutual benefits and obligations as
hereinafter set forth, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. Capitalized terms used in this Agreement and
-----------
not otherwise defined shall have the meanings given to them in this Section 1.1.
"Accepted Servicing Practices" means, with respect to any Loan or REO
----------------------------
Property, those servicing, collection, resolution or disposition practices to
maximize the net present value to Owner on the Owner's investment in any Loan or
REO Property followed with the same care, skill, prudence and diligence with
which the Servicer services and administers mortgage loans or properties held
for other portfolios similar to the Loan or REO Property, as the case may be,
but without regard to:
1. any relationship that Servicer, any sub-servicer or any affiliate of
Servicer or any sub-servicer may have with the related Obligor; or
2. Servicer's or any sub-servicer's right to receive compensation for its
services hereunder or with respect to any particular transaction; or
3. the ownership, or servicing or management for others, by Servicer or any
sub-servicer, of any other mortgage loans or property;
provided, however, that such services are performed in compliance with the terms
of this Agreement.
2
<PAGE>
"Agreement" means this Servicing Agreement as amended, modified or
---------
supplemented from time to time.
"Ancillary Income" means all income (other than interest and prepayment
----------------
fees) from the Loans and Properties to which the Servicer is entitled (exclusive
of the Servicing Fee), including, without limitation, late charges, insufficient
fund fees, assumption fees, modification fees, fees associated with any
repayment plan or forbearance agreement, fees associated with any discounted
payoff, interest on the Collection Account and Escrow Accounts (but only to the
extent that applicable Requirements or the Loan Documents do not require that
such interest be paid to the applicable Obligor) and all other incidental fees.
"Association" means any homeowners' association or condominium association.
-----------
"Balloon Mortgage Loan" means any Loan that by its original terms or by
---------------------
virtue of any modification provides for an amortization schedule extending
beyond its originally scheduled Maturity Date.
"Balloon Payment" means, with respect to a Balloon Mortgage Loan as of any
---------------
date of determination, the amount outstanding on the Maturity Date of such
Balloon Mortgage Loan in excess of the related Monthly Payment.
"Bankruptcy Code" means 11 U.S.C. 101 et seq., as the same may be amended,
---------------
modified or supplemented from time to time.
"Breach Analysis" means the following services: management of the document
---------------
delivery process, if applicable and requested by Owner; certification of
collateral documents including the review of chain of title and the providing of
an exception report, if applicable and requested by Owner; evaluation of data to
identify breaches of representations and warranties, if applicable and requested
by Owner; the completion of title searches to identify title defects and
collateral deficiencies, if applicable and requested by Owner; the submission
and tracking of breaches, if applicable and requested by Owner; the preparation
of powers of attorneys from Owner to Servicer; the conversion of any data tape
from the Current Servicer; the uploading and quality control of data; the
uploading of final trial balances; the posting of all interim payment activity
to Loans; and the setup of tax, escrow and insurance records (it being
understood that the cost of any third party fees, costs and expenses including
but not limited to title searches, recording fees for powers of attorneys, tax
search services, etc., are Setup Expenses and are not included in the Setup
Fee).
"Business Day" means any day other than (a) a Saturday or Sunday or (b) a
------------
day on which banking and savings associations in the States of Florida or
California are authorized or obligated by law or executive order to be closed.
"Collection Account" means the separate account(s) created pursuant to
------------------
Section 2.3(a) of this Agreement, which shall be entitled "Ocwen Federal Bank
FSB, as Servicer, in trust for [either: Pan
3
<PAGE>
American Bank, FSB or United PanAm Mortgage Corporation, as the case may be]
and its successors and assigns."
"Collection Period" means with respect to each Distribution Date, the
-----------------
period commencing on the first day of the month preceding the month of the
Distribution Date and ending on the last day of the month preceding the month of
the Distribution Date.
"Current Servicer" means Owner or any other servicer, sub-servicer,
----------------
document custodian, owner, holder, originator or other Person who, as of the
date of this Agreement, has possession of any document or information
constituting a part of the Servicing File.
"Decision Matrix" shall have the meaning set forth in Section 3.5.
---------------
"Determination Date" means the last day (or if such day is not a Business
------------------
Day, the Business Day immediately preceding such day) of the Collection Period.
"Disposition" means any (a) taking of Mortgaged Property by eminent domain
-----------
or condemnation or sale in lieu thereof, (b) the liquidation of a defaulted Loan
through a foreclosure sale, trustee's sale, deed-in-lieu of foreclosure or
otherwise, (c) a sale or assignment of a Loan or REO Property in accordance with
the terms hereof, and/or (d) any other disposition of the Loan or REO Property
whether through a discounted payoff, prepayment, securitization, Balloon Payment
or any other similar disposition.
"Distribution Date" means the 25th day of each month, or if such day is not
-----------------
a Business Day, the next succeeding Business Day.
"Due Date" means the day of the month of the related Collection Period on
--------
which the Monthly Payment is due on a Loan, exclusive of any days of grace.
"Environmental Liability" shall have the meaning ascribed thereto in
-----------------------
Section 8.3(c).
"Environmental Problem Property" shall have the meaning set forth in
------------------------------
Section 4.2 below.
"Escrow Accounts" means the separate account(s) created pursuant to Section
---------------
2.3(a) of this Agreement, for the payment of taxes, Association dues,
assessments, Hazard Insurance and Mortgage Insurance premiums, ground rents and
similar items which shall be entitled "Ocwen Federal Bank FSB, as Servicer, in
trust for [either: Pan American Bank, FSB or United PanAm Mortgage Corporation,
as the case may be] and its successors and assigns, and various Mortgagors."
"Escrow Payments" means amounts required to be paid for taxes, Association
---------------
dues, assessments, Hazard Insurance and Mortgage Insurance premiums, ground
rents and similar items and any and all other purposes for which funds are
required to be held in escrow.
4
<PAGE>
"FDIC" means the Federal Deposit Insurance Corporation or any successor
----
thereto.
"FHLMC" means the Federal Home Loan Mortgage Corporation or any successor
-----
thereto.
"FNMA" means the Federal National Mortgage Association or any successor
----
thereto.
"Hazard Insurance" means casualty, fire, hazard, flood, wind, liability or
----------------
similar insurance policies relating to a Property.
"HUD" means the United States Department of Housing and Urban Development.
---
"Liability" shall have the meaning ascribed thereto in Section 8.2.
---------
"Liquidation Proceeds" means cash received in connection with the
--------------------
liquidation of defaulted Loans, whether through a Disposition or otherwise, net,
however, of the amount of any broker's fees payable in connection with any sale
of a REO Property (but without any deduction for any other legal fees or other
costs or expenses).
"Loan" means a loan, secured by a mortgage or deed of trust on certain real
----
property, acquired by Owner and for which the servicing is transferred to
Servicer from time to time pursuant to the terms and provisions of Section 2.1;
the term "Loan" shall include Performing Loans and Non-Performing Loans.
"Loan Documents" means the promissory note, mortgage or deed of trust,
--------------
title insurance policy or binder, Mortgage Insurance or guaranty agreement and
any other agreement, instrument or other document evidencing or relating to a
Loan and any other agreement, instrument or other document evidencing ownership
of a REO Property.
"Maturity Date" means, with respect to any Loan as of any date of
-------------
determination, the date on which the last payment of principal is due and
payable under the related promissory note.
"Monthly Collection Amount" means, for each Distribution Date, all amounts
-------------------------
actually received into Servicer's lock box designated for receipt of payments
during the related Collection Period with respect to the Loans and/or REO
Properties from whatever source (other than partial and forbearance payments),
minus amounts representing accrued taxes and insurance premiums not yet due and
payable to the applicable taxing authority or insurer, calculated in accordance
with the then current escrow analysis performed by the Servicer in accordance
with applicable Requirements.
"Monthly Document Report" means the monthly report prepared by the Servicer
-----------------------
and delivered to Owner pursuant to Section 6.4.
5
<PAGE>
"Monthly Payment" means with respect to any Loan and any Collection Period,
---------------
the scheduled monthly payment of principal and interest, excluding any Balloon
Payment, on such Loan which is payable in such Collection Period.
"Monthly Report" means the monthly report prepared by the Servicer and
--------------
delivered to Owner pursuant to Section 6.2.
"Mortgage Insurance" means any mortgage insurance or guaranty relating to a
------------------
Loan issued by a Mortgage Insurer.
"Mortgage Insurer" means the Federal Housing Administration as a mortgage
----------------
insurer, the United States Department of Veterans Affairs as a mortgage
guarantor and any issuer of private mortgage insurance.
"Mortgaged Property" means the real property securing a Loan.
------------------
"Non-Performing Loan" means as of the Determination Date, a Loan for which
-------------------
any one of the following applies: (a) any Monthly Payment is delinquent at least
two (2) calendar months determined without giving effect to any grace period
permitted by the related Loan Documents; (b) there has been a material default
under the terms and provisions of the Loan Documents, and such material default
is not likely to be cured by Obligor within two (2) calendar months; (c) as to
which the Servicer shall have received notice of the foreclosure (or deed-in-
lieu of foreclosure) or proposed foreclosure (or proposed deed-in-lieu of
foreclosure) or exercise of other remedies of any other mortgage or lien on the
Mortgaged Property; (d) as to which the Obligor has entered into or consented to
bankruptcy, appointment of a receiver or conservator or a similar insolvency or
similar proceeding, or the Obligor has become the subject of a decree or order
for such a proceeding which shall have remained in force undischarged or
unstayed for a period of two (2) calendar months; or (e) as to which the Obligor
admits in writing its inability to pay its debts generally as they become due,
files a petition to take advantage of any applicable insolvency or
reorganization statute, makes an assignment for the benefit of its creditors or
voluntarily suspends payments of its obligations.
"Non-Recoverable Advance" shall have the meaning set forth in Section
-----------------------
2.3(b) below.
"Obligor" means the Person or Persons obligated to make payments of
-------
principal and interest on the Loan, and includes all joint, several or joint and
several obligors and all guarantors (other than Mortgage Insurers).
"Owner" means collectively Pan American Bank, FSB and United PanAm Mortgage
-----
Corporation; provided, that the term "Owner" shall mean both such parties or
either one of them, as the context may require.
"Owner Event of Default" shall have the meaning set forth in Section 9.1.
----------------------
6
<PAGE>
"Performing Loan" means any Loan which is not a Non-Performing Loan as of
---------------
the Determination Date.
"Person" means any individual, corporation, partnership, joint venture,
------
association, joint stock company, trust, limited liability company,
unincorporated organization or government or agency or political subdivision
thereof.
"Pre-Sale" shall have the meaning set forth in Section 3.2(c).
--------
"Property" means any Mortgaged Property and/or REO Property.
--------
"Property Improvement Expenses" means any costs and expenses for repairs,
-----------------------------
replacements or improvements which the Servicer deems advisable under the
circumstances, but only to the extent that they:
(a) are paid to Persons who are generally in the business of providing such
goods and services;
(b) are reasonable for the types of goods or services provided in the
geographical area in which such goods or services are provided;
(c) are designed to maintain or improve the value of a Property but not
immediately necessary to operate it; and
(d) are incurred for the purpose of facilitating the sale of the related
Loan or REO Property and maximizing the proceeds thereof, including
but not limited to the following:
(i) cosmetic improvements such as painting and landscaping;
(ii) replacement of items which are obsolete or wearing out but
which may not be dysfunctional; and
(iii) moneys paid to a tenant or buyer for a purpose similar to a
Property Improvement Expense.
"Property Protection Expenses" means the following costs and expenses, but
----------------------------
only to the extent that they are paid to Persons who are generally in the
business of providing such goods and services and are reasonable for the types
of goods or services provided in the geographical area in which such goods or
services are provided:
(a) utility costs;
(b) payments required under service contracts, including but not limited
to service contracts for heating, ventilation and air conditioning
systems, landscape maintenance, pest extermination, security,
swimming pool service and trash removal;
7
<PAGE>
(c) property management fees;
(d) usual and customary leasing and sales brokerage expenses and
commissions;
(e) permits, licenses and registration fees and costs;
(f) any expense necessary in order to prevent or cure a breach under a
lease, contract or agreement, if the consequences of failure to
prevent or cure could, in the sole judgment of Servicer, have a
material adverse effect with respect to a Loan or Property;
(g) any expense necessary in order to prevent or cure a material violation
of any applicable law, regulation, code or ordinance;
(h) costs and expenses of brokers' price opinions and surveys incidental
to evaluation, leasing and/or sale of the Loans and/or Properties;
(i) fees and expenses of attorneys, paralegals, surveyors, title and
escrow companies (including, without limitation, costs, fees and/or
expenses for title insurance premiums, title searches, escrow fees,
recording costs and all costs similar or related thereto), costs
incurred to obtain documents or information for the Servicing File,
and any costs and expenses related to the preparation and/or
recordation of releases of liens or satisfactions of mortgages (in
whole or in part);
(j) property inspections; and
(k) other such reasonable fees and expenses incurred by Servicer in
connection with the enforcement, collection, foreclosure, management
and operation of the REO Property or the Mortgaged Property, sales of
REO Properties (including, without limitation, the costs and expenses
set forth in (i) above and any and all transfer taxes and other
closing costs customarily paid by the seller in the locale where such
sale occurs) and the performance of its servicing activities.
"Requirements" means all federal, state or local laws and any other
------------
requirements of any government or agency or instrumentality thereof applicable
to the servicing of the Loans, the management of the REO Properties or the
provision of services hereunder by the Servicer.
"REO Property" means, (a) as of any Determination Date for the purpose of
------------
calculating the relevant Servicing Fee, and (b) as of the actual date of
acquisition of title for all other purposes: any Mortgaged Property which was
subject to a Loan after it has been acquired on behalf of Owner pursuant to this
Agreement through foreclosure or similar proceedings, acceptance of deed-in-lieu
of foreclosure, acquisition of title in lieu of foreclosure or the acquisition
of title by operation of law.
"Servicer" means Ocwen Federal Bank FSB, a federal savings bank, its
--------
successors in interest and permitted assigns.
"Servicer Event of Default" shall have the meaning set forth in Section
-------------------------
9.1.
"Servicing Advances" means all amounts advanced by the Servicer in payment
------------------
of Property Protection Expenses, Escrow Payments, Setup Expenses and Property
Improvement Expenses.
8
<PAGE>
"Servicing Fee" means, collectively, the fees set forth on Exhibit C,
------------- ---------
attached hereto and made a part hereof for all purposes.
"Servicing File" means with respect to each Loan, the Loan Documents and
--------------
information (including any servicing tapes, images and conversion reports)
received from the Current Servicer, provided by Owner (including title company
investigations of matters relating to the Loans and the REO Properties), or
obtained through the efforts of the Servicer hereunder. To the extent
reasonably practicable, the Servicing File will contain the Loan Documents and
information described in Exhibit B hereto.
---------
"Setup Expenses" means the Servicer's direct out-of-pocket expenses
--------------
attributable to the Breach Analysis (including, without limitation, title
searches, recording fees for powers of attorneys and tax search services).
"Setup Fee" means an initial fee for the Setup and analysis (including a
---------
Breach Analysis, except for the proviso in the definition of "Breach Analysis")
of each Loan and/or REO Property as set forth on Exhibit C attached hereto.
---------
"Transfer Date" means with respect to any Loan or REO Property, the date on
-------------
which the relevant Servicing File has been fully transferred to Servicer and
Servicer has assumed servicing responsibilities therefor in writing.
Section 1.2 Interpretation of Agreement.
---------------------------
(a) All references in this Agreement to designated Sections, Articles,
Exhibits and Schedules are to the designated sections and articles of and
exhibits and schedules to this Agreement.
(b) Use of the masculine gender is intended to include the feminine and
neuter genders.
(c) The headings and captions used in this Agreement are for convenience of
reference only and do not define, limit or describe the scope or intent of the
provisions of this Agreement.
(d) Terms in the singular include the plural and vice versa.
(e) The terms "includes" or "including" are intended to be inclusive
rather than exclusive.
9
<PAGE>
ARTICLE II
TRANSFER OF SERVICING
Section 2.1 Transfer of Servicing Files to the Servicer.
-------------------------------------------
(a) Simultaneously with the adding of a Loan or REO Property to the
servicing portfolio hereunder from time to time (which may be accomplished
simply by the Owner sending the pertinent Servicing File to Servicer and
designating the Loan or REO Property as an asset to be serviced hereunder and
Owner's acceptance of same), Owner shall cause the Current Servicer to transfer
to the Servicer the Servicing Files and/or servicing records necessary to
provide current data with respect to each of the Loans and Properties. Such
transfer shall occur in accordance with such procedures as Owner and Servicer
shall mutually agree upon taking into account the requirements of this
Agreement. In the event that not all of the related Servicing Files and/or
necessary servicing records are transferred on the first attempted transfer,
thereafter, the Servicer, at Owner's expense, shall use its best efforts to
cause the Current Servicer to transfer to the Servicer any Servicing Files
and/or servicing records necessary to provide current data with respect to each
Loan and each REO Property which were not transferred to the Servicer on the
first attempted transfer. The Servicer shall transfer and convert the Servicing
Files to the Servicer's system as soon as reasonably possible from the date of
receipt by the Servicer of the Servicing Files and such other documents as are
reasonably necessary to service the Loans and Properties from the Current
Servicer.
(b) As of each Transfer Date, Owner hereby appoints the Servicer to provide
and the Servicer hereby assumes and accepts responsibility for providing the
services described herein with respect to each Loan and REO Property; provided,
--------
however, that if the Servicer is making diligent efforts to complete and verify
- -------
the Servicing File because a Servicing File is not complete or contains
incorrect information on the Transfer Date, the Servicer shall not be
responsible for any failure to provide any service hereunder, or for any
inaction or any action taken hereunder related to such incompleteness or
incorrectness.
In the event the Servicing File for a Loan or a REO Property does not
contain (to the Servicer's current, actual knowledge) all of the Loan Documents
or other documents reasonably necessary to service the Loan or REO Property, the
Servicer shall notify Owner in writing within forty-five (45) days after the
first attempted transfer of a Servicing File of all such missing necessary
documents. For the purposes of the immediately preceding sentence, the phrase
"to the Servicer's current, actual knowledge" shall mean that the Servicer shall
only be responsible for examining the "four corners" of the Servicing File
presented to the Servicer by the Owner or the Current Servicer (as the case may
be) and verifying that each such Servicing File contains Loan Documents
customary for the type of Loan involved (e.g., a promissory note, deed of trust
or mortgage and mortgagee's title policy); the Servicer shall have no
responsibility for determining whether there are particular missing documents if
the documents presented to Servicer do not disclose the existence of such
missing document (e.g., a loan modification not included in the file delivered
to the Servicer by the Owner and not referenced in any of the Loan Documents in
the file). The Servicer shall take such steps as the Servicer believes
necessary in the exercise of its reasonable business judgment to determine what
10
<PAGE>
course of action to pursue in respect of each Loan and REO Property. Following
such determination, the Servicer shall determine in accordance with Accepted
Servicing Practices what additional documents and information should be obtained
for the related Servicing File and shall use diligent efforts to obtain such
documents and information as soon as reasonably practicable. After Servicer has
sent to Owner the notice referred to in this subsection (b) regarding missing
documents, upon delivery of such notice, the Servicer shall not be responsible
for any failure to perform services related to such Loan to the extent Servicer
is impaired by the absence of such document(s), or for any inaction or action
taken at the request of the Owner.
(c) Prior to the transfer to the Servicer of the complete Servicing File
with respect to a Loan, the Servicer shall not be responsible for the payment of
Escrow Payments with respect to such Loan unless the Servicer has actual
knowledge of the existence, amount and due date of such obligations, in which
case the Servicer shall determine in accordance with Accepted Servicing
Practices whether or not to make any Escrow Payments within five (5) Business
Days after it has actual knowledge of the existence, amount and due date of such
obligations. In the case of property taxes and similar items, the Servicer
shall be deemed not to have knowledge of the existence, amount and/or due date
of such obligations until five (5) Business Days after receiving a current
report with respect to the Mortgaged Property from a tax service retained by the
Servicer. Servicer agrees to requisition such report as soon as reasonably
possible after a Loan for which taxes are not being escrowed becomes a Non-
Performing Loan. The Servicer shall be entitled to rely in all respects on any
tax service report and shall have no liability to Owner if a tax sale occurs for
which the Servicer (i) received no notice from the applicable taxing authority,
or (ii) received a report from a tax service indicating that the taxes were
current.
(d) Upon reasonable request by the Servicer, Owner shall furnish the
Servicer with such limited powers of attorney and other documents prepared by
the Servicer and satisfactory in form and substance to Owner as may be necessary
or appropriate to enable the Servicer to liquidate, collect payments against and
otherwise service and manage the Loans and Properties in accordance with this
Agreement. Additionally, the Servicer may appoint certain designated servicing
officers in a writing to Owner and such designated servicing officers shall be
authorized to act upon behalf of Owner hereunder. Such list (or any amended
list) designating such servicing officers shall be sufficient so long as it is
executed by any officer of Servicer. All documents so provided to the Servicer
shall be held in trust by the Servicer on behalf of the Owner.
(e) Owner agrees to cooperate fully with the Servicer with respect to all
reasonable requests made by the Servicer in connection with the transfer of
servicing pursuant to this Section 2.1.
Section 2.2 Intentionally Deleted.
---------------------
Section 2.3 Servicing Responsibilities. Subject to Section 2.1 and in
--------------------------
accordance with Accepted Servicing Practices, in performing its obligations
hereunder, the Servicer shall comply with
11
<PAGE>
the following with respect to each Loan or REO Property, continuously from the
date hereof until the date each Loan or REO Property ceases to be subject to
this Agreement:
(a) The Servicer shall hold all funds received for Owner hereunder in
trust for Owner in a segregated Collection Account with a financial
institution whose accounts are insured by the FDIC (which may be accounts
maintained with the Servicer and, if not with Servicer, with a depository
institution whose (or whose direct or indirect parent's) long term
unsecured debt obligations are rated at least "A" or better by Standard &
Poor's Rating Group) in accordance with all applicable Requirements. The
Servicer shall make remittances from the Collection Account as provided in
Section 6.2. The Servicer shall hold all funds received to cover Escrow
Payments in connection with the Loans in trust for Owner, and the related
Obligor in a segregated Escrow Account (which shall be maintained in
accordance with all applicable Requirements and the terms of the Loan
Documents) with a financial institution whose accounts are insured by the
FDIC (which may be accounts maintained with the Servicer and, if not with
Servicer, with a depository institution whose (or whose direct or indirect
parent's) long term unsecured debt obligations are rated at least "A" or
better by Standard & Poor's Rating Group) and shall disburse such funds
from the appropriate Escrow Accounts as necessary or advisable. The
Servicer shall also be authorized to hold all partial payments and
forbearance payments in the Escrow Account (and shall not be required to
deposit same into the Collection Account nor to remit same to the Owner)
until such time as the Servicer applies (in accordance with Accepted
Servicing Practices) such payments to the applicable Loan.
(b) The Servicer shall timely determine the amounts of all required
disbursements from the Escrow Accounts and shall make disbursements as they
become due. The Servicer shall also determine whether any delinquency
exists in the payment of Escrow Payments and shall use commercially
reasonable efforts to cause such deficient amounts to be paid by the
Obligor. If there are not sufficient funds in the appropriate Escrow
Account to make such payments as they become due, the Servicer may, but
shall not be obligated to advance such Escrow Payments from its own funds.
The Servicer shall determine in accordance with Accepted Servicing
Practices whether to make or advance Escrow Payments. If the Servicer
determines in its reasonable judgment that an advance pursuant to this or
any other section will not be ultimately recoverable from late payments,
insurance proceeds, Liquidation Proceeds or any other recovery on such Loan
or Property (a "Non-Recoverable Advance"), the Servicer will not be
obligated to make such advance. Accordingly, the Servicer shall not make
any Escrow Payments to the extent such an advance would be a Non-
Recoverable Advance. Any advances made towards Escrow Payments shall be
deemed to be Servicing Advances. The Servicer shall be entitled to
reimbursement of all such Servicing Advances made pursuant to this Section
2.3 from all amounts subsequently deposited in the Collection Account.
(c) The Servicer shall comply with the provisions of all applicable
Requirements and the Loan Documents relating to the giving of all notices
or other communications
12
<PAGE>
required to be given by or on behalf of Owner to any Mortgage Insurer,
title insurer or other insurer or guarantor, as applicable. Where any
applicable Requirement or the Loan Documents require any notice or other
communication to be given to an Obligor, the Servicer shall, in the
absence of instructions to the contrary from Owner, give such notice or
other communication to the Obligor.
(d) The Servicer shall, at the expense of the Owner if not paid by an
Obligor, (i) enforce the Obligor's obligations under the Loan Documents to
cause each Mortgaged Property to be insured against risks, hazards and
liabilities as required by all applicable Requirements and the Loan
Documents, in an amount at least equal to the unpaid principal balance of
the Loan, and (ii) cause each REO Property to be insured against risks,
hazards and liabilities, in an amount which is at least equal to the lesser
of (A) the full replacement value of the improvements which are a part of
such REO Property, and (B) the outstanding principal balance of the related
Mortgage Loan at the time it became an REO Property; such insurance shall
be obtained from a financially sound and reputable insurance carrier. The
Servicer shall retain copies of all Hazard Insurance policies or
certificates of insurance representing such coverage. The Servicer shall
comply with all of the terms of Mortgage Insurance and guarantees relating
to any Loan and shall use its best efforts to maintain such Mortgage
Insurance and guarantees in full force and effect provided that Servicer
has actual knowledge of such insurance or guaranty. In the event of an
insured loss with respect to any Property, unless the Servicer has actual
knowledge that the Obligor has filed such a claim with respect to a
Mortgaged Property, the Servicer shall promptly file or cause to be filed a
claim on the Hazard Insurance. In the case of a Mortgaged Property, the
Servicer shall apply or disburse all insurance proceeds in accordance with
the terms and provisions of the Loan Documents and all Requirements, and,
in the case of a REO Property, the Servicer shall apply or disburse all
insurance proceeds in accordance with the instructions of Owner, in each
case net of any amounts due to Servicer as otherwise provided herein. The
Servicer shall be responsible for submitting a claim under any Mortgage
Insurance or other guaranty or insurance on a timely basis provided that
Servicer has actual knowledge of such insurance or guaranty. The Servicer
shall, at Owner's expense and where the Obligor fails or refuses to
maintain insurance on the Mortgaged Property in accordance with the
applicable Loan Documents (or to pay escrows sufficient therefor, as the
case may be), subject the Mortgaged Properties to the coverage of its
"force-placed" hazard insurance policy with such deductible as the Servicer
maintains for similar mortgaged properties serviced for itself and for
others by Servicer. The amount of any premiums to the Servicer resulting
from obtaining such coverage shall be treated as a Property Protection
Expense hereunder. The Owner shall be solely responsible for the amount of
the deductible in the event of any loss and the Servicer shall have no
liability to Owner therefor.
Subject to the preceding paragraph, the Servicer shall keep in force
during the term of this Agreement a fidelity bond and a policy or policies
of insurance covering errors and omissions in the performance of the
Servicer's obligations under this Agreement. Such fidelity bond and policy
or policies shall be maintained with recognized insurers and shall be in
such
13
<PAGE>
form and amount as would permit the Servicer to be qualified as a FNMA
or FHLMC seller-servicer. The Servicer shall be deemed to have complied
with this provision if an affiliate of the Servicer has such errors and
omissions and fidelity bond coverage and, by the terms of such insurance
policy or fidelity bond, the coverage afforded thereunder extends to the
Servicer.
(e) The Servicer shall prepare promptly each report required by all
applicable Requirements (including reports to be delivered to all
governmental agencies having jurisdiction over the servicing of the Loans
and the Escrow Accounts), shall execute such reports (or, if Owner must
execute such reports, shall deliver such reports to Owner for execution
prior to the date on which such reports are due) and shall file such
reports with the appropriate Persons. The Servicer shall timely prepare
and deliver to the appropriate Persons Internal Revenue Service forms 1098,
1099 and 1099A relating to any Loan for the time period such Loan has been
serviced by Servicer; the Owner shall be solely responsible for filing any
other forms including, without limitation and to the extent applicable,
forms 1041 and K-1. The reports to be provided under this subsection shall
cover the period through the end of the month (or the end of the calendar
year, in the case of reports to be sent to the Internal Revenue Service)
following the termination of this Agreement. The Servicer shall promptly
prepare all reports or other information required to respond to any inquiry
from or give any necessary instructions to any Mortgage Insurer, provider
of Hazard Insurance or other insurer or guarantor, taxing authority, tax
servicer, Association or the Obligor.
(f) The Servicer shall maintain adequate facilities and experienced
staff to carry out its obligations hereunder.
(g) The Servicer shall hold and be responsible for responding promptly
and accurately to all reasonable requests from Owner, the Obligor or other
Persons for information relating to a Loan or Property or to the Obligor
that the Servicer is required or permitted to disclose to such Person, upon
compliance by such Person of any conditions to the release of such
information.
(h) The Servicer shall cooperate with Owner in facilitating any
financing or securitization of the Loans (including furnishing such reports
and information with respect to the Loans as Owner may reasonably request),
and facilitating the transfer of servicing of the Loans to such entity as
Owner may designate in connection with a securitization of the Loans. Any
and all costs, fees and expenses incurred by Servicer in connection with
the foregoing shall be deemed to be Servicing Advances and shall be
reimbursed by Owner if not previously withdrawn from the Collection
Account, such obligation of Owner to survive any termination hereof.
Section 2.4 Collection and Resolution Activities. The Servicer shall be
------------------------------------
responsible, continuously from the Transfer Date until the date each Loan ceases
to be subject to this Agreement,
14
<PAGE>
for using measures consistent with the Accepted Servicing Practices to attempt
to collect delinquent payments on each Loan.
Section 2.5 Servicing Compensation. The Setup Fee shall be paid on the
----------------------
first Distribution Date following the Setup of the Loan and/or REO Property. If
not paid by Owner on or before such date, the Servicer may withdraw such Setup
Fee from the Collection Account on or after such date. The Servicer shall be
entitled each month to the Servicing Fee. The Servicing Fee shall not be
prorated for any period of less than a full calendar month. In addition,
Servicer shall be entitled to retain all Ancillary Income. Servicer shall not
be obligated to deposit any Ancillary Income into the Collection Account. In
the event that Servicer deposits into the Collection Account any Ancillary
Income, the Servicer may at any time withdraw such amount from the Collection
Account, any provision herein to the contrary notwithstanding.
ARTICLE III
DEFAULT MANAGEMENT SERVICES
Section 3.1 Default Management Responsibilities. Subject only to
-----------------------------------
Accepted Servicing Practices and the Decision Matrix, the Servicer shall have
full power and authority to do or cause to be done any and all things in
connection with such servicing and administration which it may deem necessary or
desirable. Without limiting the generality of the foregoing, Servicer is hereby
authorized and empowered by Owner (if, in the Servicer's reasonable judgment,
such action with respect to the Loans and/or the Properties is in the best
interests of Owner in accordance with, or is required by, this Agreement, and
subject to Accepted Servicing Practices and the Decision Matrix) to take the
following actions (without limitation): (i) prepare, execute and deliver, on
behalf of Owner at its expense, any and all financing statements, continuation
statements and other documents or instruments necessary to maintain the lien on
each Mortgaged Property and related collateral; and, subject to the remaining
terms and provisions of this Article III, modifications, waivers (including,
without limitation, waivers of any late payment charge in connection with any
delinquent payment on a Loan), consents, amendments, discounted payoff
agreements, forbearance agreements, cash management agreements or consents to or
with respect to any documents contained in the related Servicing File; and any
and all instruments of satisfaction or cancellation, or of partial or full
release or discharge, and all other instruments comparable to any of the types
of instruments described in this subsection (i), and (ii) institute and
prosecute judicial and non-judicial foreclosures, suits on promissory notes,
indemnities, guaranties or other Loan Documents, actions for equitable and/or
extraordinary relief (including, without limitation, actions for temporary
restraining orders, injunctions, and appointment of receivers), suits for waste,
fraud and any and all other tort, contractual and/or other claims of whatever
nature, and to appear in and file on behalf of Owner such pleadings or documents
as may be necessary or advisable in any bankruptcy action, state or federal suit
or any other action.
Section 3.2 Alternatives to Foreclosure
---------------------------
15
<PAGE>
(a) Repayment Plan and Forbearance Agreement. If the Servicer pursues
----------------------------------------
a repayment plan in respect of a Loan pursuant to the authority granted to
the Servicer by the terms and provisions of Section 3.1 above, the Servicer
will negotiate an agreement with the Obligor for repayment of the
delinquent payments over a period and for forbearance from foreclosure
during the term of such agreement. If such Obligor shall at any time be in
default under any such agreement, the Servicer shall promptly proceed with
foreclosure proceedings in accordance with Section 3.3 hereof (while
simultaneously pursuing other resolution strategies). The Servicer shall
retain any fees paid by the Obligor in connection with such repayment plan
or forbearance agreement as Ancillary Income.
(b) Suit Against the Obligor; Garnishments, etc.. If the Servicer
--------------------------------------------
determines in accordance with Accepted Servicing Practices that it would be
prudent to file suit against an Obligor rather than to seek foreclosure,
the Servicer may file suit against an Obligor directly to recover the
indebtedness, to seek a garnishment of wages, to seek a temporary
restraining order and/or temporary and/or permanent injunction, and/or to
seek any other relief available at law or in equity against the Obligor.
Additionally, if the circumstances warrant same and applicable law so
permits, the Servicer may file any such suit while simultaneously seeking
nonjudicial or judicial foreclosure or may seek such relief in the same
action as that filed to seek a judicial foreclosure.
(c) Pre-Sale. In order to avoid foreclosure, the Servicer may
--------
(pursuant to the authority granted to the Servicer by the terms and
provisions of Section 3.1 above) attempt (i) to effect a sale of the
Property (including causing the Property to be listed for sale with a real
estate broker) or (ii) to effect an assumption or prepayment of the Loan,
with the Obligor's cooperation, and, if appropriate, enter into an
agreement with the Obligor regarding payment of any deficiency (a "Pre-
Sale"). The Servicer, or any of its affiliates, may act as a broker on
behalf of the Obligor. Owner acknowledges that if the Servicer or any
affiliate of the Servicer has accepted a listing agreement with an Obligor
in connection with such sale or assumption, the Servicer or such affiliate,
acting in such capacity, is legally obligated to present all offers to
purchase the Property or assume the Loan to the Obligor and will negotiate
a sale of the Property or assumption of the Loan pursuant to the
instructions from the Obligor. The proceeds of any Pre-Sale distributable
to Owner pursuant to and subject to the distribution priorities set forth
in Section 6.2 will reflect reductions for customary costs of closing,
including brokerage commissions, make-ready expenses, title insurance,
financing costs, recording fees, transfer taxes, tax certificates, title
and closing agent fees and pro-rated items, that will reduce the proceeds
of sale payable to Owner.
(d) Modification. If the Servicer pursues a modification of the Loan
------------
pursuant to the authority granted to the Servicer by the terms and
provisions of Section 3.1 above, the Servicer will negotiate and execute
loan modification documents on behalf of Owner in accordance with the
Accepted Servicing Practices. The Servicer shall retain any fees paid by
the Obligor in connection with such modification as Ancillary Income.
16
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(e) Discounted Payoff. The Servicer may (pursuant to the authority
-----------------
granted to the Servicer by the terms and provisions of Section 3.1 above)
accept a discounted payoff of the Loan. The Servicer, or any of its
affiliates, may provide new financing to the Obligor to facilitate such
discounted payoff provided that the Servicer obtains Owner's prior written
consent. Owner acknowledges that if Servicer provides such financing
Servicer will receive fees from the Obligor in connection therewith and
Owner will not be entitled to any such fees.
(f) Deed in Lieu. If the Servicer pursues a deed in lieu of
------------
foreclosure pursuant to the authority granted to the Servicer by the terms
and provisions of Section 3.1 above, the Servicer will retain counsel to
prepare appropriate documentation, execute and deliver such documentation
on behalf of Owner and may enter into an agreement with Obligor regarding
payment of any deficiency. The actions described herein shall be taken by
the Servicer in accordance with Accepted Servicing Practices or otherwise
with the consent of Owner. Title to such Property may be taken in the name
of the Owner or its designee. Notwithstanding anything to the contrary
contained herein, in connection with a deed in lieu of foreclosure, in the
event the Servicer has reasonable cause to believe that a Property is an
Environmental Problem Property as described in Section 4.2 hereof, the
Servicer shall notify Owner of the existence of the Environmental Problem
Property, describe such problem, make a recommendation to Owner regarding
handling the Property and carry out the recommendation unless otherwise
directed by Owner in writing within five (5) days after the Owner's receipt
(or deemed receipt) of such notice in accordance with the terms and
provisions of Section 11.3 below. In no event will the Servicer be
required to acquire record title to an Environmental Problem Property. The
Servicer will provide the services described in Section 4.1 with respect to
each Property for which a deed in lieu of foreclosure is received by the
Servicer.
(g) Priority; Insurance Claims. The Servicer will be responsible for
--------------------------
retaining counsel on behalf of Owner to advise the Servicer whether any
proposed relief for the Obligor pursuant to this Section 3.2 will adversely
affect claims against any other Obligor or the priority of the lien
securing the Loan. The Servicer will be responsible for determining that
such relief will not adversely affect any applicable Mortgage Insurance or
other guaranty. The Servicer shall consider the effect of such relief on
the priority of the lien, claims against other Obligors and the effect on
Mortgage Insurance or other guarantees in acting hereunder.
(h) Monitoring. The Servicer will be responsible for monitoring
----------
compliance with a repayment plan, modification agreement, agreement
regarding payment of a deficiency or other agreement entered into pursuant
to this Section 3.2 regarding payments in respect of a Loan, and sending
appropriate reminder notices to the Obligor or other appropriate Person.
Section 3.3 Foreclosure. If the Servicer reasonably determines that
-----------
foreclosure is appropriate with respect to a Loan (including if it determines
that foreclosure is appropriate in conjunction with or as an alternative to
collection efforts and default management services hereunder), the Servicer will
(pursuant to the authority granted to the Servicer by the terms and
17
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provisions of Section 3.1 above) retain an attorney and supervise the conduct
of the foreclosure proceeding. If the Property is acquired in the foreclosure
proceeding, the Servicer may acquire the Property in the name of the Owner or
its designee, and the Servicer shall commence providing property management and
disposition services as provided in Section 4.1. Notwithstanding anything to
the contrary contained herein, in connection with a foreclosure, in the event
the Servicer has reasonable cause to believe that a Property is an
Environmental Problem Property as described in Section 4.2 hereof, the Servicer
shall notify Owner of the existence of the Environmental Problem Property,
describe such problem, make a recommendation to Owner regarding handling the
Property and carry out the recommendation unless otherwise directed by Owner in
writing within five (5) days after the Owner's receipt (or deemed receipt) of
such notice in accordance with the terms and provisions of Section 11.3 below.
In no event will the Servicer be required to acquire record title to an
Environmental Problem Property. If Servicer elects to proceed with a
foreclosure in accordance with the laws of the state where the Mortgaged
Property is located, Servicer shall not be required to pursue a deficiency
judgment against the related Obligor or any other liable party if the laws of
the state do not permit such a deficiency judgment after such foreclosure or if
Servicer determines, in accordance with Accepted Servicing Practices, that the
likely recovery if a deficiency judgment is obtained will not be sufficient to
warrant the cost, time, expense and/or exposure of pursuing the deficiency
judgment.
Section 3.4 Bankruptcy of Obligor. If the Servicer has actual knowledge
---------------------
that an Obligor is the subject of a proceeding under the Bankruptcy Code or any
other similar law, has made an assignment for the benefit of creditors or has
had a receiver or custodian appointed for its property, the Servicer will
(pursuant to the authority granted to the Servicer by the terms and provisions
of Section 3.1 above) retain an attorney to pursue claims to payment on the Loan
and foreclosure on the Property. If the Property is acquired in an insolvency
proceeding it shall be acquired in the name of Owner or its designee.
Section 3.5 Decision Matrix (Residential). The Servicer shall be
-----------------------------
authorized to do or cause to be done any and all things in connection with the
Loans and Properties according to the Accepted Servicing Practices standard and
the terms and provisions of this Article III as limited by the matrix (the
"Decision Matrix") attached hereto and made a part hereof for all purposes as
- ----------------
Exhibit D.
- ---------
ARTICLE IV
PROPERTY MANAGEMENT AND DISPOSITION SERVICES
Section 4.1 Property Management and Disposition Responsibilities. With
----------------------------------------------------
respect to each Mortgaged Property that becomes an REO Property, the Servicer
shall, in accordance with Accepted Servicing Practices, provide property
management and disposition services with respect to such REO Property, including
analysis of sale and leasing potential of such REO Property, leasing and
collection of rents, property management (including maintenance and repairs to
such REO Property to render it leasable or salable), Escrow Account
administration for payment of Escrow Payments and property sales.
18
<PAGE>
Section 4.2 Environmental Problems. If the Servicer hereafter becomes
----------------------
aware that a Property is in violation of any environmental law, rule or
regulation (an "Environmental Problem Property"), the Servicer will notify Owner
of the existence of the Environmental Problem Property. Additionally, the
Servicer shall set forth in such notice a description of such problem, a
recommendation to Owner relating to the proposed action regarding the
Environmental Problem Property and the Servicer shall carry out the
recommendation set forth in such notice unless otherwise directed by Owner in
writing within five (5) days after the Owner's receipt (or deemed receipt) of
such notice in accordance with the terms and provisions of Section 11.3 below.
If Servicer has reason to believe that a Property is in violation of any
environmental law, rule or regulation (e.g., the Servicer obtains a broker's
price opinion which reveals the potential for such problem), the Servicer will
not accept a deed-in-lieu of foreclosure upon any such Property without first
obtaining a preliminary environmental investigation for the Property
satisfactory to Owner.
ARTICLE V
STANDARDS FOR CONDUCT
Section 5.1 Standards of Care and Delegation of Duties.
------------------------------------------
(a) The obligation of the Servicer to perform its duties (including
any duty to obtain or verify information) under this Agreement will be
satisfied so long as the Servicer acts in a manner consistent with Accepted
Servicing Practices. The Servicer shall not be responsible for the form,
substance, validity, perfection, priority, effectiveness or enforceability
of any documents in the Servicing File on the Transfer Date or on the date
that it obtains such documents from the Current Servicer.
(b) In the performance of its duties and obligations under this
Agreement, the Servicer may act directly or through agents, independent
counsel, accountants and other independent professional Persons, or it may
delegate the performance of functions and consult with agents, independent
counsel and other independent Persons; provided, however, that no such
delegation shall relieve Servicer from any of its obligations hereunder.
Additionally, in the event that Servicer believes that it is unable to
comply with the requirements of this Section 5.1(a) with respect to any
particular Loan or REO Property as a result of Servicer's relationship with
an Obligor or some other reason which would cause Servicer to be in
violation of the Accepted Servicing Practices standard, it may enter into a
sub-servicing agreement whereby a sub-servicer shall perform its duties
with respect to such Loan or REO Property. In such event, so long as such
sub-servicer performs such duties on behalf of Servicer, in accordance with
the other terms and provisions of this Agreement, then Servicer shall be
deemed to be in compliance therewith.
(c) The Servicer shall be entitled to rely upon any notice, document,
correspondence, request or directives received by it from Owner that the
Servicer believes to be genuine and to have been signed or presented by an
authorized officer or representative of Owner, and shall not be obligated
to inquire as to the authority or power of any Person so
19
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executing or presenting any notice, document, request or directive or as
to the truthfulness of any statements set forth therein.
Section 5.2 Transactions with Related Persons. In carrying out its
---------------------------------
obligations and duties under this Agreement, the Servicer may contract with its
affiliates, provided that all Persons with whom the Servicer may contract, enter
into arrangements with or otherwise deal with, shall be engaged on a
commercially reasonable arm's-length basis and at competitive rates of
compensation. Nothing contained in this Agreement will prevent the Servicer or
its affiliates from engaging in other businesses or from acting in a similar
capacity for any other Person even though such Person may engage in business
activities similar to those of Owner or its affiliates.
Section 5.3 Access to Records.
-----------------
(a) To the extent required by this Agreement, the Servicer will
establish and maintain a system of (i) records of operational information
relating to the collection of Loans, the conduct of default management
services and the administration, management, servicing, repair,
maintenance, rental, sale or other disposition of Loans and Properties and
(ii) books and accounts, which shall be maintained in accordance with
customary business practices, of financial information relating to the
Loans and the Properties. Information may be maintained on a computer or
electronic system.
(b) Owner and its respective accountants, attorneys, agents or
designees may during normal business hours of the Servicer and at Owner's
expense, upon reasonable prior written notice, examine the Servicer's books
and records relating to the Loans and the Properties, provided that Owner
shall provide to Servicer a copy of any report generated in connection with
any such examination. Such records shall not include any proprietary or
confidential information, as reasonably determined by the Servicer. In
addition, Servicer shall provide to Owner any other information, related to
the Loans and Properties, reasonably requested by Owner.
Section 5.4 Annual Audit. On or before April 30 of each year, beginning
------------
with April 30, 1998, Servicer shall cause a firm of independent public
accountants (who may also render other services to Servicer), which is a member
of the American Institute of Certified Public Accountants, to furnish a
statement to Owner, and to Servicer, to the effect that such firm has examined
certain documents and records for the preceding calendar year (or during the
period from the date of commencement of such servicer's duties hereunder until
the end of such preceding calendar year in the case of the first such
certificate) and that, on the basis of such examination conducted substantially
in compliance with the Uniform Single Attestation Program for Mortgage Bankers,
such firm is of the opinion that Servicer's overall servicing operations have
been conducted in compliance with the Uniform Single Attestation Program for
Mortgage Bankers except for such exceptions that, in the opinion of such firm,
the Uniform Single Attestation Program for Mortgage Bankers requires it to
report, in which case such exceptions shall be set forth in such statement.
20
<PAGE>
ARTICLE VI
BILLING OF AND REPORTS TO OWNER
Section 6.1 Property Protection Expenses and Property Improvement
-----------------------------------------------------
Expenses. To the extent no funds remain on deposit in the Collection Account to
- --------
pay Property Protection Expenses and/or Property Improvement Expenses, Servicer
shall advance such amounts; provided, however, that the Servicer shall not be
obligated to make any advance if the Servicer determines in its reasonable
judgment (taking into account the Accepted Servicing Practices standard) that
such advance will be a Non-Recoverable Advance. Any advances made towards
Property Protection Expenses and/or Property Improvement Expenses shall be
deemed to be Servicing Advances. The Servicer shall be entitled to
reimbursement of all such Servicing Advances made pursuant to this Section 6.1
from all amounts subsequently deposited in the Collection Account. To the
extent that the Servicer has previously withdrawn from the Collection Account
funds to pay for third party costs relating to loan modifications and the
Servicer thereafter recovers cash funds from the Obligor for such amounts, the
Servicer shall deposit such recovered cash into the Collection Account.
Section 6.2 Remittances and Monthly Report. Two (2) Business Days prior
------------------------------
to each Distribution Date, the Servicer shall submit a Monthly Report by means
of hard copy and computer diskette (substantially in the form set forth on
Exhibit A hereto) or in such other form and manner as may be hereafter mutually
agreed upon by Owner and the Servicer, showing all collections of interest and
principal (from whatever source) on the Loans and all collections in respect of
the Properties (including sale proceeds and rental payments) during the related
Collection Period as well as the amounts, and a detailed description, of all
Servicing Advances incurred during the related Collection Period and all
distributions from the Collection Account since the preceding Distribution Date.
On each Distribution Date the Servicer shall withdraw the Monthly Collection
Amount from the Collection Account and distribute the amount withdrawn in the
following priority:
(a) to refund to any Obligor any funds determined to be in excess of
the amounts required under the terms of the related Loan Documents;
(b) to pay itself the Servicing Fee and Ancillary Income earned per
Loan or REO Property per month;
(c) to reimburse itself for unpaid Servicing Fees and Ancillary
Income;
(d) to reimburse itself for Servicing Advances;
(e) to reimburse itself for Servicing Advances not previously
reimbursed;
(f) upon the termination of this Agreement, to reimburse itself for
unpaid Servicing Fees and Ancillary Income and Servicing Advances;
(g) to Owner.
21
<PAGE>
Amounts payable to Owner shall be paid by wire transfer in immediately available
funds (by 4:00 p.m., Eastern Standard Time on the day of transfer) to an account
designated by Owner.
Section 6.3 Billing. If the Monthly Collection Amount on any
-------
Distribution Date is insufficient to pay or reimburse to the Servicer for any of
the items payable to Servicer in Section 6.2(b) through Section 6.2(e) incurred,
accrued or earned through the end of the related Collection Period, the Servicer
shall indicate in a Monthly Report or other written statement to Owner the sum
of such amount that remains outstanding, which amounts shall be paid to Servicer
by Owner within ten (10) days after the date the Servicer sends such notice to
Owner.
Section 6.4 Missing Document Report. In addition to the Monthly Report,
-----------------------
the Servicer shall provide to Owner a report with respect to a Loan within
thirty (30) days after a loan is first boarded, which report shall include a
listing with respect to each Loan and REO Property of all missing documents
reasonably necessary to service such Loan. Owner will cure any such
deficiencies within seven (7) calendar days after Owner's receipt of such
report.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.1 Representations and Warranties of the Servicer. The
----------------------------------------------
Servicer, as a condition to the consummation of the transactions contemplated
hereby, makes the following representations and warranties to Owner as of the
initial Transfer Date and during the term of this Agreement:
(a) Organization and Good Standing; Licensing. The Servicer is a
-----------------------------------------
federal savings association duly organized, validly existing and in good
standing under the laws of the United States of America and has the power
and authority to own its assets and to transact the business in which it is
currently engaged. The Servicer is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which
the character of the business transacted by it or properties owned, or
leased or serviced by it requires such qualification (except where there is
an appropriate statutory exemption applicable to Servicer or the failure so
to qualify would not have a material adverse effect on the business,
properties, assets or condition (financial or otherwise) of the Servicer or
Owner).
(b) Authorization: Binding Obligations. The Servicer has the power
----------------------------------
and authority to make, execute, deliver and perform this Agreement
(including all instruments of transfer to be delivered pursuant to this
Agreement) and perform all of the transactions contemplated to be performed
by it under this Agreement, and has taken all necessary action to authorize
the execution, delivery and performance of this Agreement. When executed
and delivered, this Agreement will constitute the legal, valid and binding
obligation of the Servicer enforceable against it in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency or
similar laws affecting the enforcement of creditors' rights generally and
by the availability of equitable remedies.
22
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(c) No Consent Required. The Servicer is not required to obtain the
-------------------
consent of any other party or any consent, license, approval or
authorization from, or registration or declaration with, any governmental
authority, bureau or agency in connection with the execution, delivery,
performance, validity or enforceability of this Agreement, except such as
have been obtained or made or as to which the failure to obtain or make
will not materially adversely affect the ability of the Servicer to perform
its obligations hereunder.
(d) No Violations. The execution, delivery and performance of this
-------------
Agreement by the Servicer will not violate any provision of any existing
law or regulation or any order or decree of any court applicable to the
Servicer (except for violations that will not adversely affect the
Servicer's ability to perform its obligations hereunder) or the charter or
by-laws of the Servicer, or constitute a material breach of any mortgage,
indenture, contract or other agreement to which the Servicer is a party or
by which the Servicer may be bound.
(e) Litigation. No litigation or administrative proceeding of or
----------
before any court, tribunal or governmental body is currently pending or to
the knowledge of the Servicer threatened, against the Servicer or any of
its properties or with respect to this Agreement, which if adversely
determined, would have a material adverse effect on the transactions
contemplated by this Agreement.
(f) HUD Approved. The Servicer is a mortgagee approved by HUD for
------------
servicing pursuant to 24 CFR (S) 202.18. No event has occurred that, with
notice to HUD, would result in a breach of the representation made in the
preceding sentence.
Section 7.2 Representations and Warranties of Owner. Owner, as a
---------------------------------------
condition to the consummation of the transactions contemplated hereby, hereby
makes the following representations and warranties to the Servicer as of the
initial Transfer Date:
(a) Organization and Good Standing; Licensing. Each Owner is either a
-----------------------------------------
federal savings bank or a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has the
power and authority to own its assets and to transact the business in which
it is currently engaged. Owner is duly qualified to do business as a
foreign entity and is in good standing in each jurisdiction in which the
character of the business transacted by it or properties owned or leased by
it requires such qualification (except where there is an appropriate
statutory exemption applicable to Owner or the failure so to qualify would
not have a material adverse effect on the business, properties, assets or
condition (financial or otherwise) of Owner or the Servicer).
(b) Authorization: Binding Obligations. Owner has the power and
-----------------------------------
authority to make, execute, deliver and perform this Agreement (including
all instruments of transfer to be delivered pursuant to this Agreement) and
perform all of the transactions contemplated to be performed by it under
this Agreement, and has taken all necessary action to authorize the
execution, delivery and performance of this Agreement. When executed and
delivered, this
23
<PAGE>
Agreement will constitute the legal, valid and binding obligation of Owner
enforceable in accordance with its terms, except as enforcement may be
limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally and by the availability of
equitable remedies.
(c) No Consent Required. Owner is not required to obtain the consent
-------------------
of any other party or any consent, license, approval or authorization from,
or registration or declaration with, any governmental authority, bureau or
agency in connection with the execution, delivery, performance, validity or
enforceability of this Agreement, except such as have been obtained or
made.
(d) No Violations. The execution, delivery and performance of this
-------------
Agreement by Owner will not violate any provision of any existing law or
regulation or any order or decree of any court applicable to Owner or the
organizational documents of Owner, or constitute a material breach of any
mortgage, indenture, contract or other agreement to which Owner is a party
or by which Owner may be bound.
(e) Litigation. No litigation or administrative proceeding of or
----------
before any court, tribunal or governmental body is currently pending or to
the knowledge of Owner threatened, against Owner or any of its properties
or with respect to this Agreement, which if adversely determined would have
a material adverse effect on the transactions contemplated by this
Agreement.
(f) Holder of Notes. The Owner is the owner and holder of the notes
---------------
evidencing the debt under the Mortgage Loans (with each note endorsed to
Owner), and is the beneficiary or mortgagee of record of the mortgage or
deed of trust securing such Mortgage Loans.
ARTICLE VII
INDEMNIFICATION
Section 8.1 Liabilities to Obligors. No liability to any Obligor under
-----------------------
any of the Loans or Properties arising out of any act or omission to act of any
servicer, sub-servicer, owner, holder or originator of the Loans or Properties
prior to the Transfer Date is assumed by the Servicer under or as a result of
this Agreement and the transactions contemplated hereby and, to the maximum
extent permitted and valid under mandatory provisions of law, the Servicer
expressly disclaims such assumption.
Section 8.2 Servicer's Indemnity of Owner. The Servicer shall defend
-----------------------------
and indemnify Owner against any and all claims, losses, damages, liabilities,
judgments, penalties, fines, forfeitures, reasonable legal fees and expenses,
and any and all related costs and/or expenses of litigation, administrative
and/or regulatory agency proceedings, and any other costs, fees and expenses,
suffered or incurred by Servicer (each, a "Liability") arising out of or
resulting from third party claims or
24
<PAGE>
actions that were caused directly by or directly resulted from a breach of any
of the Servicer's representations and warranties contained in this Agreement or
the failure of the Servicer to perform its duties in accordance with the terms
of this Agreement. The Servicer shall not be liable to Owner, however, with
respect to action taken, or for refraining from taking any action, with respect
to any Loan or REO Property at or in conformity with the direction of Owner
(for this purpose, the terms of this Agreement are not directions of Owner), or
for any Liability caused by or resulting from a delay occasioned by Owner's
objection to a proposal by the Servicer hereunder, or for any Liability caused
by or resulting from Owner's breach of a representation or warranty herein or
for any Liability incurred by reason of Owner's willful misfeasance, bad faith
or negligence in acting or refraining from acting. In any event, the Servicer
shall not have any liability or obligations for any actions of any prior
servicer, sub-servicer, originator, holder or owner, or any successor servicer,
of the Loans or Properties.
Section 8.3 Owner's Indemnity of Servicer; Limitation on Liability of
---------------------------------------------------------
the Servicer.
- ------------
(a) Owner shall defend and indemnify the Servicer against any
Liability arising from (i) third party claims or actions that were caused
by or resulted from (A) any actions or omissions in respect of any Loan or
REO Property of any prior servicer, sub-servicer, owner or originator of a
Loan or REO Property or (B) taking any action, or refraining from taking
any action, with respect to any Loan or REO Property at or in conformity
with the direction of Owner (for this purpose, the terms of this Agreement
are not directions of Owner), and/or (ii) any Environmental Liability (as
defined in Section 8.3(c) below).
(b) Neither the Servicer nor any directors, officers, employees or
agents of the Servicer shall be liable to Owner for any action taken or for
refraining from taking any action in good faith pursuant to this Agreement
or for errors in judgment; provided, however, that this provision shall not
protect the Servicer against any liability directly and solely caused by
Servicer that would otherwise be imposed by reason of Servicer's willful
misfeasance or bad faith in the performance of or failure to perform duties
hereunder. The Servicer may rely in good faith on any document of any kind
prima facie properly executed and submitted to the Servicer respecting any
----- -----
matters arising hereunder and shall not be liable for taking any action or
refraining from taking any action in good faith reliance thereon, pursuant
to this Agreement.
(c) The term "Environmental Liability" shall mean any and all claims,
losses, damages, liabilities, judgments, penalties, fines, forfeitures,
reasonable legal fees and expenses, and any and all related costs and/or
expenses of litigation, administrative and/or regulatory agency
proceedings, and any other costs, fees and expenses, suffered or incurred
by Servicer arising out of or resulting from the introduction of such
materials on any Property before and/or after the date hereof, including,
without limitation, (a) any liability under or on account of the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Section 9601 et seq., as the same may be amended from time to time,
and/or any other federal or state environmental laws, and specifically
including, without limitation, any liability relating
25
<PAGE>
to asbestos and asbestos containing materials, polychlorinated biphenyls,
radon gas, petroleum and petroleum products, urea formaldehyde and any
substances classified as being "in inventory", "usable work in process" or
similar classification which would, if classified as unusable, be included
in the foregoing definition, including the assertion of any lien
thereunder, (b) claims brought by third parties for loss or damage
incurred or sustained subsequent to the date hereof, and (c) liability
with respect to any other matter affecting the Property within the
jurisdiction of the federal Environmental Protection Agency or state
environmental regulatory agencies pursuant to any state laws, and in the
regulations adopted pursuant to any of said laws; provided, however, that
the indemnity for Environmental Liability shall not be effective with
respect to any liability directly and solely caused by Servicer that would
otherwise be imposed by reason of Servicer's willful misfeasance or bad
faith in the performance of or failure to perform duties hereunder.
Section 8.4 Operation of Indemnities. If any Person has made any
------------------------
indemnity payments to any other Person pursuant to this Article VIII and such
other Person thereafter collects any of such amounts from others, such other
Person will repay such amounts collected, together with any interest collected
thereon. The provisions of this Article VIII shall survive termination of this
Agreement.
ARTICLE IX
DEFAULT
Section 9.1 Events of Default. The following shall constitute "Servicer
-----------------
Events of Default" hereunder by Servicer:
(a) any failure by the Servicer to make any deposit or payment, or to
remit any payment, required to be made under the terms of this Agreement
which continues unremedied for a period of three (3) Business Days after
the date upon which written notice of such failure, requiring the same to
be remedied, shall have been given to the Servicer by Owner; or
(b) failure on the part of the Servicer duly to observe or perform in
any material respect any other of the covenants or agreements on the part
of the Servicer set forth in this Agreement which continues unremedied for
a period of thirty (30) days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to the
Servicer by Owner; or
(c) a decree or order of a court or agency or supervisory authority
having jurisdiction in the premises in an involuntary case under any
present or future federal or state bankruptcy, insolvency or similar law or
appointing a conservator or receiver or liquidator in any insolvency,
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 Servicer and such decree or order shall have
remained in force undischarged or unstayed for a period of sixty (60) days;
or
26
<PAGE>
(d) the Servicer shall consent to the appointment of a trustee,
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings of or
relating to the Servicer or of or relating to all or substantially all of
the property of the Servicer; or
(e) the Servicer 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 take any action in furtherance of the foregoing; or
(f) the Servicer assigns or attempts to assign its rights to the
servicing compensation hereunder or attempts to assign this Agreement or
the servicing responsibilities hereunder without the consent of Owner
except as otherwise expressly permitted by the other terms and provisions
of this Agreement.
The following shall constitute "Owner Events of Default" hereunder by Owner:
(a) any failure by the Owner to make any payment required to be made
by Owner to Servicer under the terms of this Agreement which continues
unremedied for a period of three (3) Business Days after the date upon
which written notice of such failure, requiring the same to be remedied,
shall have been given to the Owner by Servicer; or
(b) failure on the part of the Owner duly to observe or perform in any
material respect any other of the covenants or agreements on the part of
the Owner set forth in this Agreement which continues unremedied for a
period of thirty (30) days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to the
Owner by Servicer; or
(c) a decree or order of a court or agency or supervisory authority
having jurisdiction in the premises in an involuntary case under any
present or future federal or state bankruptcy, insolvency or similar law or
appointing a conservator or receiver or liquidator in any insolvency,
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 Owner and such decree or order shall have
remained in force undischarged or unstayed for a period of sixty (60) days;
or
(d) the Owner shall consent to the appointment of a trustee,
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings of or
relating to the Owner or of or relating to all or substantially all of the
property of the Owner; or
(e) the Owner 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
27
<PAGE>
statute, make an assignment for the benefit of its creditors, or
voluntarily suspend payment of its obligations or take any action in
furtherance of the foregoing; or
(f) the Owner is removed or terminated under the terms and provisions
of any of the Primary Servicing Agreements.
Section 9.2 Effect of Transfer. After the effective date of the
------------------
termination of servicing duties pursuant to Section 9.1 and/or Section 10.1, the
Servicer shall have no further obligations hereunder other than under Article
VIII or Article X.
ARTICLE X
TERM
Section 10. Term of Agreement.
-----------------
(a) This Agreement shall terminate upon the distribution of the final
payment or Liquidation Proceeds on the last Loan or REO Property subject to
this Agreement.
(b) If the Owner fails to perform any of its obligations which would
result, after expiration of the applicable notice and cure or grace period
(if applicable), in an Owner Event of Default hereunder or is in breach of
its representations and warranties hereunder or if the Servicer fails to
perform any of its obligations which would result, after expiration of the
applicable notice and cure or grace period (if applicable), in a Servicer
Event of Default hereunder, the non-breaching party may terminate this
Agreement by written notice to the other party, specifying the effective
date of such termination and instructions with respect to the Servicing
Files and Loan Files. The Servicer shall do all things necessary or
appropriate to effect the purposes of such termination and the transfer of
servicing, provided that the breaching party shall pay all costs and
expenses related to the transfer of servicing. On or after the receipt by
the Servicer of such written notice, all authority and power of the
Servicer under this Agreement, whether with respect to the Loans or
Properties shall terminate effective as of the date specified in such
written notice. If the Owner fails to perform any of its obligations which
would result, after expiration of the applicable notice and cure or grace
period (if applicable), in an Owner Event of Default hereunder or is in
breach of its representations and warranties hereunder or if the Servicer
fails to perform any of its obligations which would result, after
expiration of the applicable notice and cure or grace period (if
applicable), in a Servicer Event of Default hereunder, the non-breaching
party may also pursue whatever rights it may have at law or in equity to
damages, including injunctive relief and specific performance. To the
extent that Owner fails to perform any of its obligations which would
result, after expiration of the applicable notice and cure or grace period
(if applicable), in an Owner Event of Default hereunder or is in breach of
its representations and warranties hereunder, Servicer shall not be liable
nor responsible for any ramifications which result therefrom; Owner
acknowledges that such failure and/or breach may impair Servicer's ability
to perform hereunder (e.g., if the Owner is not qualified to do
28
<PAGE>
business in a particular jurisdiction, this may impair Servicer's ability
to service the Loans and/or Properties in such jurisdiction).
(c) This Agreement may also be terminated by Owner at its election at
any time upon (i) ninety (90) days' prior written notice for any reason;
provided, however, that the cost of any related transfer of servicing shall
be borne by Owner; and (ii) payment to Servicer of a termination fee equal
to: $15 per Loan or REO Property; provided, however, that the
aforementioned termination fee shall be waived in the event the subject
Loans are securitized and Ocwen Federal Bank FSB or one of its affiliates
becomes the servicer of the Loans under the securitization.
(d) This Agreement may also be terminated by Servicer without cause on
or after the date occurring nine months after the first date above written
(i) with respect to Loans being serviced by Servicer hereunder (i.e.,
which, as of the date of the sending of the notice, are already being
serviced under this Agreement), upon the sending of 180 days' written
notice to Owner, and/or (ii) with respect to the adding of any new Loans
hereunder (i.e., which, as of the date of the sending of the notice, are
not being serviced under this Agreement), upon the sending of 120 days'
written notice to Owner. Additionally, upon a change of control of Owner
which is not acceptable to Servicer, Servicer may terminate this Agreement
upon the sending of 60 days' prior written notice. For the purposes of this
subsection, "control" when used with respect to Owner means the power to
direct the management and policies of Owner, directly or indirectly,
whether through the ownership of voting securities, by contract or
otherwise.
Section 10. Transfers of Servicing. The Servicer shall not pledge or
----------------------
assign this Agreement or its rights to the Servicing Fee or transfer the
servicing hereunder or delegate its rights or duties hereunder without the prior
written approval of Owner.
Section 10. Servicer Not to Resign. Except as set forth in Section
----------------------
10.1(d) above, Servicer shall not resign from the obligations and duties imposed
on Servicer by this Agreement except by mutual consent of Servicer and Owner or
upon the determination that Servicer's duties hereunder are no longer
permissible under applicable law and such incapacity cannot be cured by
Servicer. Any such determination permitting the resignation of Servicer shall
be evidenced by an opinion of counsel to such effect delivered to Owner in form
and substance reasonably acceptable to Owner. No such resignation shall become
effective until Owner or its designee shall have assumed Servicer's
responsibilities and obligations hereunder.
Section 10. Successor Servicer. If any successor servicer succeeds to
------------------
the obligations of Servicer after a termination pursuant to Section 9.1 above,
the successor, to the extent necessary to permit the successor to carry out the
provisions of the terms hereof, shall, without act or deed on the part of the
successor, succeed to all of the rights and obligations of Servicer under any
sub-servicing agreement entered into pursuant to Section 5.1(b). In such event,
the successor Servicer shall be deemed to have assumed all of Servicer's
interest therein and to have replaced Servicer as a party to
29
<PAGE>
such sub-servicing agreement to the same extent as if such sub servicing
agreement had been assigned to the successor Servicer, except that Servicer, as
applicable, shall not have any liability or obligation under such sub-servicing
agreement in respect of events that occur after such succession unless so
provided in such sub-servicing agreement or unless such events arise out of
actions or events that occurred prior to such succession. In the event that
the successor Servicer assumes the servicing obligations of Servicer, upon
request of the successor Servicer, Servicer, shall at its own expense deliver
to the successor Servicer (as the case may be) all documents and records
relating to any sub-servicing agreement and the Loans then being serviced
thereunder and an accounting of amounts collected and held by it, if any, and
will otherwise use its best efforts to effect the orderly and efficient
transfer of any sub-servicing agreement to the successor Servicer.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Successors and Assigns; No Third Party Beneficiaries. This
----------------------------------------------------
Agreement will inure to the benefit of and be binding upon the parties hereto
and their successors and assigns. This Agreement is not intended to confer on
any person other than the parties hereto and their successors and assigns any
rights, obligations, remedies or liabilities.
Section 11.2 Choice of Law. This Agreement is made under and shall be
-------------
governed by and construed under the laws of Florida.
Section 11.3 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given and received: (a) upon receipt if
delivered personally (unless subject to clause (b)) or if mailed by registered
or certified mail return receipt requested, postage prepaid; (b) at 5:00 p.m.
local time on the business day after dispatch if sent by a nationally recognized
overnight courier; or (c) upon the completion of transmission (which is
confirmed by telephone or by a statement generated by the transmitting machine)
if transmitted by telecopy or other means of facsimile which provides immediate
or near immediate transmission to compatible equipment in the possession of the
recipient, in any case to the parties at the following addresses or telecopy
numbers (or at such other address or telecopy number for a party as will be
specified by like notice):
if to Servicer:
Ocwen Federal Bank FSB
The Forum, Suite 1002
1675 Palm Beach Lakes
Boulevard
West Palm Beach, FL 33401
Attention: Secretary
Facsimile Number: (561) 681-8177
Confirmation Number: (561) 681-8517
If to Owner:
30
<PAGE>
Pan American Bank, FSB
625 The City Drive, Suite 490
Orange, CA 92868
Attention: Blair F. Kenny
Facsimile Number: (714) 621-1131
Confirmation Number: (714) 621-3522 x289
United PanAm Mortgage Corporation
625 The City Drive, Suite 490
Orange, CA 92868
Attention: Blair F. Kenny
Facsimile Number: (714) 621-1131
Confirmation Number: (714) 621-3522 x289
Any change of address must be in writing.
Section 11.4 Entire Agreement; Amendments; Waivers. This Agreement
-------------------------------------
constitutes the entire agreement between the parties with respect to the
transactions contemplated hereby and supersedes all prior agreements (or
contemporaneous oral agreements) of the parties with respect thereto. This
Agreement may be amended only in writing signed by the party against whom such
amendment is sought to be enforced. Each of the Servicer or Owner may, by
written notice to the other, extend the time for or waive the performance of any
of the obligations of such other hereunder. The waiver by any party hereto of a
breach of this Agreement shall not operate or be construed as a waiver of any
other or subsequent breach. No delay, omission or act by a party shall be
deemed a waiver of such party's rights, powers or remedies. No course of
dealing between the parties hereto shall operate as a waiver of any provision
hereof.
Section 11.5 No Joint Venture; Limited Agency. The services provided by
--------------------------------
the Servicer are in each case those of an independent contractor providing a
service. Nothing contained in this Agreement: (i) shall constitute the Servicer
and Owner as members of any partnership, joint venture, association, syndicate,
unincorporated business or other separate entity; (ii) shall be construed to
impose any liability as such on the Servicer or Owner or (iii) shall, except as
otherwise expressly provided in this Agreement as to the Servicer, constitute a
general or limited agency or be deemed to confer on it any express, implied or
apparent authority to incur any obligation or liability on behalf of the other.
Section 11.6 Severability; Interpretation. If any provision hereof is
----------------------------
invalid, illegal or unenforceable, the remaining provisions shall not be
affected or impaired thereby. No provision of this Agreement shall be construed
against or interpreted to the disadvantage of any party hereto by any court or
other authority by reason of such party having or being deemed to have
structured, dictated or drafted such provision. The parties hereto acknowledge
that no other agreement entered into by the Servicer for the provision of
servicing, default management services and property
31
<PAGE>
management and disposition services shall be used or referred to in construing
the provisions of this Agreement.
Section 11.7 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
Section 11.8 Waiver of Jury Trial. EACH PARTY HEREBY KNOWINGLY,
--------------------
VOLUNTARILY AND INTENTIONALLY, WAIVES (TO THE EXTENT PERMITTED BY APPLICABLE
LAW) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR
RELATING TO THIS AGREEMENT AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED
BEFORE A JUDGE SITTING WITHOUT A JURY.
Section 11.9 Limitation of Damages. NOTWITHSTANDING ANYTHING CONTAINED
---------------------
HEREIN TO THE CONTRARY, THE PARTIES AGREE THAT NEITHER PARTY SHALL BE LIABLE TO
THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES WHATSOEVER, WHETHER
IN CONTRACT, TORT (INCLUDING NEGLIGENCE AND STRICT LIABILITY) OR ANY OTHER LEGAL
OR EQUITABLE PRINCIPLE.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
effective as of the date first written above.
OWNER:
------
PAN AMERICAN BANK, FSB
By: /s/ John T. French
--------------------------------------
Name: John T. French
------------------------------------
Title: Director
-----------------------------------
(Signatures Continued On Next Page)
32
<PAGE>
UNITED PANAM MORTGAGE
CORPORATION
By: /s/ Phyllis A. Downes
---------------------------------------
Name: Phyllis A. Downes
-------------------------------------
Title: Exec. V.P.
------------------------------------
SERVICER:
---------
OCWEN FEDERAL BANK FSB
By: /s/ Jay B. Goldman
---------------------------------------
Name: Jay B. Goldman
-------------------------------------
Title: Vice President
------------------------------------
33
<PAGE>
Exhibit 10.84
MANAGEMENT INCENTIVE PLAN
- INTRODUCTION -
The purposes of the United PanAm Mortgage Corporation Management Incentive Plan
(MICP) described herein are as follows:
. To provide an annual incentive for those key executives who have the
ability to make an impact on the financial results of the organization.
. To reinforce the company's annual financial objectives.
. To provide competitive rewards to key executives commensurate with the
Company's financial success.
Effective Date -
The original effective date of the plan is June 30, 1997 and the Plan will
initially cover the fiscal year 1997 (July 1, 1997 to December 31, 1997). The
Plan has no termination date, but the Company reserves the right to change the
provisions of the plan at any time.
Administration -
The Plan shall be administered by the President, subject to the concurrence of
the Chairman of the Board. The Board of Directors will approve the Plan and any
changes and all compensation actions proposed for officers of the Company.
Approval of all awards, other than his own, shall be made by the President
subject to first being submitted to the Board of Directors for final approval.
Eligibility -
Eligibility for the Plan is to include key UPAM executives, who by the nature of
their responsibilities have the ability to make a significant impact on
profitability and are selected for participation in the plan by the President
and approved by the Board. Executives paid incentive compensation are not
eligible to participate in the Management Incentive Plan.
1
<PAGE>
- OVERVIEW OF THE PLAN -
The Plan will work essentially as follows:
. Each year, plan participants will be assigned a Target Bonus represented
as a percentage of salary and based on full achievement of approved
financial and management objectives.
. Financial and management objectives will be established that reflect goals
critical to the success of the Company. Income before taxes will always be
a primary goal, but other financial goals and management objectives may
vary from year to year. A weighting is established for each of these goals
dependent on their importance to the Company. Financial objectives may or
may not be the same as the approved budget.
. Entry level and maximum financial performance targets will be established
as well.
1997 - Minimum = 50% Maximum = 150%.
. The total of the Target Bonus values for all participants in the program
will constitute the Target Bonus Pool for the Company.
. The Attainment Percent, represented as a percentage of target shall be
calculated based upon the actual results compared to entry level, target
and maximum values described in the plan schedule for the year. The
Attainment Percent will be the extrapolated results, rounded to the nearest
tenth of a percent, using either the entry level and target values or
target level and maximum values.
. Actual Bonus Earned for participants is calculated based on the Attainment
Percent for each of the established goals, the Weighting of the goal and
the Target Bonus for each of the participants.
. No bonus is payable on management and other financial objectives if the
entry level is not attained for Income Before taxes. This means that even
if objectives are met for other objectives, no bonus will be payable on
these objectives and not bonus will be payable under the plan, until at
least the entry level goal for Income Before Taxes is attained.
. The remaining bonus due will be calculated and awarded subsequent to the
certified audit of the fiscal year during which the bonus was earned.
2
<PAGE>
- SIZE OF TARGET BONUS -
A Target Bonus will be assigned to each position according to competitive market
conditions, salary surveys and internal relationships of jobs within the
Company.
Base salary used in calculating the Target Bonus is typically defined as the
current annual salary in effect subsequent to salary reviews for officers each
year, but that may be modified given a promotion of a participant and the
approval of both the President and the Board. In the event that an individual's
Target Bonus Level changes during the course of the year, the assigned Target
Bonus will be recalculated on a pro-rata basis according to the amount of time
spent at each bonus level.
- ENTRY INTO THE PLAN -
- CHANGE OF ASSIGNMENT - TRANSFER -
If an associate enters the plan mid-year, he will participate in the plan on a
pro-rata basis dependent on the number of months, rounded to the nearest half
month, in the plan. In the event of a change of assignment which would result
in a change of Target Bonus during the course of the year, the assigned Target
Bonus(es) will be computed on the base salary figure received at each position.
- TERMINATION PROVISIONS -
Release, Reduction in Work Force or Resignation -
If a participant in the Plan is not on the payroll at the end of the Fiscal
Year, a bonus will not be paid, regardless of length of service or reason for
termination or resignation, except as provided for under the next section.
Termination Due to Death or Retirement and employees on Total and Permanent
Disability or Approved Leaves of Absence -
A pro-rata bonus based on active employment is payable under these circumstances
and will be based upon the assigned Target Bonus and corresponding base salary
received while covered under the Plan.
Discharge by the Company for Willful and Deliberate or Gross Misconduct -
Any right of the associate to a bonus under the Bonus Program shall be forfeited
even if the employee is on the payroll at the end of the Fiscal Year.
3
<PAGE>
- DEFINITIONS -
GOALS
Income Before Tax -
Income before tax is defined as the dollar amount shown on the UPAM Certified
Financials in each fiscal year. This amount should include a provision for the
accrual of bonus at the targeted amounts.
PLAN TERMS
Entry Level -
This is defined as the minimum performance, as approved by the board of
Directors, expected to be achieved for any bonus to be awarded.
Target Level -
This is the bonus target level as approved by the Board of Directors on which
target bonuses may be awarded to participants.
Maximum Level -
This is the level against which a maximum award would be paid if the amount or
greater is achieved.
Target Percentage of Salary -
This is the target amount represented as a percentage of salary that will be
awarded the participant if the Company is to meet all of its financial and
management objectives at the target level.
Attainment Percent -
This shall be calculated based upon the actual results compared to entry level,
target and maximum values described in the plan schedule for the year. the
Attainment Percent will be the extrapolated results, rounded to the nearest
tenth of a percent, using either the entry level and target values or target
level and maximum values.
Weighting of Goals -
Shall be the weighting as represented in a whole percent that has been
established for each of the financial and management goals.
4
<PAGE>
Total Bonus Percent Earned -
This represents the sum of UPAM'S performance against goals and is to be
calculated for each goal by multiplying the Attainment Percent by the Weighting
that has been established for each goal. This should be expressed to the
nearest tenth of a percent. The result for each of the goals is then totaled to
represent the Total Bonus Percent Earned.
Total Bonus Earned -
Total Bonus Percent Earned represents the bonus due a participant and is to be
calculated by multiplying the Total Bonus Percent Earned by the Participants
Target Percentage. That result is then multiplied by the salary of the
participant and may be further reduced by the percentage of the year that the
participant was not employed if he was not with the Company at the beginning of
the year.
5
<PAGE>
EXHIBIT 10.85
UNITED AUTO CREDIT CORPORATION
1998 EMPLOYEE STOCK INCENTIVE PLAN
Adopted as of March 25, 1998
SECTION 1. PURPOSE OF PLAN
The purpose of this 1998 Employee Stock Incentive Plan ("PLAN") of United
Auto Credit Corporation, a California corporation (the "COMPANY"), is to enable
the Company to attract, retain and motivate its employees and independent
contractors by providing for or increasing the proprietary interests of such
employees and independent contractors in the Company, and to enable the Company
to attract, retain and motivate its nonemployee directors and further align
their interest with those of the shareholders of the Company by providing for or
increasing the proprietary interest of such directors in the Company.
SECTION 2. PERSONS ELIGIBLE UNDER PLAN
Each of the following persons (each, a "PARTICIPANT") shall be eligible to
be considered for the grant of Awards (as hereinafter defined) hereunder: (a)
any employee of the Company or any of its subsidiaries, including any director
who is also such an employee, (b) any director of the Company or any of its
subsidiaries who is not also an employee of the Company or any of its
subsidiaries and (c) any independent contractor of the Company or any of its
subsidiaries.
SECTION 3. AWARDS
(a) The Committee (as hereinafter defined), on behalf of the Company, is
authorized under this Plan to enter into any type of arrangement with a
Participant that is not inconsistent with the provisions of this Plan and that,
by its terms, involves or might involve the issuance of (i) shares of common
stock of the Company ("COMMON SHARES") or (ii) a Derivative Security (as such
term is defined in Rule 16a-1 promulgated under the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), as such rule may be amended from time to
time) with an exercise or conversion privilege at a price related to the Common
Shares or with a value derived from the value of the Common Shares. The
entering into of any such arrangement is referred to herein as the "GRANT" of an
"AWARD."
(b) Awards are not restricted to any specified form or structure and may
include, without limitation, sales or bonuses of stock, restricted stock, stock
options, reload stock options, stock purchase warrants, other rights to acquire
stock, securities convertible into or redeemable for stock, stock appreciation
rights, phantom stock, dividend equivalents, performance units or
<PAGE>
performance shares, and an Award may consist of one such security or benefit, or
two or more of them in tandem or in the alternative.
(c) Awards may be issued, and Common Shares may be issued pursuant to an
Award, for any lawful consideration as determined by the Committee, including,
without limitation, services rendered by the recipient of such Award; provided,
--------
that such terms satisfy all of the applicable provisions of Section 25102(o) of
the California Corporations Code ("CCC") and the Rules of the California
Commissioner of Corporations required to be satisfied to exempt such Award from
qualification under the CCC, unless such Awards are otherwise exempt from
qualification under the CCC.
(d) Subject to the provisions of this Plan, the Committee, in its sole and
absolute discretion, shall determine all of the terms and conditions of each
Award granted under this Plan, which terms and conditions may include, among
other things:
(i) a provision permitting the recipient of such Award, including
any recipient who is a director or officer of the Company, to pay the
purchase price of the Common Shares or other property issuable
pursuant to such Award, or such recipient's tax withholding obligation
with respect to such issuance, in whole or in part, by any one or more
of the following:
(A) the delivery of cash;
(B) the delivery of other property deemed acceptable by
Committee;
(C) the delivery of previously owned shares of capital stock
of the Company (including "pyramiding") or other property; or
(D) a reduction in the amount of Common Shares or other
property otherwise issuable pursuant to such Award.
(ii) a provision conditioning or accelerating the receipt of
benefits pursuant to such Award, either automatically or in the
discretion of the Committee, upon the occurrence of specified events,
including, without limitation, a change of control of the Company (as
defined by the Committee), an acquisition of a specified percentage of
the voting power of the Company, the dissolution or liquidation of the
Company, a sale of substantially all of the property and assets of the
Company or an event of the type described in Section 7 hereof; or
2
<PAGE>
(iii) a provision required in order for such Award to qualify as
an incentive stock option under Section 422 of the Internal Revenue
Code (an "INCENTIVE STOCK OPTION"); provided, however, that no Award
-------- -------
issued to any independent contractor or any nonemployee director may
qualify as an Incentive Stock Option.
SECTION 4. STOCK SUBJECT TO PLAN
(a) At any time, the aggregate number of Common Shares issued and issuable
pursuant to all Awards (including all Incentive Stock Options) granted under
this Plan shall not exceed 150 shares, subject to adjustment as provided in
Section 7 hereof.
(b) For purposes of Section 4(a) hereof, the aggregate number of Common
Shares issued and issuable pursuant to Awards granted under this Plan shall at
any time be deemed to be equal to the sum of the following:
(i) the number of Common Shares that were issued prior to such
time pursuant to Awards granted under this Plan, other than Common
Shares that were subsequently reacquired by the Company pursuant to
the terms and conditions of such Awards and with respect to which the
holder thereof received no benefits of ownership such as dividends;
plus
(ii) the number of Common Shares that were otherwise issuable
prior to such time pursuant to Awards granted under this Plan, but
that were withheld by the Company as payment of the purchase price of
the Common Shares issued pursuant to such Awards or as payment of the
recipient's tax withholding obligation with respect to such issuance;
plus
(iii) the maximum number of Common Shares that are or may be
issuable at or after such time pursuant to Awards granted under this
Plan prior to such time.
SECTION 5. DURATION OF PLAN
No Awards shall be made under this Plan after March 25, 2008. Although
Common Shares may be issued after March 25, 2008 pursuant to Awards made prior
to such date, no Common Shares shall be issued under this Plan after
March 25, 2018.
SECTION 6. ADMINISTRATION OF PLAN
3
<PAGE>
(a) This Plan shall be administered by a committee (the "COMMITTEE") of the
Board of Directors of the Company (the "BOARD") consisting of two or more
directors, each of whom is an "outside director" within the meaning of Section
162(m) of the Internal Revenue Code of 1986, as amended; provided, however, that
-------- -------
before the registration of the Common Shares under Section 12 of the Exchange
Act, grants of Awards may, in the absence of action of the Committee, be made by
the entire Board.
(b) Subject to the provisions of this Plan, the Committee shall be
authorized and empowered to do all things necessary or desirable in connection
with the administration of this Plan, including, without limitation, the
following:
(i) adopt, amend and rescind rules and regulations relating to
this Plan;
(ii) determine which persons are Participants and to which of
such Participants, if any, Awards shall be granted hereunder;
(iii) grant Awards to Participants and determine the terms and
conditions thereof, including the number of Common Shares issuable
pursuant thereto;
(iv) determine whether, and the extent to which adjustments are
required pursuant to Section 7 hereof; and
(v) interpret and construe this Plan and the terms and conditions
of any Award granted hereunder.
SECTION 7. ADJUSTMENTS
If the outstanding securities of the class then subject to this Plan are
increased, decreased or exchanged for or converted into cash, property or a
different number or kind of securities, or if cash, property or securities are
distributed in respect of such outstanding securities, in either case as a
result of a reorganization, merger, consolidation, recapitalization,
restructuring, reclassification, dividend (other than a regular cash dividend)
or other distribution, stock split, reverse stock split or the like, or if
substantially all of the property and assets of the Company are sold, then,
unless the terms of such transaction shall provide otherwise, the Committee
shall make appropriate and proportionate adjustments in (a) the number and type
of shares or other securities or cash or other property that may be acquired
pursuant to Awards theretofore granted under this Plan and (b) the maximum
number and type of shares or other securities that may be issued pursuant to
Awards thereafter granted under this Plan.
SECTION 8. AMENDMENT AND TERMINATION OF PLAN
4
<PAGE>
The Board may amend or terminate this Plan at any time and in any manner,
provided that no such amendment or termination shall deprive the recipient of
any Award theretofore granted under this Plan, without the consent of such
recipient, or any of his or her rights thereunder with respect thereto.
SECTION 9. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of March 25, 1998, the date upon which it
was approved by the Board; provided, however, that no Common Shares may be
-------- -------
issued under this Plan until it has been approved, directly or indirectly, by
the affirmative votes of the holders of a majority of the securities of the
Company present, or represented, and entitled to vote at a meeting duly held in
accordance with the laws of the State of California.
5
<PAGE>
The Board of Directors
United PanAm Financial Corp.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus. Our report refers to a
change in the Company's method of accounting for transfers and servicing of
financial assets in 1997.
San Francisco, California
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 15,026,000 5,063,000
<INT-BEARING-DEPOSITS> 4,000,000 21,000,000
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 8,230,000 0
<INVESTMENTS-HELD-FOR-SALE> 1,002,000 0
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 268,537,000 155,587,000
<ALLOWANCE> 6,487,000 5,356,000
<TOTAL-ASSETS> 310,842,000 188,743,000
<DEPOSITS> 233,194,000 159,061,000
<SHORT-TERM> 34,237,000 4,000,000
<LIABILITIES-OTHER> 17,472,000 7,991,000
<LONG-TERM> 12,930,000 10,930,000
0 0
0 0
<COMMON> 110,000 107,000
<OTHER-SE> 12,899,000 6,654,000
<TOTAL-LIABILITIES-AND-EQUITY> 310,842,000 188,743,000
<INTEREST-LOAN> 25,872,000 15,855,000
<INTEREST-INVEST> 639,000 706,000
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 26,511,000 16,561,000
<INTEREST-DEPOSIT> 10,095,000 7,225,000
<INTEREST-EXPENSE> 12,411,000 7,853,000
<INTEREST-INCOME-NET> 14,100,000 8,708,000
<LOAN-LOSSES> 507,000 194,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 946,000 395,000
<INCOME-PRETAX> 10,739,000 1,641,000
<INCOME-PRE-EXTRAORDINARY> 10,739,000 1,641,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,248,000 950,000
<EPS-PRIMARY> 0.58 0.09
<EPS-DILUTED> 0.53 0.09
<YIELD-ACTUAL> 11.41 10.34
<LOANS-NON> 6,633,000 5,835,000
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 5,356,000 5,250,000
<CHARGE-OFFS> 2,474,000 718,000
<RECOVERIES> 1,145,000 274,000
<ALLOWANCE-CLOSE> 6,487,000 5,356,000
<ALLOWANCE-DOMESTIC> 6,487,000 5,356,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 593,000 0
</TABLE>
