<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1998
Or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ___________
Commission File Number 000-24051
UNITED PANAM FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
California 95-3211687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1300 SOUTH EL CAMINO REAL
San Mateo, California 94402
(Address of principal executive offices) (Zip Code)
(650) 345-1800
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock as of August
7, 1998 was 17,275,000 shares.
<PAGE>
UNITED PANAM FINANCIAL CORP.
FORM 10-Q
JUNE 30, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1998 and December 31, 1997 1
Consolidated Statements of Operations
for the three and six months ended June 30, 1998
and June 30, 1997 2
Consolidated Statements of Cash Flows
for the three and six months ended June 30, 1998
and June 30, 1997 3
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
--------------------
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands, except per share data) 1998 1997
--------------------- ---------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,975 $ 15,026
Short term investments 42,430 4,000
--------------------- ---------------------
Cash and cash equivalents 48,405 19,026
Securities available for sale, at fair value -- 1,002
Residual interests in securitizations, at fair value -- 8,230
Loans, net 181,485 148,535
Loans held for sale 160,963 120,002
Federal Home Loan Bank stock, at cost 2,059 1,945
Accrued interest receivable 1,512 1,494
Real estate owned, net 1,209 562
Premises and equipment, net 4,522 3,085
Deferred tax assets 3,001 3,171
Intangible assets 395 457
Other assets 8,247 3,333
--------------------- ---------------------
Total assets $411,798 $310,842
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $300,334 $233,194
Notes payable 10,930 12,930
Federal Home Loan Bank advances -- 28,000
Warehouse line of credit -- 6,237
Accrued expenses and other liabilities 18,469 17,472
--------------------- ---------------------
Total liabilities 329,733 297,833
--------------------- ---------------------
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, 17,275,000 and 10,950,000 shares at
June 30, 1998 and December 31, 1997, respectively 173 110
Additional paid-in capital 68,454 5,127
Retained earnings 13,438 7,772
--------------------- ---------------------
Total stockholders' equity 82,065 13,009
--------------------- ---------------------
Total liabilities and stockholders' equity $411,798 $310,842
===================== =====================
</TABLE>
See notes to unaudited consolidated financial statements. 1
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
(In thousands, except per share data) Ended June 30, Ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $11,608 $ 5,935 $20,627 $10,739
Accretion of discount on loans purchased 204 231 542 353
Short term investments and securities available
for sale 280 155 466 273
----------- --------- ----------- -----------
Total interest income 12,092 6,321 21,635 11,365
----------- --------- ----------- -----------
INTEREST EXPENSE
Deposits 3,876 2,303 7,123 4,346
Federal Home Loan Bank advances 244 357 545 444
Warehouse line of credit 907 -- 1,466 --
Notes payable 152 150 340 298
----------- --------- ----------- -----------
Total interest expense 5,179 2,810 9,474 5,088
----------- --------- ----------- -----------
Net interest income 6,913 3,511 12,161 6,277
Provision for loan losses 1,085 285 1,123 379
----------- --------- ----------- -----------
Net interest income after provision
for loan losses 5,828 3,226 11,038 5,898
----------- --------- ----------- -----------
NON-INTEREST INCOME
Gain on sale of loans, net 17,294 4,697 27,191 7,077
Loan related charges and fees 46 112 72 194
Service charges and fees 162 54 305 105
Other income 31 13 63 23
----------- --------- ----------- -----------
Total non-interest income 17,533 4,876 27,631 7,399
----------- --------- ----------- -----------
NON-INTEREST EXPENSE
Compensation and benefits 10,172 3,882 18,772 7,031
Occupancy expense 1,365 670 2,478 1,127
Other expenses 4,430 1,944 7,514 3,138
----------- --------- ----------- -----------
Total non-interest expense 15,967 6,496 28,764 11,296
----------- --------- ----------- -----------
Income before income taxes 7,394 1,606 9,905 2,001
Income taxes 3,181 666 4,239 828
----------- --------- ----------- -----------
Net income $ 4,213 $ 940 $ 5,666 $ 1,173
=========== ========= =========== ===========
Earnings per share-basic $ 0.27 $ 0.09 $ 0.43 $ 0.11
=========== ========= =========== ===========
Earnings per share-diluted $ 0.26 $ 0.08 $ 0.40 $ 0.11
=========== ========= =========== ===========
Weighted average shares outstanding-basic 15,469 10,669 13,210 10,669
=========== ========= =========== ===========
Weighted average shares outstanding-diluted 16,376 11,154 14,060 11,140
=========== ========= =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements. 2
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,213 $ 940 $ 5,666 $ 1,173
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Gain on sale of loans (17,294) (4,697) (27,191) (7,077)
Origination of mortgage loans held for sale (334,655) (108,712) (598,157) (176,488)
Sales of mortgage loans held for sale 359,609 97,160 562,566 139,794
Net proceeds from sale of residual interests in -- -- 8,302 --
securitizations
Provision for loan losses 1,085 285 1,123 379
Accretion of discount on loans (204) (231) (542) (353)
Depreciation and amortization 379 162 756 285
FHLB stock dividend (29) (21) (56) (41)
(Decrease) increase in accrued interest receivable 348 (47) (18) (158)
Increase in other assets (3,304) (593) (4,612) (634)
Deferred income taxes 126 16 170 20
Increase (decrease) in accrued expenses and other
liabilities (1,624) 6,068 998 4,518
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 8,650 ( 9,670) (50,995) (38,582)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities -- -- 1,002 --
Originations, net of repayments, of mortgage loans 11,731 6,906 19,141 10,244
Originations, net of repayments, of non-mortgage loans (13,593) (11,013) (32,021) (28,024)
Purchase of securities available for sale -- -- -- (2,002)
Purchase of premises and equipment (1,252) (635) (2,103) (1,233)
Purchase of FHLB stock, net (58) -- (58) (342)
Proceeds from sale of real estate owned -- 387 450 1,188
Other, net 5 -- (330) --
--------- --------- --------- ---------
Net cash used in investing activities (3,167) (4,355) (13,919) (20,169)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable to shareholders (2,000) -- (2,000) --
Net increase in deposits 12,102 22,734 67,140 36,090
Proceeds from initial public offering of common stock, net 63,390 -- 63,390 --
Proceeds, net of repayments, from warehouse line of credit (53,888) -- (6,237) --
Proceeds, net of repayments, from FHLB advances (5,000) 4,000 (28,000) 16,000
--------- --------- --------- ---------
Net cash provided by financing activities 14,604 26,734 94,293 52,090
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 20,087 12,709 29,379 (6,661)
Cash and cash equivalents at beginning of period 28,318 6,693 19,026 26,063
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 48,405 $ 19,402 $ 48,405 $ 19,402
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements. 3
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $5,669 $2,806 $9,578 $5,067
--------- --------- --------- ---------
Taxes $ 925 $ 880 $2,510 $ 880
--------- --------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Acquisition of real estate owned through
foreclosure of related mortgage loans $1,038 $ 281 $1,308 $1,030
--------- --------- --------- ---------
</TABLE>
See notes to unaudited consolidated financial statements. 4
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1. ORGANIZATION
United PanAm Financial Corp. (the "Company") was incorporated in
California on April 9, 1998 for the purpose of reincorporating its business in
that state, through the merger of United PanAm Financial Corp., a Delaware
corporation (the "Predecessor"), into the Company. Unless the context indicates
otherwise, all references herein to the "Company" include the Predecessor. The
Company was originally 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 of Pan American Federal Savings
Bank from the Resolution Trust Corporation (the "RTC") on April 29, 1994
pursuant to a whole purchase and assumption agreement. The Company, PAFI and
the Bank are considered to be minority owned. PAFI is a wholly-owned subsidiary
of the Company, and the Bank is a wholly-owned subsidiary of PAFI. United PanAm
Mortgage Corporation, a California 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.
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. BASIS OF PRESENTATION
Certain statements in this Quarterly Report on Form 10-Q, including
statements regarding the Company's strategies, plans, objectives, expectations
and intentions, may include forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: limited operating history; loans made to credit-impaired
borrowers; need for additional sources of financing; concentration of business
in California; reliance on operational systems and controls and key employees;
competitive pressure in the banking and mortgage lending industry; changes in
the interest rate environment; rapid growth of the Company's businesses; risks
in connection with the securitization of mortgage loans; general economic
conditions; and other risks identified from time to time in the Company's
filings with the Securities and Exchange Commission (the "SEC"). See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Future Results."
The accompanying unaudited 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 June 30, 1998 and December 31, 1997.
Significant inter-company accounts and transactions have been eliminated in
consolidation.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the Company's
financial condition and results of operations for the interim periods presented
in this Form 10-Q have been included. Operating results for the interim periods
are not necessarily indicative of financial results for the full year. These
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's Registration Statement on Form S-1 (File No. 333-39941), as amended,
declared effective by the SEC on April 23, 1998 in connection with its initial
public offering.
5
<PAGE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. EARNINGS PER SHARE
At December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128").
Under SFAS 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.
Basic EPS and diluted EPS are calculated as follows for the three and six
months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Six Months
(In thousands, except per share amounts) Ended June 30, Ended June 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
-------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Earnings per share-basic
Net income $ 4,213 $ 940 $ 5,666 $ 1,173
============== =============== ============= ==============
Average common shares outstanding 15,469 10,669 13,210 10,669
============== =============== ============= ==============
Earnings per share-basic $ 0.27 $ 0.09 $ 0.43 $ 0.11
============== =============== ============= ==============
Earnings per share-diluted
Net income $ 4,213 $ 940 $ 5,666 $ 1,173
============== =============== ============= ==============
Average common shares outstanding 15,469 10,669 13,210 10,669
Add: Stock options 907 485 850 471
-------------- --------------- ------------- --------------
Average common shares outstanding-diluted 16,376 11,154 14,060 11,140
============== =============== ============= ==============
Earnings per share-diluted $ 0.26 $ 0.08 $ 0.40 $ 0.11
============== =============== ============= ==============
</TABLE>
4. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (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 periods
presented in that financial statement. For the three and six months ended June
30, 1998 and 1997, the Company had no items of comprehensive income to report
other than net income.
In June 1997, the FASB issued SFAS No. 131, "Disclosure 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, and the Company is in the process
of determining its preferred format for disclosure purposes.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statements of financial condition and
measure those instruments at fair value.
6
<PAGE>
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.
5. INITIAL PUBLIC OFFERING
On April 23, 1998, the Company's Registration Statement on Form S-1 for
the initial public offering of 5,500,000 shares of its common stock at a price
of $11.00 per share was declared effective by the SEC. The Company received
approximately $56 million from the sale of its common stock after underwriting
discount and expenses associated with the offering. On May 22, 1998, the
Underwriters' over-allotment option for 825,000 shares of common stock was
exercised resulting in $8 million of additional proceeds being received by the
Company, after underwriting discount.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
Certain statements in this Quarterly Report on Form 10-Q including
statements regarding the Company's strategies, plans, objectives, expectations
and intentions, may include forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements. For discussion of the factors that might cause such a difference,
see "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Results" and other risks
identified from time to time in the Company's filings with the SEC.
GENERAL
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 markets to 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, a mortgage warehouse line of credit,
loan securitizations, and whole loan sales at its federal savings bank
subsidiary, Pan American Bank, FSB (the "Bank").
The Company commenced operations in 1994 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"). In 1996, the Company commenced its
current mortgage and automobile finance businesses. The Company was
incorporated in California on April 9, 1998 for the purpose of reincorporating
its business in that state, through the merger of United PanAm Financial Corp.,
a Delaware corporation (the "Predecessor"), into the Company. Unless the
context indicates otherwise, all references herein to the "Company" include the
Predecessor.
Finance companies, such as the Company, 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 received 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, generates income from a
combination of spread and non-interest income.
MORTGAGE FINANCE
The Company originates and sells subprime mortgage loans secured primarily by
first mortgages on single family residences. The Company's mortgage finance
customers are considered "subprime" because of factors such as impaired credit
history or high debt-to-income ratios compared to customers of traditional
mortgage lenders. The Company has funded its mortgage finance business to date
primarily through the Bank's deposits, FHLB advances, a mortgage warehouse line
of credit, the sale of its mortgage loan
8
<PAGE>
originations to mortgage companies and investors through whole loan packages
offered for bid several times per month and, to a lesser extent, from loan
securitizations. The Company completed its first securitization of mortgage
loans in December 1997 and in March 1998 sold the residual interests in this
securitization for cash at a price in excess of its carrying value.
The Company's mortgage lending income is generated from cash gains on sales of
loans, and a 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.
INSURANCE PREMIUM FINANCE
In May 1995, the Bank entered into a joint venture with BPN under the name
"ClassicPlan" (such business, "IPF"). Under this joint venture, which commenced
operations in September 1995, the Bank underwrites and finances primarily
automobile insurance premiums in California and BPN markets the financing
program and services the loans for the Bank. The Bank lends to individuals for
the purchase of single premium automobile insurance policies and the Bank's
collateral is the unearned insurance premium held by the insurance company. The
unearned portion of the insurance premium 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.
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.
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 Commonwealth Premium Finance. 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
agreement already in effect. 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.
As a result of the Commonwealth acquisition, IPF increased its commercial
insurance premium financing to approximately 7.5% of loans outstanding at June
30, 1998, and it is expected that this business will increase to approximately
15% of loans outstanding by the end of the year.
AUTOMOBILE FINANCE
In 1996, the Bank commenced its automobile finance business through its
subsidiary, United Auto Credit Corporation (such business, "UACC"). UACC
acquires, holds for investment and services subprime retail automobile
installment sales contracts ("auto contracts") generated by franchised and
independent dealers of used automobiles. 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.
As UACC provides all marketing, origination, underwriting and servicing
activities for its loans, 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
9
<PAGE>
advances, a mortgage warehouse line of credit and loan sales and
securitizations. As of June 30, 1998, the Bank was a five-branch federal savings
bank with $300.3 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 $70.5 million in principal amount (before unearned discounts
and premiums) at June 30, 1998.
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 retail deposit 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
has been completed 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.
The Company has initiated formal communications with its 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 has assessed the expense of year 2000 compliance and the effect on
the Company's earnings is not considered material.
10
<PAGE>
AVERAGE BALANCE SHEETS
The following tables set forth information relating to the Company for the
three and six months ended June 30, 1998 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>
Three Months Ended June 30,
----------------------------------------------------------------------------------
1998 1997
------------------------------------------ ------------------------------------
Average Average
(Dollars in thousands) Average Yield/ Average Yield/
Balance(1) Interest Cost Balance(1) Interest Cost
------------- ---------- --------- ----------- --------- ---------
ASSETS (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Investment securities $ 20,243 $ 280 5.54% $ 10,968 $ 155 5.67%
Mortgage loans, net(2) 299,672 7,501 10.01% 146,355 3,529 9.64%
IPF loans, net(3) 52,699 1,775 13.47% 48,258 1,728 14.33%
Automobile installment
contracts, net(4) 40,299 2,536 25.18% 13,771 909 26.41%
--------- -------- --------- -------
Total interest earning assets 412,913 12,092 11.71% 219,352 6,321 11.53%
-------- -------
Non-interest earnings assets 34,880 10,989
--------- ---------
Total assets $447,793 $230,341
========= =========
LIABILITIES AND EQUITY
Interest bearing liabilities
Customer deposits 296,423 3,876 5.25% 182,225 2,303 5.07%
Notes payable 11,430 152 5.34% 10,930 150 5.49%
FHLB advances 17,276 244 5.67% 24,863 357 5.76%
Warehouse line of credit 56,971 907 6.38% -- -- --
--------- -------- --------- -------
Total interest bearing
liabilities 382,100 5,179 5.44% 218,018 2,810 5.17%
-------- -------
Non-interest bearing liabilities 18,522 5,558
-------- ---------
Total liabilities 400,622 223,576
Equity 47,171 6,765
-------- ---------
Total liabilities and equity $447,793 $230,341
========= =========
Net interest income before provision
for loan losses $ 6,913 $3,511
======== =======
Net interest rate spread(5) 6.27% 6.36%
Net interest margin(6) 6.70% 6.40%
Ratio of interest earning assets to
interest bearing liabilities 108.1% 100.6%
</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, and 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.
11
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------------------------
1998 1997
----------------------------------------- ----------------------------------------
Average Average
(Dollars in thousands) Average Yield/ Average Yield/
Balance(1) Interest Cost Balance(1) Interest Cost
------------- ---------- --------- ----------- --------- ---------
ASSETS (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Investment securities $ 15,929 $ 466 5.85% $ 10,404 $ 273 5.26%
Mortgage loans, net(2) 264,019 13,358 10.12% 137,697 6,525 9.48%
IPF loans, net(3) 48,011 3,236 13.48% 43,080 3,046 14.14%
Automobile installment
contracts, net(4) 36,307 4,575 25.20% 11,551 1,521 26.34%
--------- -------- ------ --------- -------
Total interest earning assets 364,266 21,635 11.88% 202,732 11,365 11.21%
-------- -------
Non-interest earnings assets 35,859 14,460
--------- ---------
Total assets $400,125 $217,192
========= =========
LIABILITIES AND EQUITY
Interest bearing liabilities
Customer deposits 274,196 7,123 5.24% 172,958 4,346 5.07%
Notes payable 12,073 340 5.68% 10,930 298 5.48%
FHLB advances 19,226 545 5.72% 16,072 444 5.57%
Warehouse line of credit 46,227 1,466 6.40% -- -- --
--------- -------- --------- -------
Total interest bearing
liabilities 351,722 9,474 5.43% 199,960 5,088 5.13%
-------- -------
Non-interest bearing liabilities 15,804 10,737
--------- ---------
Total liabilities 367,526 210,697
Equity 32,599 6,495
--------- ---------
Total liabilities and equity $400,125 $217,192
========= =========
Net interest income before provision
for loan losses $12,161 $ 6,277
======== =======
Net interest rate spread(5) 6.45% 6.08%
Net interest margin(6) 6.73% 6.24%
Ratio of interest earning assets to 103.6% 101.4%
interest bearing liabilities
</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, and 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.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
JUNE 30, 1997
GENERAL
Net income increased from $940,000 for the three months ended June 30, 1997 to
$4.2 million for the three months ended June 30, 1998. 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 during 1997
and 1998. Also contributing to the favorable operating results for the three
months ended June 30, 1997 compared with the same period in 1998 was an increase
of $12.6 million in gain on sale of loans from the Company's mortgage finance
operations and $3.4 million in net interest income offset by an increase in non-
interest expense of $9.5 million and an increase in provision for loan losses of
$800,000. Net interest income was also favorably impacted during the second
quarter of 1998 by using the $63.4 million of net proceeds from the Company's
initial public offering of common stock to supplement the financing of its
mortgage operations.
12
<PAGE>
As a result of the expansion of the Company's lending operations, mortgage
loan originations increased from $108.5 million for the three months ended June
30, 1997 to $335.0 million for the three months ended June 30, 1998, while
insurance premium financing originations increased from $42.0 million to $43.9
million, respectively, and auto contracts purchased increased from $9.5 million
to $19.9 million, respectively. Sales of mortgage loans were $344.6 million for
the three months ended June 30, 1998 and $92.5 million for the comparable period
in 1997.
INTEREST INCOME
Interest income increased from $6.3 million for the three months ended June
30, 1997 to $12.1 million for the three months ended June 30, 1998 due primarily
to a $193.6 million increase in average interest earning assets and a 0.18%
increase in the average yield on interest earning assets. The largest components
of growth in average interest earning assets were mortgage loans, insurance
premium finance loans and auto contracts, which increased $153.3 million, $4.4
million and $26.5 million, respectively. The increase in the average yield on
interest earning assets was attributable to an increase in the origination or
purchase of higher yielding loans 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 $61.7 million at June 30, 1997 to $161.0 million
at June 30, 1998. Generally, these loans are originated for sale in the
secondary mortgage market. The increase in such loans was primarily a result of
growth in the Company's mortgage finance business and the opening of 13 retail
lending branches and two wholesale loan centers since June of 1997. 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,
much of which took place in the first two quarters of 1997, and the purchase of
the rights to solicit new and renewal insurance premium finance business in
connection with the Commonwealth acquisition. The increase in auto contracts
principally resulted from the opening of seven new branch offices since June of
1997 and the purchasing of additional dealer contracts in these new markets.
INTEREST EXPENSE
Interest expense increased from $2.8 million for the three months ended June
30, 1997 to $5.2 million for the three months ended June 30, 1998 due to a
$164.1 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 average interest bearing liabilities was
deposits of the Bank, which increased from an average balance of $182.2 million
during the quarter ended June 30, 1997 to $296.4 million during the quarter
ended June 30, 1998. The average cost of deposits increased from 5.07% for the
three months ended June 30, 1997 to 5.25% for the comparable period in 1998.
The increase in deposits resulted from the use of retail and wholesale
certificates of deposit ("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 average interest bearing liabilities
was from borrowings under the Bank's warehouse line of credit, increasing to
$57.0 million for the three months ended June 30, 1998. In October 1997, the
Bank entered into a master repurchase agreement under which it may sell and
repurchase, at a set price, mortgage loans pending the sale or securitization of
these loans. The weighted average interest rate on such borrowings was 6.38%
for the three months ended June 30, 1998. There were no warehouse line of
credit advances outstanding during the quarter ended June 30, 1997.
13
<PAGE>
PROVISION FOR LOAN LOSSES
Provision for loan losses increased from $285,000 for the three months ended
June 30, 1997 to $1.1 million for the three months ended June 30, 1998. The
increase in provision for losses reflects the Company's loan growth over the
past 12 months and management's decision to increase general loan loss
allowances as a result of this growth. The total allowance for loan losses was
$5.9 million at June 30, 1997 compared with $8.4 million at June 30, 1998. The
increase in the allowance for loan losses is attributable to the additional
provision for losses and acquisition discounts related to the Company's purchase
of auto contracts. The Company allocates the estimated amount of its
acquisition discounts attributable to credit risk to the allowance for loan
losses. Net charge-offs to average loans were 1.67% for the three months ended
June 30, 1998 compared with 0.71% for the comparable period in 1997.
A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loans held for investment and the adequacy of its
allowance for loan losses. The Company reports its loans held for sale at the
lower of cost or market value, accordingly, loan loss provisions are not
established for this portfolio. 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.
NON-INTEREST INCOME
Non-interest income increased $12.6 million, from $4.9 million for the three
months ended June 30, 1997 to $17.5 million for the three months ended June 30,
1998. This increase resulted from cash gains on sales of mortgage loans and is
due primarily to a substantial increase in the volume of mortgage loans sold by
the Company. During the three months ended June 30, 1997, the Company sold
$92.5 million in mortgage loans on a whole loan non-recourse basis compared to
$344.6 million in mortgage loans sold during the comparable period in 1998. Net
gains on sales of loans, as a percentage of loans sold, were 5.08% for the three
months ended June 30, 1997 compared to 5.03% for the three months ended June 30,
1998. The decline reflects competitive pressure in the securitization and whole
loan sale markets resulting, in part, from higher industry-wide loan prepayment
rates in the later part of 1997 and 1998 as compared to the second quarter of
1997.
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 $60,000, from $179,000 for the three months ended June 30, 1997 to
$239,000 for the three months ended June 30, 1998.
NON-INTEREST EXPENSE
Non-interest expense increased $9.5 million, from $6.5 million for the three
months ended June 30, 1997 to $16.0 million for the three months ended June 30,
1998. This increase primarily reflects an increase in salaries, loan
commissions, employee benefits and other personnel costs of $6.3 million
associated with the expansion of the Company's mortgage and automobile finance
operations. In addition, occupancy expense increased $695,000, reflecting an
increase in the number of mortgage and automobile lending offices. Marketing
expense was $891,000 for the three months ended June 30, 1998, compared with
$356,000 for the three months ended June 30, 1997. 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 $2.0
million during the three months ended June 30, 1998 compared with the same
period in 1997.
14
<PAGE>
During the last 12 months, the Company expanded significantly its mortgage and
automobile finance operations, resulting in an increase from 188 employees in 13
offices and 43 employees in six offices, respectively, as of June 30, 1997 to
541 employees in 28 offices and 84 employees in 13 offices, respectively, as of
June 30, 1998.
INCOME TAXES
Income taxes increased $2.5 million, from $666,000 for the three months ended
June 30, 1997 to $3.2 million for the three months ended June 30, 1998. This
increase occurred as a result of a $5.8 million increase in income before income
taxes between the two periods and an increase in the effective tax rate from
41.5% for the three months ended June 30, 1997 to 43.0% for the three months
ended June 30, 1998.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE
30, 1997
GENERAL
Net income increased from $1.2 million for the six months ended June 30, 1997
to $5.7 million for the six months ended June 30, 1998. This increase was due
primarily to the expansion of the Company's mortgage, insurance premium and auto
finance businesses in the second half of 1997 and during 1998. Also
contributing to the favorable operating results for the six months ended June
30, 1997 compared with the same period in 1998 was in increase of $20.1 million
in gain on sale of loans from the Company's mortgage finance operations and $5.9
million in net interest income offset by an increase in non-interest expense of
$17.5 million and an increase in provision for loan losses of $744,000.
As a result of the expansion of the Company's lending operations, mortgage
loan originations increased from $175.8 million for the six months ended June
30, 1997 to $598.8 million for the six months ended June 30, 1998, while
insurance premium finance originations increased from $85.3 million to $87.8
million, respectively, and auto contracts purchased increased from $17.2 million
to $37.7 million, respectively. Sales of mortgage loans were $538.4 million for
the six months ended June 30, 1998 and $132.7 million for the comparable period
in 1997.
INTEREST INCOME
Interest income increased from $11.4 million for the six months ended June 30,
1997 to $21.6 million for the six months ended June 30, 1998 due primarily to a
$161.5 million increase in average interest earning assets and a 0.67% increase
in the yield on average earning assets. The largest components of growth in
average earning assets were mortgage loans, insurance premium finance loans and
auto contracts, which increased $126.3 million, $4.9 million and $24.8 million,
respectively. The increase in the average yield on interest earning assets was
attributable to an increase in the origination or purchase of higher yielding
loans 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. These loans are
generally held for sale in the secondary mortgage market and the increase in
such loans was primarily a result of growth in the Company's mortgage finance
business and the opening of additional retail lending branches and wholesale
loan centers. 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 and the purchase of the rights to solicit new and
renewal insurance premium finance business in connection with the Commonwealth
acquisition. 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.
15
<PAGE>
INTEREST EXPENSE
Interest expense increased from $5.1 million for the six months ended June 30,
1997 to $9.5 million for the six months ended June 30, 1998 due to a $151.8
million increase in average interest bearing liabilities and a 0.18% increase in
the weighted average interest rate on interest bearing liabilities. The largest
component of growth in interest bearing liabilities was deposits of the Bank,
which increased from an average balance of $173.0 million for the six months
ended June 30, 1997 to $274.2 million for the six months ended June 30, 1998.
The average cost of deposits increased from 5.07% for the six months ended June
30, 1997 to 5.24% for the comparable period in 1998.
The second largest component of growth in average interest bearing
liabilities was from borrowings under the Bank's warehouse line of credit.
During the six months ended June 30, 1998, the average balance outstanding under
this warehouse line of credit was $46.2 million with an average interest rate of
6.40%. There were no warehouse line of credit advances outstanding during the
six months ended June 30, 1997. The increase in both deposits and the warehouse
line of credit were attributable to additional financing requirements as a
result of the growth in the Company's lending operations.
PROVISION FOR LOAN LOSSES
Provision for loan losses increased from $379,000 for the six months ended
June 30, 1997 to $1.1 million for the six months ended June 30, 1998. The
increase in provision for loan losses reflects management's decision to increase
general valuation allowances as a result of the increase in loans made by the
Company. Net charge-offs to average loans were 1.36% for the six months ended
June 30, 1998 compared with 0.71% for the comparable period in 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.
NON-INTEREST INCOME
Non-interest income increased $20.2 million, from $7.4 million for the six
months ended June 30, 1997 to $27.6 million for the six months ended June 30,
1998. This increase resulted from cash gains on sales of mortgage loans and is
due to a substantial increase in the volume of loans sold. During the six
months ended June 30, 1997, the Company sold $132.7 million in mortgage loans
compared with $538.4 million in mortgage loans sold during the comparable period
in 1998. Net gains on sales of loans, as a percentage of loans sold, were 5.05%
for the six months ended June 30, 1998 compared with 5.33% for the six months
ended June 30, 1997. All loans sold during the six months ended June 30, 1998
and 1997 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 $118,000, from $322,000 for the six months ended June 30, 1997 to
$440,000 for the six months ended June 30, 1998.
NON-INTEREST EXPENSE
Non-interest expense increased $17.5 million, from $11.3 million for the six
months ended June 30, 1997 to $28.8 million for the six months ended June 30,
1998. This increase reflects an increase in salaries, loan commissions,
employee benefits and other personnel costs of $11.7 million associated with the
growth and expansion of the Company's mortgage and automobile finance
operations. Also, as a result of this growth, occupancy expense increased from
$1.1 million for the six months ended June 30, 1997 to $2.5
16
<PAGE>
million for the six months ended June 30, 1998. Marketing expense was $1.7
million for the six months ended June 30, 1998, compared with $498,000 for the
comparable period in 1997. This increase is attributable to the Company's
retail mortgage lending operations, which use extensive direct mail and
telemarketing campaigns to target prospective borrowers. Other operating
expense, including stationery and supplies, data processing, insurance,
telephone and postage, increased $3.2 million during the six months ended June
30, 1998 compared with the same period in 1997.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Total assets increased $101.0 million, from $310.8 million at December 31,
1997 to $411.8 million at June 30, 1998. This increase occurred primarily as a
result of a $73.9 million increase in loans, from $268.5 million at December 31,
1997 to $342.4 million as of June 30, 1998. The increase in loans was comprised
of a $53.7 million increase in subprime mortgage loans, a $16.7 million increase
(net of unearned finance charges) in auto contracts and a $16.2 million increase
in insurance premium finance loans, offset by a $11.5 million decrease in loans
purchased from the RTC as a result of scheduled principal amortization and
prepayments.
Cash and cash equivalents increased $29.4 million, from $19.0 million at
December 31, 1997 to $48.4 million at June 30, 1998, primarily as a result of an
increase in short-term investments.
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. In March 1998, the Company sold its residual interests from the
December securitization for $8.3 million in cash and recorded a gain on sale of
approximately $100,000. Accordingly, as of June 30, 1998, the Company had no
remaining residual interests in securitizations reflected on its balance sheet.
Premises and equipment increased from $3.1 million at December 31, 1997 to
$4.5 million at June 30, 1998 as a result of purchases of furniture and
equipment for the Company's new branch offices and the continued growth in
lending operations.
Deposits increased $67.1 million, from $233.2 million at December 31, 1997 to
$300.3 million at June 30, 1998, due primarily to an increase in CDs of $64.2
million, from $197.1 million at December 31, 1997 to $261.3 million at June 30,
1998. Included in deposits at June 30, 1998 and December 31, 1997 are $17.5
million in brokered CDs. The growth in deposits reflects the continued
financing of the Company's mortgage, insurance premium finance and auto lending
activities with retail and wholesale deposits through the Bank's five-branch
network.
Other interest bearing liabilities include the RTC notes payable which
remained unchanged at $10.9 million between the period ends, FHLB advances which
were $28.0 million as of December 31, 1997 at a weighted average interest rate
of 7.07%, notes payable to shareholders which were $2.0 million at December 31,
1997 and a warehouse line of credit which was $6.2 million at December 31, 1997.
At June 30, 1998, there were no FHLB advances or warehouse line of credit
advances outstanding. In addition, the notes payable to shareholders were paid
off.
Net deferred tax assets were $3.0 million at June 30, 1998 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 $13.0 million at December 31, 1997 to
$82.1 million at June 30, 1998, solely as a result of the Company's net income
of $5.7 million during the six months ended June 30, 1998 and the net proceeds
received of $63.4 million from the Company's initial public offering completed
in the second quarter of 1998.
17
<PAGE>
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 (the "OTS NPV model") prepared quarterly by
the Office of Thrift Supervision (the "OTS"), 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 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 purposes of the risk-based capital requirement.
At March 31, 1998, 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 138 basis points and would result in a $6.6
million increase in the NPV of the Bank and (ii) a 200 basis point increase in
interest rates was 143 basis points and would result in a $6.7 million decrease
in the NPV of the Bank. At March 31, 1998, 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.
The following table shows the NPV and projected change in the NPV of the Bank
at March 31, 1998 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.
18
<PAGE>
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
--------------- -------------- -------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
+400 bp $39,279 $(22,427) (36)% 9.81% (498)bp
+300 bp $48,086 $(13,620) (22)% 11.83% (296)bp
+200 bp $54,970 $ (6,736) (11)% 13.36% (143)bp
+100 bp $59,211 $ (2,495) (4)% 14.26% (53)bp
0 bp $61,706 -- -- 14.79% --
- -100 bp $64,281 $ 2,575 +4 % 15.32% +53 bp
- -200 bp $68,345 $ 6,639 +11 % 16.17% +138 bp
- -300 bp $73,626 $ 11,920 +19 % 17.27% +248 bp
- -400 bp $80,307 $ 18,601 +30 % 18.63% +384 bp
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's primary sources of funds have been deposits at the Bank, FHLB
advances, financing under a secured warehouse line of credit, principal and
interest payments on loans, cash proceeds from the sale or securitization 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 one of the primary sources of
funds for the Company. During the six months ended June 30, 1998 and 1997, cash
flows from sales of loans were $562.6 million, and $139.8 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 requirements 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 June 30, 1998, such retail deposits were $215.1 million or 71.62% of total
deposits.
The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at June 30, 1998, wholesale deposits were $67.7 million or
22.55% of total deposits while broker-originated deposits were $17.5 million or
5.83% 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. Broker deposits are originated through major dealers
specializing in such products.
19
<PAGE>
The following table sets forth the balances and rates paid on each category of
deposits for the dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------------------------------------
1998 1997 1996
----------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Passbook accounts $ 29,431 3.84% $ 26,095 3.76% $ 17,054 2.84%
Checking accounts 9,567 1.44% 9,959 1.33% 10,642 1.32%
Certificates of deposit
Under $100,000 174,221 5.54% 144,926 5.56% 123,914 5.47%
$100,000 and over 87,115 5.83% 52,214 5.89% 7,451 5.89%
-------- -------- --------
Total $300,334 5.32% $233,194 5.25% $159,061 4.68%
======== ======== ========
</TABLE>
The following table sets forth the time remaining until maturity for all CDs
at June 30, 1998, December 31, 1997 and 1996.
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1998 1997 1996
----------------------- -------------------- ----------------------
(In thousands)
<S> <C> <C> <C>
Maturity within one year $229,973 $181,858 $103,369
Maturity within two years 31,256 14,984 26,819
Maturity within three years 107 298 1,177
----------------------- -------------------- ----------------------
Total certificates of deposit $261,336 $197,140 $131,365
======================= ==================== ======================
</TABLE>
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.
At June 30, 1998, the Bank exceeded all of its regulatory capital requirements
with (i) tangible capital of $28.9 million, or 7.08% of total adjusted assets,
which is above the required level of $6.1 million, or 1.50%; (ii) core capital
of $28.9 million, or 7.08% of total adjusted assets, which is above the required
level of $12.2 million, or 3.00%; and (iii) risk-based capital of $32.7 million,
or 10.96% of risk-weighted assets, which is above the required level of $23.9
million, or 8.00%.
Under the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), the
Bank is deemed to be "well capitalized" at June 30, 1998.
The Company has other sources of liquidity, including FHLB advances, a
warehouse line 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. As of June 30, 1998, the Bank's available borrowing capacity
under this credit facility was $31.6 million.
The Bank has a $150 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
20
<PAGE>
rate of interest to be determined by the parties upon each such sale of mortgage
loans, but which shall not exceed LIBOR plus 0.90%. 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. At June 30, 1998, there were no balances
outstanding under this warehouse line of credit.
Other borrowings of the Company at June 30, 1998 consist of the RTC Notes
Payable (as defined below) which mature in 1999.
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>
December 31,
June 30, ---------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(Dollars in thousands)
FHLB advances
Maximum month-end balance $34,500 $40,900 $4,000
Balance at end of period -- 28,000 4,000
Average balance for period 20,876 18,526 1,170
Weighted average interest rate on
Balance at end of period --% 7.07% 5.70%
Average balance for period 5.27% 5.95% 6.15%
Warehouse line of credit
Maximum month-end balance $83,441 $64,359 $ --
Balance at end of period -- 6,237 --
Average balance for period 53,348 8,914 --
Weighted average interest rate on
Balance at end of period --% 6.70% --%
Average balance for period 5.54% 6.10% --%
</TABLE>
The Company had no material contractual obligations or commitments for capital
expenditures at June 30, 1998. 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 June 30, 1998, the Company had outstanding commitments to
originate loans of $364.9 million, compared to $117.4 million at December 31,
1997. The Company anticipates that it will have sufficient funds available to
meet its current origination commitments.
RTC NOTES PAYABLE
In connection with its acquisition of certain assets from the RTC, the Bank
obtained loans (the "RTC Notes Payable") 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, 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
21
<PAGE>
Notes Payable. The RTC is entitled to declare the entire 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 at 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 plus 300 basis points, beginning on the
date such unpaid amount became due.
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 and prepayments,
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 June 30, 1998, the Company's loan portfolio
-------------------------
constituted $342.4 million, or 83.2% of the Company's total assets, of which
$181.5 million, or 53.0%, were held for investment and $161.0 million, or 47.0%,
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.
The following table sets forth the composition of the Company's loan portfolio
at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1998 1997 1996
-------------------- -------------------- -----------------------
(In thousands)
<S> <C> <C> <C>
MORTGAGE LOANS
Mortgage loans (purchased primarily from RTC) $ 70,533 $ 81,995 $102,733
-------------------- -------------------- -----------------------
Subprime mortgage loans
Held for sale 160,963 120,002 20,766
Held for investment 18,109 5,375 1,294
-------------------- -------------------- -----------------------
Total subprime mortgage loans 179,072 125,377 22,060
-------------------- -------------------- -----------------------
Total mortgage loans 249,605 207,372 124,793
-------------------- -------------------- -----------------------
CONSUMER LOANS
Automobile installment contracts 61,273 40,877 10,830
Insurance premium financing 56,208 39,990 32,058
Other consumer loans 344 267 230
-------------------- -------------------- -----------------------
Total consumer loans 117,825 81,134 43,118
-------------------- -------------------- -----------------------
Total loans 367,430 288,506 167,911
Unearned discounts and premiums (2,335) (2,901) (3,697)
Unearned finance charges (14,290) (10,581) (3,271)
Allowance for loan losses (8,357) (6,487) (5,356)
-------------------- -------------------- -----------------------
Total loans, net $342,448 $268,537 $155,587
==================== ==================== =======================
</TABLE>
22
<PAGE>
Loan Maturities. The following table sets forth the dollar amount of loans
---------------
maturing in the Company's loan portfolio at June 30, 1998 based on scheduled
contractual amortization. Loan balances are reflected before unearned discounts
and premiums, unearned finance charges and allowance for losses.
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------------------------------------------------------------
More Than 1 More Than 3 More Than 5 More Than 10
One Year or Year to Years to Years to Years to 20 More Than 20 Total
Less 3 Years 5 Years 10 Years Years Years Loans
------- ------- ------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Mortgage loans held
for investment $ 28 $ 545 $ 1,867 $6,642 $24,109 $ 55,451 $ 88,642
Mortgage loans held
for sale -- -- -- -- 9,135 151,828 160,963
Consumer loans 57,444 29,262 31,119 -- -- -- 117,825
------- ------- ------- ------ ------- -------- --------
Total $57,472 $29,807 $32,986 $6,642 $33,244 $207,279 $367,430
======= ======= ======= ====== ======= ======== ========
</TABLE>
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 June 30, 1998, the Company had $1.3 million in assets classified as special
mention, $11.8 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 (before
specific reserves for losses) that were more than 30 days delinquent at June 30,
1998, December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Loan June 30, % of Total December 31, % of Total December 31, % of Total
Delinquencies 1998 Loans 1997 Loans 1996 Loans
---------- ------- --------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 4,251 1.2% $ 356 0.1% $1,941 1.2%
60 to 89 days 2,411 0.7% 994 0.4% 109 0.1%
90+ days 10,520 3.0% 7,101 2.6% 6,430 3.9%
---------- ------- --------- ------- --------- --------
Total $17,182 4.9% $8,451 3.1% $8,480 5.2%
========== ======= ========= ======= ========= ========
</TABLE>
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
23
<PAGE>
collateral. The Company does not generally modify, extend or rewrite loans and
at June 30, 1998 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 June 30,
1998, December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------------
1998 1997 1996
----------------- ------------------- -----------------
<S> <C> <C> <C>
(Dollars in thousands)
Nonaccrual loans
Single-family residential $8,769 $5,219 $5,044
Multi-family residential 80 81 81
Consumer and other loans 496 1,333 710
----------------- ------------------- -----------------
Total $9,345 $6,633 $5,835
================= =================== =================
Nonaccrual loans as a percentage of
Total loans held for investment 5.15% 4.31% 4.19%
Total assets 2.27% 2.13% 3.09%
General allowance for loan losses as a percentage of
Total loans held for investment 3.43% 3.54% 3.14%
Nonaccrual loans 66.71% 82.33% 74.90%
</TABLE>
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 June 30, 1998, December 31, 1997 and
1996, real estate owned was $1.2 million, $562,000 and $988,000, respectively,
and consisted entirely of one to four family residential properties.
24
<PAGE>
Allowance for Loan Losses. The following is a summary of the changes in the
-------------------------
consolidated allowance for loan losses of the Company for the periods indicated.
<TABLE>
<CAPTION>
At or For the
Year Ended
At or For the Six December 31,
Months Ended June 30, ----------------------------------------
1998 1997 1996
--------------------- ------------------- -----------------
<S> <C> <C> <C>
(Dollars in thousands)
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 6,487 $ 5,356 $5,250
Provision for loan losses 1,123 507 194
Charge-offs
Mortgage loans held for investment (212) (373) (285)
Mortgage loans held for sale -- -- --
Consumer loans (1,617) (2,101) (433)
--------------------- ------------------- -----------------
(1,829) (2,474) (718)
Recoveries
Mortgage loans held for investment -- 77 --
Mortgage loans held for sale -- -- --
Consumer loans 709 1,068 274
--------------------- ------------------- -----------------
709 1,145 274
--------------------- ------------------- -----------------
Net charge-offs (1,120) (1,329) (444)
--------------------- ------------------- -----------------
Acquisition discounts allocated to loss allowance 1,867 1,953 356
--------------------- ------------------- -----------------
Balance at end of period $ 8,357 $ 6,487 $5,356
===================== =================== =================
Annualized net charge-offs to average loans 1.36% 0.60% 0.30%
Ending allowance to period end loans, net 4.61% 4.37% 3.97%
</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.
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.
25
<PAGE>
The following is a summary of the Company's cash equivalents and securities
portfolios as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
(Dollars in thousands)
Balance at end of period
Overnight deposits $22,500 $4,000 $21,000
Commercial paper 19,930 -- --
U.S. agency securities -- 1,002 --
--------------------- --------------------- ---------------------
Total $42,430 $5,002 $21,000
===================== ===================== =====================
Weighted average yield at end of period
Overnight deposits 5.50% 3.50% 5.02%
Commercial paper 5.60% -- --
U.S. agency securities -- 6.54% --
Weighted average maturity at end of period
Overnight deposits 1 day 1 day 1 day
Commercial paper 22 days -- --
U.S. agency securities -- 24 months --
</TABLE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
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. 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. 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, a mortgage warehouse line of credit, loan securitizations, and whole
loan sales at the Bank. 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. 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 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. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
26
<PAGE>
Operations Liquidity and Capital Resources."
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. 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, collections 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 as
well as the key employees of BPN. The loss of the services of any key employee,
or the failure of the Company 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.
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. 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.
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-bearing assets
in a given period, a significant increase in market rates of interest could have
a material adverse effect on the Company's net 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
27
<PAGE>
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.
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. 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 its residual interests in
this securitization for cash in the amount of $8.3 million which exceeded the
carrying value of approximately $8.2 million at the date of sale. 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 securitizations represented a
significant portion of the Company's revenues and net income and the Company
were unable to securitize profitably a sufficient number of loans in a
particular quarter, then the Company's revenues for the quarter could decline,
which could result in lower earnings or a loss reported for the quarter. In
addition, delays in closing a securitization could require the Company to seek
additional 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.
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.
CHANGE 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
28
<PAGE>
delinquencies and defaults. A decline in collateral values and an increase in
delinquencies and defaults increase the possibility and severity of losses.
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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Management of Interest Rate Risk."
29
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-----------------
NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
-----------------------------------------
Use of proceeds - As discussed in Note 5 to Unaudited Notes to Consolidated
Financial Statements under "Item 1. Financial Information" of this
Quarterly Report, the Company completed an initial public offering of
common stock. In connection therewith:
1. The effective date of the Company's Registration Statement on Form S-1,
as amended (File No. 333-39941) ("Registration Statement"), was April
23, 1998.
2. The offering commenced on April 23, 1998 and was terminated on May 28,
1998 with the sale of all of the registered securities at a price to
the public of $11.00 per share.
3. NationsBanc Montgomery Securities LLC and Piper Jaffray Inc. acted as
managing underwriters for the Company.
4. The class of securities registered pursuant to the Registration
Statement was common stock, no par value per share. The aggregate
amount of such securities registered and sold was 6,325,000 shares for
an aggregate dollar amount of $69.6 million. There were no selling
shareholders.
5. Expenses incurred by the Company in connection with the sale of the
shares of common stock, none of which were paid directly or indirectly
to directors or officers of the Company or their associates, included
the following (dollars in thousands):
Underwriting discounts and commissions $4,870
Finders' fees --
Expenses paid to or for underwriters --
Other expenses 1,314
-------
$6,184
=======
6. The net offering proceeds to the Company after deduction of the above
expenses were approximately $63.4 million and were used for general
corporate purposes, including financing the growth of the Company's
mortgage and automobile finance operations, and to repay $2.0 million
in indebtedness to certain shareholders. Such use of proceeds did not
represent a material change in the use of proceeds described in the
Company's Registration Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
Not applicable
30
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION.
-----------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits
10.86 Mortgage Loan Purchase and Interim Servicing
Agreement, dated June 23, 1998, between Pan
American Bank, FSB and Countrywide Home Loans,
Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
31
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
UNITED PANAM FINANCIAL CORP.
DATE: August 7, 1998 By: /s/ Lawrence J. Grill
------------------------------------
Lawrence J. Grill
President and Chief Executive Officer
(Principal Executive Officer)
August 7, 1998 By: /s/ Carol M. Bucci
------------------------------------
Carol M. Bucci
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
32
<PAGE>
EXHIBIT 10.86
MORTGAGE LOAN PURCHASE AND INTERIM SERVICING AGREEMENT
------------------------------------------------------
This Mortgage Loan Purchase and Interim Servicing Agreement is
dated and effective as of June 23, 1998 (the "Agreement"), between Pan American
Bank, FSB, having an address at 625 The City Drive, Orange, California 92868
(the "Seller"), and Countrywide Home Loans, Inc., having an address at 4500 Park
Granada, Calabasas, California 91302 (the "Purchaser").
R E C I T A L S
---------------
The Seller desires to sell and transfer to the Purchaser, and the
Purchaser desires to purchase from the Seller, those certain mortgage loans
identified on Exhibit A hereto, including all servicing rights relating thereto
---------
(the "Mortgage Loans") upon such terms as are set forth below.
In consideration of the promises and the mutual agreements and
undertakings set forth herein, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
Definitions
-----------
Whenever used herein, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
ACCRUED INTEREST: Accrued interest owing to the Seller on the
----------------
Stated Principal Balance of each Mortgage Loan at a rate equal to the Mortgage
Interest Rate of each such Mortgage Loan, from the date through which interest
has last been paid (as of Cut-off Date) through the day prior to the Closing
Date, inclusive; provided, however, with respect to those Mortgage Loans for
which interest has been paid through a date beyond the Cut-off Date, such
accrued interest owing to Seller shall be reduced by the amount of interest
accruing on the Stated Principal Balance of each such Mortgage Loan at a rate
equal to the Mortgage Interest Rate of such Mortgage Loan, from the Closing Date
to the day prior to the interest paid through date for such Mortgage Loan,
inclusive.
AGENCIES: Both FNMA or FHLMC.
--------
AGREEMENT: This Mortgage Loan Purchase and Interim Servicing
---------
Agreement, including all exhibits and supplements hereto, and all amendments
hereof.
APPRAISED VALUE: With respect to any Mortgage Loan, the value of
---------------
the related Mortgaged Property based upon the lesser of (i) the appraisal made
for the originator at the time of origination of the Mortgage Loan or (ii) the
purchase price of the Mortgaged Property at the time of origination of the
Mortgage Loan, provided, however, that in the case of a refinanced Mortgage
Loan, such value is based solely upon the appraisal made at the time of
origination of such refinanced Mortgage Loan and in the case of a Mortgage Loan
originated under the streamlined documentation program, such value shall be
based on an appraisal obtained at the time the original loan was originated.
ASSIGNMENT OF MORTGAGE: An assignment of the Mortgage, notice of
----------------------
transfer or equivalent instrument in recordable form, sufficient under the laws
of the jurisdiction wherein the related Mortgaged Property is located to reflect
the sale of the Mortgage to the Purchaser.
1
<PAGE>
BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii)
------------
a day on which banking and savings and loan institutions in the State of
California, are authorized or obligated by law or executive order to be closed.
COMMITMENT LETTER: That certain letter agreement dated June 2, 1998,
-----------------
between the Seller and the Purchaser setting forth the general terms and
conditions of the transaction contemplated herein and identifying certain of the
loan characteristics of the Mortgage Loans to be purchased hereunder.
CLOSING DATE: June 23, 1998, or such other date as may be mutually
------------
agreed upon by the Seller and the Purchaser.
CUT-OFF DATE: June 16, 1998.
------------
DUE DATE: The day of the month on which a Monthly Payment is due on a
--------
Mortgage Loan, exclusive of any days of grace.
ESCROW ACCOUNT: An account or accounts maintained by the Seller, or
--------------
the Seller's predecessor in interest, maintained for the deposit of Escrow
Payments received in respect of one or more Mortgage Loans.
ESCROW PAYMENTS: The amounts held in Escrow Accounts which include
---------------
amounts being held for payment of taxes, assessments, water rates, mortgage
insurance premiums, fire and hazard insurance premiums and other payments
required to be escrowed by the Mortgagor pursuant to any Mortgage Loan.
FHLMC: The Federal Home Loan Mortgage Corporation, or any successor
-----
thereto.
FNMA: The Federal National Mortgage Association or any successor
----
thereto.
GROSS MARGIN: The fixed percentage amount set forth in the related
------------
Mortgage Note which amount is added to the Index in accordance with the terms of
the related Mortgage Note to determine the Mortgage Interest Rate for such
Mortgage Loan.
HMDA: The Home Mortgage Disclosure Act, as amended.
----
HUD: The Department of Housing and Urban Development or any successor
---
thereto.
INDEX: On each Interest Adjustment Date, the Index shall mean the
-----
rate per annum equal to the average of interbank offered rates for six-month
U.S. dollar denominated deposits in the London market (LIBOR), as published in
the Wall Street Journal as of the first Business Day of the month immediately
preceding the month in which such Interest Adjustment Date occurs.
INTEREST ADJUSTMENT DATE: With respect to each Mortgage Loan, the
------------------------
date on which an adjustment to the Mortgage Interest Rate on a Mortgage Note
becomes effective.
INTERIM SERVICING PERIOD: The period commencing with the Closing Date
------------------------
and ending with the Servicing Transfer Date.
LIFETIME MORTGAGE INTEREST RATE CAP: The absolute maximum Mortgage
-----------------------------------
Interest Rate payable for a Mortgage Loan, above which the Mortgage Interest
Rate shall not be adjusted, as provided in the Mortgage Loan Schedule.
LOAN-TO-VALUE RATIO OR LTV: With respect to any Mortgage Loan, the
------------------- ----
ratio of the original outstanding principal amount to the Appraised Value of the
Mortgage Loan.
2
<PAGE>
MONTHLY PAYMENT: The scheduled monthly payment of principal and
---------------
interest on a Mortgage Loan.
MORTGAGE: The mortgage, deed of trust or other such instrument
--------
securing a Mortgage Note, which creates a first lien on an unsubordinated estate
in fee simple in real property securing the Mortgage Note or a first lien upon a
leasehold estate of Mortgagor, as the case may be.
MORTGAGE FILE: The file containing the Mortgage Loan Documents, all
-------------
other documents in connection with the origination of a particular Mortgage Loan
and all documents, files and other information reasonably necessary to service
the Mortgage Loans, including, but not limited to, good faith estimate, HUD 1
Settlement Statement, Truth in Lending Disclosure Statement, and Truth in
Lending Notice of Right to Cancel (if required by law).
MORTGAGE INTEREST RATE: The annual rate at which interest accrues on
----------------------
any Mortgage Loan, exclusive of any primary mortgage insurance, as adjusted from
time to time in accordance with the provisions of the related Mortgage Note, if
applicable.
MORTGAGE LOAN: A mortgage loan identified in the Mortgage Loan
-------------
Schedule which is sold pursuant to this Agreement, which Mortgage Loan includes
without limitation the Mortgage File, the Monthly Payments, Principal
Prepayments and all other rights, benefits, proceeds and obligations arising
from or in connection with such Mortgage Loan.
MORTGAGE LOAN DOCUMENTS: The following documents pertaining to any
-----------------------
Mortgage Loan:
(a) The original Mortgage Note bearing all intervening endorsements,
endorsed "Pay to the order of __________________" and signed in the name of the
Seller by an authorized officer;
(b) The original Assignment of Mortgage for each Mortgage Loan in
blank;
(c) The original Mortgage with evidence of recording thereon;
(d) The originals of all intervening assignments of mortgage with
evidence of recording thereon; and
(e) The original mortgagee title insurance policy.
MORTGAGE LOAN SCHEDULE: The schedule of Mortgage Loans set forth on
----------------------
Exhibit A hereto.
- ---------
MORTGAGE NOTE: The note or other evidence of the indebtedness of a
-------------
Mortgagor secured by a Mortgage.
MORTGAGED PROPERTY: The real property securing repayment of the debt
------------------
evidenced by a Mortgage Note.
MORTGAGOR: The obligor on a Mortgage Note.
---------
NET ESCROW PAYMENTS: Escrow Payment balances remaining after advances
-------------------
by the Seller for taxes and insurance to the extent documented under a detailed
statement provided to the Purchaser.
PERIODIC MORTGAGE INTEREST RATE CAP: The provision of a Mortgage Note
-----------------------------------
which provides for an absolute maximum amount by which the Mortgage Interest
Rate therein may increase or decrease on an Interest Adjustment Date above the
Mortgage Interest Rate previously in effect, equal to the rate set forth in the
Mortgage Loan Schedule, if applicable.
3
<PAGE>
PRIMARY MORTGAGE INSURANCE POLICY: A policy of primary mortgage
---------------------------------
guaranty insurance issued by a Qualified Insurer, providing coverage at least
equal to the level of coverage required by the Agencies at the time the related
Mortgage Loan was originated if such Mortgage Loan was to be eligible for sale
to, and securitization by, either FNMA or FHLMC.
PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on a
--------------------
Mortgage Loan which is received in advance of its scheduled Due Date, including
any prepayment penalty or premium thereon, which is not accompanied by an amount
of interest representing scheduled interest due on any date or dates in any
month or months subsequent to the month of prepayment.
PURCHASE PRICE: The purchase price to be paid by the Purchaser for
--------------
the Mortgage Loans (including the Servicing Rights relating thereto) which shall
equal the product of (a) the Purchase Price Percentage, times (b) the Stated
Principal Balance of the Mortgage Loans.
PURCHASE PRICE PERCENTAGE: The purchase price percentage set forth in
-------------------------
the Commitment Letter.
PURCHASE PROCEEDS: The aggregate of the Purchase Price and the
-----------------
Accrued Interest.
PURCHASER: Any entity which purchases the Mortgage Loans pursuant to
---------
this Agreement or its successor in interest or any successor or assign to the
Purchaser under this Agreement as herein provided. Unless the context requires
otherwise, all references to "Purchaser" in this Agreement shall be deemed to
include such Purchaser's successors in interest, assignees or designees.
QUALIFIED INSURER: An insurance company duly qualified as such under
-----------------
the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, approved as an insurer by the
Agencies and whose claims paying ability is rated in the two highest rating
categories by the Standard & Poor's Ratings Group or Moody's Investors Service
with respect to primary mortgage insurance and in the two highest rating
categories by Best's with respect to hazard and flood insurance.
REPURCHASE PRICE: With respect to any Mortgage Loan, a price equal to
----------------
the sum of (a) the product of (i) the unpaid principal balance of the Mortgage
Loan at the time of repurchase, and (ii) the greater of par or the Purchase
Price Percentage (subject to any buyup or buydown adjustments as contemplated in
the Commitment Letter), and (b) interest on such unpaid principal balance at the
Mortgage Interest Rate from the last date through which interest has been paid
and distributed to the Purchaser to the date of repurchase.
SEGMENT(S): One or more segments of Mortgage Loans (each, a
----------
"Segment") comprising the Segment A Mortgage Loans, the Segment B Mortgage
Loans, the Segment C Mortgage Loans, the Segment D Mortgage Loans, the Segment E
Mortgage Loans, and the Segment F Mortgage Loans, whether individually or in the
aggregate, as applicable. Each such Segment and the Mortgage Loans relating
thereto are identified on Exhibit A and may hereafter be referred to as Segments
----------
A, B, C, D, E and F, respectively.
SEGMENT A MORTGAGE LOANS: The Mortgage Loans identified under Segment
------------------------
A of the Mortgage Loan Schedule.
SEGMENT B MORTGAGE LOANS: The Mortgage Loans identified under Segment
------------------------
B of the Mortgage Loan Schedule.
SEGMENT C MORTGAGE LOANS: The Mortgage Loans identified under Segment
------------------------
C of the Mortgage Loan Schedule.
SEGMENT D MORTGAGE LOANS: The Mortgage Loans identified under Segment
------------------------
D of the Mortgage Loan Schedule.
4
<PAGE>
SEGMENT E MORTGAGE LOANS: The Mortgage Loans identified under Segment
------------------------
E of the Mortgage Loan Schedule.
SEGMENT F MORTGAGE LOANS: The Mortgage Loans identified under Segment
------------------------
F of the Mortgage Loan Schedule.
SERVICING RIGHTS: With respect to each Mortgage Loan, any and all of
----------------
the following: (a) all rights to service the Mortgage Loans; (b) any payments
or monies payable or received for servicing the Mortgage Loans; (c) any late
fees, assumption fees, penalties or similar payments with respect to the
Mortgage Loans; (d) all agreements or documents creating, defining or evidencing
any such Servicing Rights and all rights of the Seller thereunder, including,
but not limited to, any clean-up calls and termination options; (e) Escrow
Payments or other similar payments with respect to the Mortgage Loans and any
amounts actually collected with respect thereto; (f) all accounts and other
rights to payments related to any of the property described in this paragraph;
(g) possession and use of any and all Mortgage Files pertaining to the Mortgage
Loans or pertaining to the past, present, or prospective servicing of the
Mortgage Loans; and (h) all rights, powers and privileges incident to any of the
foregoing.
SERVICING TRANSFER DATE: July 31, 1998, or such other date the
-----------------------
Purchaser may select upon reasonable notice to the Seller.
STATED PRINCIPAL BALANCE: The unpaid principal balance of the
------------------------
Mortgage Loans at the Cut-off Date.
ARTICLE II
SALE OF THE MORTGAGE LOANS
--------------------------
SECTION 2.1 AGREEMENT OF SALE. The Seller does hereby agree to sell,
-----------------
convey, transfer and assign to the Purchaser on the Closing Date all right,
title and interest in and to the Mortgage Loans, the Servicing Rights, the
Mortgage Loan Documents, the Mortgage Files and the Escrow Accounts relating to
the Mortgage Loans, all in accordance with the terms and conditions set forth
herein.
SECTION 2.2 PAYMENT OF THE PURCHASE PROCEEDS. No later than 1:00
--------------------------------
p.m. (Pacific time) on the Closing Date, the Purchaser shall pay to the Seller
the Purchase Proceeds, by wire transfer in immediately available funds to the
account designated by the Seller. Upon completion of the wire transfer to the
Seller's designated account, the Purchaser shall own the Mortgage Loans and the
Servicing Rights, free and clear of any lien or encumbrance whatsoever.
SECTION 2.3 ENTITLEMENT TO PAYMENT ON THE MORTGAGE LOANS. The
--------------------------------------------
Purchaser shall be entitled to all collections and recoveries of principal and
interest received or applied to any Mortgagor's account after the Cut-off Date.
All payments and remittances on the Mortgage Loans received by the Seller after
the Closing Date and payable to the Purchaser shall be paid promptly to the
Purchaser in accordance to the terms set forth in Article IV or Article V, as
---------- ---------
applicable.
SECTION 2.4 EXAMINATION OF MORTGAGE LOAN DOCUMENTS BY THE PURCHASER.
-------------------------------------------------------
Prior to the Closing Date, the Purchaser shall have, the right to review the
Mortgage File and, based on its review, decline to purchase any Mortgage Loan
which the Purchaser, in its sole discretion, determines not to be in compliance
with each of the representations and warranties contemplated hereby or which is
otherwise unsatisfactory to the Purchaser in its reasonable discretion. The
Seller agrees to deliver or make available to the Purchaser a complete Mortgage
File for each Mortgage Loan on or before such date as may be reasonably
requested by the Purchaser. The fact that the Purchaser has conducted or has
failed to conduct any partial or complete examination of the Mortgage Files
shall not affect the Purchaser's right to demand repurchase or to avail itself
of any other remedy available hereunder. Notwithstanding anything contained
herein to the
5
<PAGE>
contrary, should there be a material adverse change in the characteristics of
the Mortgage Loans remaining after the exclusion or rejection of one or more
Mortgage Loans by the Purchaser as contemplated above, the Purchaser may, in its
sole discretion, elect not to purchase the remaining Mortgage Loans and the
Purchaser shall have no liability therefor.
SECTION 2.5 DELIVERY OF MORTGAGE LOAN DOCUMENTS. At least two (2)
-----------------------------------
Business Days prior to the Closing Date, the Seller shall deliver the Mortgage
Loan Documents with respect to each Mortgage Loan to the Purchaser or a bonded
third party custodian (the "Custodian") and, in the case of the latter, shall
cause the Custodian to deliver to the Purchaser a custodian's certification
pursuant to which the Custodian certifies to the Purchaser that (i) with respect
to each Mortgage Loan, it has in its possession originals of each of the
Mortgage Loan Documents, (ii) all of the Mortgage Loan Documents appear on their
face to be genuine originals or copies, as applicable, and (iii) upon the
Purchaser's wiring of the Purchase Proceeds to the Seller, that the Custodian
shall hold the Mortgage Loan Documents with respect to each Mortgage Loan in
trust for the Purchaser and will, subsequent thereto, act only in a manner
consistent with the Purchaser's instructions with respect thereto. In the event
that any of the Mortgage Loan Documents set forth in clauses (c) through (e) of
the definition of Mortgage Loan Documents in Article I have not been delivered
---------
to the Purchaser in the time specified above (the "Missing Documents") either
-----------------
because such Missing Documents have not been returned by the applicable public
recording office with respect to items (c) and (d), or because the final
original title policy has not yet been issued by the title company with respect
to item (e), then the Seller shall deliver to the Purchaser certified true and
correct copies of the same and shall further deliver the originals of any such
Missing Documents promptly upon its receipt thereof, but in no event later than
one hundred and twenty (120) days from the Closing Date. If the Seller fails to
deliver any of the Missing Documents relating to a Mortgage Loan within the time
specified above, the Seller shall, upon written request from the Purchaser,
repurchase such Mortgage Loan in accordance with Section 3.3.
-----------
SECTION 2.6 CONDITIONS TO CLOSING: The Purchaser's obligations
---------------------
hereunder are subject to the fulfillment of the following conditions precedent.
In the event that any of the conditions set forth below are not satisfied in all
material respects, the Purchaser shall not have any obligation to purchase any
of the Mortgage Loans or to pay the Purchase Proceeds as contemplated hereunder
and shall instead be entitled, in its sole discretion, to terminate this
Agreement in its entirety.
(a) Each of the representations and warranties made by the Seller
hereunder shall be true and correct in all material respects as of the Closing
Date and no event shall have occurred which, with notice or the passage of time,
would constitute a default under this Agreement.
(b) The Seller shall have delivered to the Purchaser all of the
Mortgage Loan Documents in accordance with Section 2.5 and a complete Mortgage
-----------
File with respect to each Mortgage Loan.
(c) Each of the terms and conditions set forth herein which are
required to be satisfied on or before the Closing Date shall have been satisfied
unless waived by the prejudiced party(ies).
(d) The Seller shall have delivered to the Purchaser on or before
the Closing Date the following documents:
(1) a fully executed Agreement;
(2) the Mortgage Loan Schedule, which shall include, without
limitation, the Stated Principal Balance of each
Mortgage Loan;
(3) an executed Funding Schedule, in the form of Exhibit B
---------
hereto;
(4) an Officer's Certificate, in the form of Exhibit C
---------
hereto; and
6
<PAGE>
(5) such other documents related to the purchase and sale of
the Mortgage Loans and the Servicing Rights as the
Purchaser may reasonably request .
SECTION 2.7 RECORD TITLE: Record title to each Mortgage and the
------------
related Mortgage Note shall be transferred by the Seller to the Purchaser, The
Seller shall, at the option of the Purchaser, either (i) prepare and cause to be
recorded the Assignment of Mortgage for each Mortgage Loan and shall, promptly
upon its receipt of each original recorded Assignment of Mortgage from the
applicable recording office, deliver the same to the Purchaser, or (ii) prepare
and deliver to the Purchaser an original Assignment of Mortgage in blank, in
each case, within the time and in the manner specified in Section 2.5. The
-----------
Seller shall bear the cost and expense related to (i) providing all Assignments
of Mortgages and endorsements of Mortgage Notes for any transfer of record title
required hereunder with respect to the obligations of the Mortgage Notes and the
underlying security interest related to each Mortgage Loan and (ii) recording
title of the Mortgage Loans including, but not limited to, recording fees and
fees for title policy endorsements.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
SECTION 3.1 REPRESENTATIONS AND WARRANTIES RESPECTING THE SELLER.
----------------------------------------------------
The Seller represents, warrants and covenants to the Purchaser that, as of the
Closing Date:
(a) The Seller is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and is
qualified to transact business in and is in good standing under the laws of each
state where a Mortgaged Property is located or is otherwise exempt under
applicable law from such qualification or is otherwise not required under
applicable law to effect such qualification and no demand for such qualification
has been made upon the Seller by any state having jurisdiction and in any event
the Seller is or will be in compliance with the laws of any such state to the
extent necessary to insure the enforceability of each Mortgage Note and the sale
of the Mortgage Loans and Servicing Rights as contemplated by this Agreement;
(b) The Seller has the full power and authority to perform, and to
enter into and consummate, all transactions contemplated by this Agreement. As
of the Closing Date, the Seller has the full power and authority to hold each
Mortgage Loan and to sell each Mortgage Loan and the Servicing Rights;
(c) Neither the acquisition or origination of the Mortgage Loans by
the Seller, the sale of the Mortgage Loans or the Servicing Rights to the
Purchaser, the consummation of the transactions contemplated hereby, nor the
fulfillment of or compliance with the terms and conditions of this Agreement,
will conflict with or result in a breach of any of the terms, conditions or
provisions of the Seller's certificate of incorporation or bylaws or result in a
material breach of any legal restriction or any agreement or instrument to which
the Seller is now a party or by which it is bound, or constitute a material
default or result in an acceleration under any of the foregoing, or result in
the violation of any law, rule, regulation, order, judgment or decree to which
the Seller or its property is subject;
(d) The Seller is an approved seller/servicer for the Agencies, in
good standing with each such agency, and is a mortgagee approved by the
Secretary of HUD. No event has occurred, including but not limited to, a change
in insurance coverage, which would make the Seller unable to comply with FNMA-,
FHLMC- or HUD-eligibility requirements or which would require notification to
the Agencies or HUD;
(e) The Seller does not believe, nor does it have any reason or
cause to believe, that it cannot perform each and every covenant contained in
this Agreement;
(f) There is no action, suit, proceeding, investigation or
litigation pending or, to the best of the Seller's knowledge, threatened, which
either in any one instance or in the aggregate, if determined
7
<PAGE>
adversely to the Seller, would adversely affect the sale of the Mortgage Loans
or the Servicing Rights to the Purchaser, or the Seller's ability to perform its
obligations under this Agreement;
(g) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Seller of or compliance by the Seller with this Agreement or
the terms of the Mortgage Loans, the delivery of the Mortgage Files to the
Purchaser, the sale of the Mortgage Loans and the Servicing Rights to the
Purchaser or the consummation of the transactions contemplated by this
Agreement, or if required, such consent, approval, authorization or order has
been obtained prior to the Closing Date; and
(h) The consummation of the transactions contemplated by this
Agreement are in the ordinary course of business of the Seller, and the
transfer, assignment and conveyance of the Mortgage Notes, the Mortgages and/or
the Servicing Rights by the Seller pursuant to this Agreement are not subject to
the bulk transfer or any similar statutory provisions in effect and applicable
to this transaction.
SECTION 3.2 REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
---------------------------------------------------
MORTGAGE LOANS. With respect to each Mortgage Loan, the Seller represents and
- --------------
warrants to the Purchaser that as of the Closing Date:
(a) The information set forth in the Mortgage Loan Schedule and in
each Mortgage File is complete, true and correct;
(b) All payments required under the terms of the Mortgage Note to
be made on or prior to the Closing Date have been made; the Seller has not
advanced funds, or induced, solicited or knowingly received any advance of funds
from a party other than the owner of the Mortgaged Property subject to the
Mortgage, directly or indirectly, for the payment of any amount required under
the Mortgage Loan; and there has been no delinquency of thirty (30) days or more
in any payment by the Mortgagor thereunder during the last twelve (12) months.
No Mortgage Loan is subject to any pending foreclosure, bankruptcy, insolvency,
or reorganization proceeding. Notwithstanding the foregoing, with respect to the
Mortgage Loans for which the Monthly Payment relating to the June 1, 1998 Due
Date has not been made, the Purchaser has nonetheless agreed to purchase such
Mortgage Loan, provided, however, that if such Monthly Payment is not made on or
prior to June 30, 1998, the Seller shall be deemed to have breached this
representation with respect to such Mortgage Loan and the Purchaser shall have,
without limitation, the repurchase rights set forth in Section 3.3. Nothing
-----------
contained in this Section 3.2(b) shall in any way limit any other rights of the
--------------
Purchaser as provided hereunder;
(c) There are no delinquent taxes, water charges, sewer rents,
assessments, insurance premiums, leasehold payments, including assessments
currently due and owing in future installments, or other outstanding charges
affecting the related Mortgaged Property;
(d) The terms of the Mortgage Note and the Mortgage have not been
impaired, waived, altered or modified in any respect, except by written
instruments which are in the Mortgage File and have been or will be recorded, if
necessary to protect the interests of the Purchaser, and which have been
delivered to the Purchaser, all in accordance with this Agreement. The
substance of any such waiver, alteration or modification has been approved by
the primary mortgage guaranty insurer, if any, and by the title insurer, to the
extent required by the related policy, and its terms are reflected on the
Mortgage Loan Schedule. No Mortgagor has been released, in whole or in part,
except in connection with an assumption agreement approved by the primary
mortgage insurer, if any, and title insurer, to the extent required by the
policy, and which assumption agreement is part of the Mortgage File and the
terms of which are reflected in the Mortgage Loan Schedule, if executed prior to
the Closing Date;
(e) The Mortgage Note and the Mortgage are 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 Mortgage Note and the
Mortgage, or the exercise of any right thereunder, render the Mortgage
unenforceable,
8
<PAGE>
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;
(f) All buildings upon, or comprising part of, the Mortgaged
Property are insured by an insurer acceptable to the Agencies against loss by
fire, hazards of extended coverage and such other hazards as are customary in
the area where the Mortgaged Property is located, and such insurer is licensed
to do business in the state where the Mortgaged Property is located. All such
insurance policies (collectively, the "hazard insurance policy") contain a
standard mortgagee clause naming the Seller, its successors and assigns as
mortgagee and all premiums thereon have been paid. If upon origination of the
Mortgage Loan, the Mortgaged Property was, or was subsequently deemed to be, in
an area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available), which require under applicable law that a flood insurance policy
meeting the requirements of the current guidelines of the Federal Insurance
Administration (or any successor thereto) be obtained, such flood insurance
policy is in effect which policy conforms to the requirements of the Agencies.
The Mortgage obligates the Mortgagor thereunder to maintain all such insurance
at Mortgagor's cost and expense and, on the Mortgagor's failure to do so,
authorizes the holder of the Mortgage to maintain such insurance at Mortgagor's
cost and expense and to obtain reimbursement therefor from the Mortgagor. Each
Mortgage Loan has in place a fully-paid life of loan flood certification from a
FNMA- or FHLMC-approved vendor, assigned in care of the Purchaser, which
provides for notification to the Purchaser of changes in designated flood areas
which would affect such Mortgage Loan;
(g) Any and all requirements of any federal, state or local law
including, without limitation, usury, truth in lending, real estate settlement
procedures including, without limitation, the Real Estate Settlement Procedures
Act of 1974, as amended, consumer credit protection, equal credit opportunity or
disclosure laws applicable to the Mortgage Loan have been complied with in all
material respects;
(h) The Mortgage has not been satisfied, canceled, subordinated, or
rescinded, in whole or in part, and the Mortgaged Property has not been released
from the lien of the Mortgage, in whole or in part, nor has any instrument been
executed that would effect any such release, cancellation, subordination or
rescission;
(i) The Mortgage is a valid, existing and enforceable first lien on
the Mortgaged Property, including all improvements on the Mortgaged Property, if
any, subject only to (a) the lien of current real property taxes and assessments
not yet due and payable, (b) covenants, conditions and restrictions, rights of
way, easements and other matters of the public record as of the date of
recording being acceptable to mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered to the
originator of the Mortgage Loan and which do not adversely affect the Appraised
Value (as defined in clause (i) of such definition) of the Mortgaged Property,
and (c) other matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be provided
by the Mortgage or the use, enjoyment, value or marketability of the related
Mortgaged Property. The Seller has full right to sell and assign the Mortgage
to the Purchaser;
(j) The Mortgage Note and the related Mortgage are genuine and each
is the legal, valid and binding obligation of the maker thereof, enforceable in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency or reorganization;
(k) All parties to the Mortgage Note and the Mortgage had the legal
capacity to enter into the Mortgage Loan transaction and to execute and deliver
the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage have
been duly and properly executed by such parties;
(l) The proceeds of the Mortgage Loan have been fully disbursed and
there is no requirement for future advances thereunder and any and all
requirements as to completion of any on-site or off-site improvement and as to
disbursements of any escrow funds therefor have been complied with. All costs,
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fees and expenses incurred in making or closing the Mortgage Loan and the
recording of the Mortgage were paid, and the Mortgagor is not entitled to any
refund of any amounts paid or due under the Mortgage Note or Mortgage;
(m) The Seller is the sole owner and holder of the Mortgage Loan
and the related Servicing Rights and is the custodian of the related Escrow
Account, if applicable. The Mortgage Loan has neither been assigned nor pledged,
and the Seller has good and marketable title thereto, and has full right to
transfer and sell the Mortgage Loan and the related Servicing Rights to the
Purchaser free and clear of any encumbrance, equity, lien, pledge, charge, claim
or security interest and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to sell and assign each
Mortgage Loan and the related Servicing Rights to the Purchaser pursuant to the
terms of this Agreement;
(n) All parties which have had any interest in the Mortgage,
whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period
in which they held and disposed of such interest, were) (a) in compliance with
any and all applicable licensing requirements of the laws of the state wherein
the Mortgaged Property is located, and (b) (i) organized under the laws of such
state, or (ii) qualified to do business in such state, or (iii) a federal
savings and loan association or national bank, or (iv) not deemed to be doing
business in such state under applicable law;
(o) The Mortgage Loan is covered by an ALTA lender's title
insurance policy acceptable to the Agencies, issued by a title insurer
acceptable to the Agencies and qualified to do business in the jurisdiction
where the Mortgaged Property is located, insuring (subject to the exceptions
contained in (i)(a) and (b) above) the Seller, its successors and assigns as to
the first priority lien of the Mortgage in the original principal amount of the
Mortgage Loan and against any loss by reason of the invalidity or
unenforceability of the lien resulting from the provisions of the Mortgage Note
and/or Mortgage providing for adjustment in the Mortgage Interest Rate and
Monthly Payment. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress, and against encroachments by or upon
the Mortgaged Property or any interest therein. The Seller is the sole insured
of such lender's title insurance policy, and such lender's title insurance
policy is in full force and effect and will be in full force and effect upon the
consummation of the transactions contemplated by this Agreement. No claims have
been made under such lender's title insurance policy, and no prior holder of the
related Mortgage, including the Seller, has done, by act or omission, anything
which would impair the coverage of such lender's title insurance policy;
(p) There is no default, breach, violation or event of acceleration
existing under the Mortgage or the Mortgage Note and no event which, with the
passage of time or with notice and the expiration of any grace or cure period,
would constitute a default, breach, violation or event of acceleration, and the
Seller has not waived any default, breach, violation or event of acceleration;
(q) There are no mechanics' or similar liens or claims which have
been filed for work, labor or material (and no rights are outstanding that under
law could give rise to such lien) affecting the related Mortgaged Property which
are or may be liens prior to or equal with, the lien of the related Mortgage;
(r) All improvements which were considered in determining the
Appraised Value (as defined in clause (i) of said definition) of the related
Mortgaged Property lay wholly within the boundaries and building restriction
lines of the Mortgaged Property, and no improvements on adjoining properties
encroach upon the Mortgaged Property;
(s) The Mortgage Loan was originated by the Seller or by a FNMA-
approved or FHLMC-approved mortgage banker (which mortgage banker is a mortgagee
approved by HUD), or 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 another mortgagee approved by the Secretary of
HUD;
(t) The origination, servicing and collection practices with
respect to each Mortgage Note and Mortgage including, without limitation, the
establishment, maintenance and servicing of the Escrow
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Accounts and Escrow Payments, if any, since origination, have been conducted in
all respects in accordance with the terms of Mortgage Note and in compliance
with all applicable laws and regulations and, unless otherwise required by law
or FNMA/FHLMC standard, in accordance with the proper, prudent and customary
practices in the mortgage origination and servicing business. With respect to
the Escrow Accounts and Escrow Payments, if any, all such payments are in the
possession or under the control of the Seller and there exists no deficiencies
in connection therewith for which customary arrangements for repayment thereof
have not been made. No escrow deposits or Escrow Payments or other charges or
payments due the Seller have been capitalized under any Mortgage or the related
Mortgage Note. All Mortgage Interest Rate adjustments have been made in strict
compliance with state and federal law and the terms of the related Mortgage
Note. Any interest required to be paid pursuant to state and local law has been
properly paid and credited;
(u) The Mortgaged Property is free of material damage and waste and
there is no proceeding pending for the total or partial condemnation thereof;
(v) The Mortgage contains customary and enforceable provisions to
render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the benefits of the security
intended to be provided thereby, including, (a) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (b) otherwise by judicial
foreclosure. There is no other exemption available to the Mortgagor which would
interfere with the right to sell the Mortgaged Property at a trustee's sale or
the right to foreclose the Mortgage. The Mortgagor has not notified the Seller
and the Seller has no knowledge of any relief requested or allowed to the
Mortgagor under the Soldiers and Sailors Civil Relief Act of 1940;
(w) The Mortgage Note is not and has not been secured by any
collateral except the lien of the applicable Mortgage;
(x) The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan application
by an appraiser who meets the minimum requisite qualifications of the Agencies
for appraisers, duly appointed by the originator, who had no interest, direct or
indirect. in the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or disapproval of the
Mortgage Loan; the appraisal is in a form acceptable to the Agencies, with such
riders as are acceptable to the Agencies;
(y) In the event the Mortgage constitutes a deed of trust, a
trustee, duly qualified under applicable law to serve as such, has been properly
designated and currently so serves and is named in the Mortgage, and no fees or
expenses are or will become payable by the Purchaser to the trustee under the
deed of trust, except in connection with a trustee's sale after default by the
Mortgagor;
(z) No Mortgage Loan contains a permanent or temporary "buydown"
provision;
(aa) The Mortgagor has executed one or more statements to the effect
that the Mortgagor has received all disclosure materials required by applicable
law with respect to the making of the Mortgage Loan. The Seller shall maintain
all such statements in the Mortgage File;
(bb) No Mortgage Loan was made in connection with (a) the
construction or rehabilitation of a Mortgaged Property or (b) facilitating the
trade-in or exchange of a Mortgaged Property;
(cc) [Intentionally left blank];
(dd) To the best of Seller's knowledge, the Mortgaged Property is
lawfully occupied under applicable law and 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, have been made or
obtained from the appropriate authorities;
(ee) [Intentionally left blank];
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(ff) The Assignment of Mortgage is in recordable form and is
acceptable for recording under the laws of the jurisdiction in which the
Mortgaged Property is located;
(gg) Any future advances made to the Mortgagor prior to the Closing
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. The lien of the Mortgage securing the
consolidated principal amount is expressly insured as having first lien priority
by a title insurance policy, an endorsement to the policy insuring the
mortgagee's consolidated interest or by other title evidence acceptable to the
Agencies. The consolidated principal amount does not exceed the original
principal amount of the Mortgage Loan;
(hh) If the Mortgaged Property is a condominium unit or a planned
unit development, such condominium or planned unit development project meets the
eligibility requirements of the Agencies;
(ii) The Mortgage Note and Mortgage are on forms acceptable to
either of the Agencies;
(jj) The Mortgaged Property is located in the state indicated on the
Mortgage Loan Schedule, and consists of a single parcel of real property with a
detached single family residence erected thereon, or an individual condominium
unit, or a 2-4 family dwelling or an individual unit in a planned unit
development as defined by FNMA, none of which is a mobile home or manufactured
dwelling;
(kk) There are no circumstances or conditions with respect to the
Mortgage, the Mortgage Property, the Mortgagor, the Mortgage File or the
Mortgagor's credit standing that can reasonably be expected to cause private
institutional investors to regard the Mortgage Loan as an unacceptable
investment, cause the Mortgage Loan to become delinquent, or adversely affect
the value or marketability of the Mortgage Loan;
(ll) The Mortgage contains an enforceable provision for the
acceleration of the payment of the unpaid principal. balance of the Mortgage
Loan in the event that the Mortgaged Property is sold or transferred without the
prior written consent of the mortgagee thereunder;
(mm) The Seller has no knowledge of any circumstances existing that
could reasonably be expected to adversely affect the value or the marketability
of any Mortgaged Property or Mortgage Loan or to cause the Mortgage Loans to
prepay during any period materially faster or slower than the mortgage loans of
similar characteristics originated by the Seller generally;
(nn) Each Mortgage Loan is covered by a valid and transferable tax
service contract with First American, or such other vendor as may be reasonably
acceptable to the Purchaser;
(oo) Each Mortgage Loan in Segments A, B and C is an adjustable rate
mortgage loan requiring monthly payments sufficient to amortize the original
principal balance over the original term set forth in the Mortgage Loan
Schedule. Each Mortgage Loan in Segments D, E and F is a fixed rate mortgage
loan requiring monthly payments sufficient to amortize the original principal
balance over the original term set forth in the Mortgage Loan Schedule,
provided, however, with respect to Segment E, the related Mortgage Note requires
that the Mortgage Loan be paid in full one hundred and eighty (180) months after
the Due Date of the first monthly payment. No Mortgage Loan has negatively
amortized nor shall any Mortgage Loan have any negative amortization after the
Closing Date. With respect to Segments A, B and C, the Mortgage Interest Rate
adjusts semi-annually in accordance with the related Mortgage Note, provided,
however, with respect to Segments B and C, the Mortgage Interest Rate shall be
fixed for an initial period of two (2) and three (3) years, respectively. On
each Interest Adjustment, Date, the Mortgage Interest Rate shall be adjusted to
equal the Index plus the Gross Margin (rounded up or down to the nearest
0.125%), subject to the Periodic Mortgage Interest Rate Cap and the Lifetime
Mortgage Interest Rate Cap as set forth in the respective Mortgage Note and the
Mortgage Loan Schedule. None of the Mortgage Loans contain a provision allowing
the Mortgagor to convert the Mortgage Note from an adjustable rate mortgage loan
to a fixed rate mortgage loan;
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(pp) Each Mortgage Loan at the time of origination was underwritten
in accordance with the credit underwriting guidelines of the Seller attached
hereto as Exhibit D and, to the extent not inconsistent therewith, generally
---------
accepted sub-prime credit underwriting guidelines;
(qq) As of the Closing Date, the Seller shall have received neither
actual nor constructive notice that either a Mortgage Loan will be paid in full
(whether by virtue of a demand statement or otherwise) or that any Mortgagor has
elected to convert the related Mortgage Loan into a fixed-rate mortgage loan in
accordance with the terms of the related Mortgage Note;
(rr) The Mortgage Note is not and has not been secured by any
collateral except the lien of corresponding Mortgage on the Mortgaged Property;
(ss) No Mortgage Loan contains provisions pursuant to which Monthly
Payments are (a) paid or partially paid with funds deposited in any separate
account established by the Seller, the Mortgagor, or anyone on behalf of the
Mortgagor or (b) paid by any source other than the Mortgagor or contains any
other similar provisions which may constitute a "buydown' provision. The
Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan
does not have a shared appreciation or other contingent interest feature; and
(tt) No error, omission, misrepresentation, negligence, fraud or
similar occurrence with respect to a Mortgage Loan has taken place on the part
of the Seller, or, to the best of Seller's knowledge, on the part of any other
person including without limitation the Mortgagor, any appraiser, any builder or
developer, or any other party involved in the origination of the Mortgage Loan
or in the application of any insurance in relation to such Mortgage Loan.
SECTION 3.3 REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
-----------------------------------------------------
The representations and warranties set forth in Sections.3.1 and 3.2 shall
--------------------
survive the sale of the Mortgage Loans to the Purchaser and shall inure to the
benefit of the Purchaser, notwithstanding any restrictive or qualified
endorsement on any Mortgage Note or Assignment of Mortgage or the examination or
failure to examine any Mortgage File. Furthermore, the absence of the Seller in
either the chain of title or endorsement shall in no way limit the Purchaser's
recourse against the Seller as provided in this Section 3.3 for a breach of one
-----------
or more of the Seller's representations and warranties made herein. Upon
discovery by either the Seller or the Purchaser of a breach of any of the
foregoing representations and warranties which materially and adversely affects
the value of one or more of the Mortgage Loans or the Purchaser's interest
therein, the party discovering such breach shall give prompt written notice to
the other. Without in any way limiting the generality of the foregoing, if the
first payment due to the Purchaser under the Mortgage Note is not received by
the Purchaser, whether from the Mortgagor directly or forwarded by the Seller if
the Mortgagor has submitted the payment to the Seller, by the last day of the
month in which it is due, the Seller shall, at the Purchaser's option and not
later than five (5) Business Days after receipt of notice of such breach from
the Purchaser, repurchase such Mortgage Loan at the Repurchase Price.
The Seller shall have a period of sixty (60) days from the earlier of
the discovery of a breach or the receipt by the Purchaser of notice of a breach
within which to correct or cure such breach. If any such breach cannot be
corrected or cured within such sixty (60) day period, the Seller shall, at the
Purchaser's option and not later than sixty (60) days after its discovery or its
receipt of notice of such breach, repurchase such Mortgage Loan at the
Repurchase Price. In the event that a breach shall involve any representation
or warranty set forth in Section 3.1 and such breach cannot be cured within
-----------
sixty (60) days of the earlier of either discovery by or notice to the Seller of
such breach, all of the Mortgage Loans shall, at the Purchaser's option, be
repurchased by the Seller at the Repurchase Price. Any repurchase of a Mortgage
Loan(s) pursuant to the foregoing provisions of this Section 3.3 shall be
-----------
accomplished by wire transfer of immediately available funds on the repurchase
date to an account designated by the Purchaser.
At the time of repurchase, the Purchaser and the Seller shall arrange
for the reassignment of the repurchased Mortgage Loan to the Seller and the
delivery to the Seller of any documents held by the
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<PAGE>
Purchaser or its custodian relating to such Mortgage Loan. The Seller shall,
simultaneously with such reassignment, give written notice to the Purchaser that
such repurchase has taken place.
Any cause of action against the Seller relating to or arising out of
the breach of any representations and warranties made in Sections 3.1 or 3.2
-------------------
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with the
relevant provisions of this Agreement.
SECTION 3.4 INDEMNIFICATION OF THE PURCHASER. In addition to the
--------------------------------
repurchase obligations set forth in Section 3.3, the Seller shall indemnify the
-----------
Purchaser and hold it harmless against any losses, damages, penalties, fines,
forfeitures, judgments and any related costs including, without limitation,
reasonable and necessary legal fees, resulting from any claim, demand, defense
or a material omission on the part of the Seller in receiving, processing,
funding or servicing any Mortgage Loan, or from any assertion based on, grounded
upon or resulting from a breach of any of the Seller's representations and
warranties contained in this Article III. In addition to the obligations of the
-----------
Seller set forth in this Article III, the Purchaser may pursue any and all
-----------
remedies otherwise available at law or in equity, including, but not limited to,
the right to seek damages. Notwithstanding the foregoing, Seller shall not be
liable for any special, consequential or punitive damages.
SECTION 3.5 PREPAYMENT AND CONVERSION PROTECTION. In the event that
------------------------------------
any of the Mortgage Loans are (i) paid in full by the related Mortgagor or (ii)
converted to a fixed-rate mortgage loan, in either case, on or prior to the
Servicing Transfer Date, or (iii) subject to a breach of the representation set
forth in Section 3.2(qq), the Seller shall, with respect to each such Mortgage
---------------
Loan, pay to the Purchaser, in addition to the unpaid principal balance plus
accrued interest at the time of such payoff or conversion, the product of (a)
the positive difference, if any, between the Purchase Price Percentage (subject
to any buyup or buydown adjustments as contemplated in the Commitment Letter)
and 100%, times (b) the unpaid principal balance of such Mortgage Loan at the
time such Mortgage Loan is paid in full or converted, as applicable. In
addition, and without limiting the generality of the foregoing, with respect to
any Mortgage Loan which is paid in full by the related Mortgagor within thirty-
six (36) months of its date of origination, and which, at the time of such
payoff, (i) has an unpaid principal balance of three hundred thousand dollars
and no cents ($300,000.00) or greater, and (ii) has no prepayment penalties, the
Seller shall, with respect to each such Mortgage Loan, pay to the Purchaser, in
addition to the unpaid principal balance plus accrued interest at the time of
such payoff, the product of (a) the positive difference, if any, between the
Purchase Price Percentage (subject to any buyup or buydown adjustments as
contemplated in the Commitment Letter) and 100%, times (b) the unpaid principal
balance of such Mortgage Loan at the time such Mortgage Loan is paid in full,
provided, however, that such premium recapture shall be amortized on a straight-
line basis over a thirty-six (36) month period from the Closing Date. The
Purchaser shall not be entitled to recover any premium paid for any Mortgage
Loan pursuant to this Section 3.5 if the Purchaser refinances such Mortgage
-----------
Loan.
ARTICLE IV
INTERIM SERVICING OF THE MORTGAGE LOANS
---------------------------------------
SECTION 4.1 GENERAL. The Mortgage Loans will be purchased by the
-------
Purchaser and sold by the Seller on a servicing-released basis and the purchase
of the Mortgage Loans by the Purchaser shall, for all purposes, include all
Servicing Rights relating thereto. From the Closing Date to the Servicing
Transfer Date, the Seller shall interim service the Mortgage Loans in strict
accordance with the terms of this Agreement and, to the extent not inconsistent
herewith, the servicing standards of the Agencies. Without limiting the
generality of the foregoing, the Seller shall not take, or fail to take, any
action which would result in the Purchaser's interest in the Mortgage Loans
being adversely affected. It is expressly understood by the Seller that, during
the Interim Servicing Period, the Purchaser intends to market the Mortgage Loans
for sale to a whole loan investor and, as such, the Seller agrees to comply with
all reasonable requests of the Purchaser
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<PAGE>
made prior to the Servicing Transfer Date in order to effectuate the foregoing
including, without limitation, any request for information or documentation in
connection with any Mortgage Loan which the Purchaser deems is necessary to
carry out the foregoing. With respect to each Mortgage Loan for which an Escrow
Account has been established for the payment of taxes, insurance and other
similar payments, the Seller shall, upon notice from the Purchaser, effect the
termination of such Escrow Account on or prior to the Servicing Transfer Date,
and refund any positive balance therein to the related Mortgagor(s).
SECTION 4.2 REPORTING AND REMITTANCE. Within five (5) Business Days
------------------------
following the conclusion of each calendar month reporting and remittance cycle
occurring during the Interim Servicing Period (each, a "Reporting Cycle"), if
any, the Seller shall forward to the Purchaser with respect to the Mortgage
Loans a full set of tapes or other computer or like records and a trial balance
as of the end of each such Reporting Cycle, which tapes or computer records and
trial balance shall include information relating to all payment and other
activity on the Mortgage Loans. With respect to any payments of principal or
interest (including all prepayments) received, or applied to any Mortgagor's
account, by the Seller during the Interim Servicing Period (or prior to the
Closing Date, if any such payments were not reflected in the calculation of the
Purchaser Proceeds), the Seller shall remit to the Purchaser all such payments
of principal and interest on the Mortgage Loans no later than the fifth (5/th/)
day of the month following the conclusion of each Reporting Cycle and, with
respect to the month in which the Servicing Transfer Date occurs, no later than
the fifth (5/th/) Business Day thereafter.
ARTICLE V
TRANSFER OF SERVICING RIGHTS
----------------------------
SECTION 5.1 TRANSFER OF SERVICING. The Seller agrees to act
---------------------
reasonably, in good faith and in accordance with all applicable laws and
regulations and to do all things necessary to effect the transfer of the
Servicing Rights to the Purchaser on the Servicing Transfer Date including,
without limitation, complying with all reasonable instructions provided by the
Purchaser relating to the transfer of the Servicing Rights.
SECTION 5.2 OBLIGATIONS OF THE SELLER PRIOR TO THE SERVICING TRANSFER
---------------------------------------------------------
DATE. Without limiting the generality of Section 5.1, the Seller shall take, or
- ---- -----------
cause to be taken, the following actions with respect to the Mortgage Loans
prior to the Servicing Transfer Date (or within such time as may otherwise be
specified below) in order to effect the transfer of the Servicing Rights to the
Purchaser on the Servicing Transfer Date:
(a) Preliminary Test Tape. On or prior to the Closing Date, the
---------------------
Seller shall forward to the Purchaser a preliminary test tape or other computer
or like records (including master file, escrow file, payee file, ARM master
file, ARM history, all HMDA data required by the Agencies, etc.) containing all
of the Mortgage Loans as of a date mutually agreed upon by the Seller and the
Purchaser. The preliminary test tape or computer records shall include all
field descriptions and record layouts;
(b) Notice to Hazard Insurers. The Seller shall inform by written
-------------------------
notice all hazard insurance companies and/or their agents of the transfer and
request a change in the loss payee mortgage endorsement clause to the
Purchaser's name. The Seller shall provide the Purchaser with a form of the
notification letter and an officer's certification that all hazard insurance
companies have been notified by an identical letter;
(c) Notice to Mortgage Insurance Companies. The Seller shall
--------------------------------------
inform by written notice all mortgage insurance companies providing any Primary
Mortgage Insurance Policy of the change in insured's name on each such policy to
the Purchaser's name. The Seller shall provide the Purchaser with a form of the
notification letter and an officer's written certification that all such
mortgage insurance companies have been notified by an identical letter;
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<PAGE>
(d) Tax Service Contracts. The Seller shall have obtained a life of
---------------------
loan, transferable real estate tax service contract with a tax service company
reasonably acceptable to the Purchaser on all of the Mortgage Loans and shall
assign all such contracts to the Purchaser or, in the alternative, the Seller
--
shall notify the Purchaser as to any Mortgage Loans for which it has not
procured the requisite contract and shall pay to the Purchaser a fee of twenty-
five dollars ($25.00) for each such Mortgage Loan;
(e) Flood Certifications. The Seller shall have obtained a life of
--------------------
loan, transferable flood certification contract for each Mortgage Loan and shall
assign all such contracts to the Purchaser or, in the alternative, the Seller
--
shall notify the Purchaser as to any Mortgage Loans for which it has not
procured the flood certification referenced above and shall pay to the Purchaser
a fee of fifteen dollars ($15.00) for each such Mortgage Loan;
(f) Notice to Mortgagors. The Seller shall, no later than fifteen
--------------------
(15) days prior to the Servicing Transfer Date, inform in writing all Mortgagors
of the change in servicer from the Seller to the Purchaser, all in accordance
with applicable law. The Seller shall obtain the Purchaser's approval of the
form of such notifications prior to their mailing. The Seller acknowledges that
the Purchaser's review of this notice shall not be a review for statutory or
regulatory compliance purposes, and that the Seller shall have the sole
responsibility for such compliance. The Seller shall provide the Purchaser with
a form of the notification letter and an officer's written certification that
all Mortgagors have been notified by an identical letter;
(g) Payment of Real Estate Taxes. The Seller shall make or cause to
----------------------------
be made all payments of all real estate taxes on the Mortgage Loans which (i)
will be delinquent on or prior to the Servicing Transfer Date, (ii) are required
to be paid within thirty (30) days after the Closing Date to receive a discount,
or (iii) will be delinquent within thirty (30) days after the Closing Date. If
tax bills have not been received by the Seller by the Servicing Transfer Date on
any Mortgage Loans subject to this subsection, the Seller shall obtain and pay
all tax bills subsequent to the Servicing Transfer Date and the Purchaser will
promptly reimburse the Seller upon receipt from the Seller of documentation
evidencing such payment. On non-impounded accounts, the Seller shall ensure that
all taxes which would otherwise be delinquent by the Servicing Transfer Date, if
not paid by such date, have been paid. With respect to each of the Mortgage
Loans which do not have an impound or escrow account maintained for the payment
of taxes and insurance, the Seller shall hold harmless and indemnify the
Purchaser against any and all costs, expenses, penalties, fines, damages and
judgments of whatever kind arising from the Seller's failure to pay, or cause to
be paid, any delinquent taxes or tax penalties outstanding as of the Servicing
Transfer Date;
(h) Payment of Insurance Premiums. The Seller shall pay all hazard
-----------------------------
and flood insurance and Primary Mortgage Insurance Policy premiums required to
be paid prior to the Servicing Transfer Date or within thirty (30) days after
the Closing Date on all impounded accounts relating to the Mortgage Loans and
shall ensure that all premiums required to be paid prior to the Servicing
Transfer Date by the Mortgagors on non-impounded accounts have been paid. With
respect to each of the Mortgage Loans which do not have an impound or escrow
account maintained for the payment of taxes and insurance, the Seller shall hold
harmless and indemnify the Purchaser against any and all costs, expenses,
penalties, fines, damages and judgments of whatever kind arising from the
Seller's failure to ensure that the related Mortgagor is maintaining adequate
insurance coverage on the Mortgaged Property at all times prior to the Servicing
Transfer Date in accordance with the terms of the any document contained in the
Mortgage File or any applicable law or regulation including, without limitation,
adequate flood insurance coverage for all Mortgaged Properties located within an
"A" or 'V" flood hazard area; and
(i) ARM Adjustments. With respect to each adjustable rate Mortgage
---------------
Loan whose index value for any Interest Adjustment Date is available on or prior
to the Servicing Transfer Date, the Seller shall make all such adjustments and
shall inform the related Mortgagors of such adjustments.
SECTION 5.3 OBLIGATIONS OF THE SELLER AFTER THE SERVICING TRANSFER
------------------------------------------------------
DATE. Without limiting the generality of Section 5.1, the Seller shall take, or
- ---- -----------
cause to be taken, the following actions with
16
<PAGE>
respect to the Mortgage Loans within three (3) Business Days following the
Servicing Transfer Date (or within such time as may otherwise be specified
below):
(a) Tape. The Seller shall furnish to the Purchaser all available
----
computer or like records requested by the Purchaser reflecting the status of
payments, balances and other pertinent information with respect to the Mortgage
Loans as of the Servicing Transfer Date (including, without limitation, (i)
master file, (ii) escrow file, (iii) payee file, which includes comprehensive
tax and insurance information identifying payee, payee address, next payment due
date, next amount payable and policy number/parcel number, and (iv) ARM master
file). Such records shall include magnetic tapes reflecting all computer files
maintained on the Mortgage Loans and shall include hard copy trial balance
reports as specifically requested by the Purchaser;
(b) Mortgage File. If the Seller has not already done so, the
-------------
Seller shall have forwarded a complete Mortgage File with respect to each
Mortgage Loan;
(c) Accounting Reports. The Seller shall furnish to the Purchaser
------------------
copies of all accounting reports relating to the Mortgage Loans as of the
Servicing Transfer Date including, without limitation, a trial balance and
reports of collections, delinquencies, prepaids, curtailments, escrow payments,
escrow balances, partial payments, partial payment balances and other like
information with respect to the Mortgage Loans;
(d) Other Documentation. The Seller shall provide the Purchaser any
-------------------
and all further documents reasonably required by the Purchaser in order to fully
transfer to the Purchaser possession of all tangible evidence of the Servicing
Rights and escrow, impound and trust funds transferred hereunder;
(e) Transfer of Escrow Funds and Other Proceeds. The Seller shall
-------------------------------------------
transfer to the Purchaser, by wire transfer to the account designated by the
Purchaser, an amount equal to the sum of (i) the Net Escrow Payments, (ii) all
undistributed insurance loss draft funds, (iii) all unapplied funds received by
the Seller, (iv) all unapplied interest on escrow balances accrued through the
Servicing Transfer Date, (v) all buydown funds held by the Seller as of the
Servicing Transfer Date, and (vi) all other amounts held by the Seller with
respect to the Mortgage Loans as of the Servicing Transfer Date for which the
Seller is not entitled to retain (collectively, the "Escrow Proceeds"). Within
five (5) Business Days following the Purchaser's receipt of the Escrow Proceeds,
the Seller and the Purchaser shall resolve any discrepancies between the
Seller's accounting statement and the Purchaser's reconciliation with respect
thereto. No later than ten (10) Business Days following the Servicing Transfer
Date, the Seller or the Purchaser, as the case may be, shall transfer to the
other, by wire transfer to the designated account, any amounts to which the
other party is entitled; and
(f) Mortgage Payments Received after Servicing Transfer Date. The
--------------------------------------------------------
Seller shall promptly forward to the Purchaser any payment received by it after
the Servicing Transfer Date with respect to any of the Mortgage Loans, whether
such payment is in the form of principal, interest, taxes, insurance, loss
drafts, insurance refunds, etc., in the original form received, unless such
payment has been received in cash or by the Seller's lock box facility, in which
case the Seller shall forward such payment in a form acceptable to the
Purchaser. The Seller shall notify the Purchaser of the particulars of the
payment, which notification shall set forth sufficient information to permit
timely and appropriate processing of the payment by the Purchaser.
ARTICLE VI
MISCELLANEOUS
-------------
SECTION 6.1 NOTICES. All demands, notices and communications
-------
required to be provided hereunder shall be in writing and shall be deemed to
have been duly given if mailed, by registered or certified mail, postage
prepaid, and return receipt requested, or, if by other means, when received by
the other party at the address as follows:
(i) if to the Seller:
17
<PAGE>
United PanAm Mortgage
625 The City Drive
Orange, CA 92868
Attn: Mr. Blair Kenny
(ii) if to the Purchaser:
As provided by Purchaser in writing.
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 6.2 INTENTION OF THE PARTIES. Pursuant to this Agreement,
------------------------
the Purchaser is purchasing, and the Seller is selling the Mortgage Loans and
not a debt instrument of the Seller or any other security. Accordingly, the
Seller and the Purchaser shall each treat the transaction for federal income tax
purposes as a sale by the Seller, and a purchase by the Purchaser, of the
Mortgage Loans and the Servicing Rights. The Purchaser shall have the right to
review the Mortgage Loans and the related Mortgage Loan Files to determine the
characteristics of the Mortgage Loans which shall affect the federal income tax
consequences of owning the Mortgage Loans and the Servicing Rights and the
Seller shall cooperate with all reasonable requests made by the Purchaser in the
course of such review.
SECTION 6.3 EXHIBITS. The exhibits to this Agreement are hereby
--------
incorporated and made a part hereof and are an integral part of this Agreement.
SECTION 6.4 GENERAL INTERPRETIVE PRINCIPLES. For purposes of this
-------------------------------
Agreement, except as otherwise expressly provided or unless the context
otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned
to them in this Agreement and include the plural as well as the singular, and
the use of any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Sections," "Subsections," "Paragraphs,"
and other Subdivisions without reference to a document are to designated
Sections, Subsections, Paragraphs and other subdivisions of this Agreement;
(d) reference to a Subsection without further reference to a
Section is a reference to such Subsection as contained in the same Section in
which the reference appears, and this rule shall also apply to Paragraphs and
other subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
provision; and
(f) the term "include" or "including" shall mean without limitation
by reason of enumeration.
SECTION 6.5 REPRODUCTION OF DOCUMENTS. This Agreement and all
-------------------------
documents relating thereto, including, without limitation, (a) consents, waivers
and modifications which may hereafter be executed, (b) documents received by any
party at the closing, and (c) financial statements, certificates and other
information previously or hereafter furnished, may be reproduced by any
photographic, photostatic, microfilm,
18
<PAGE>
micro-card, miniature photographic or other similar process. The parties agree
that any such reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding, whether or not the original
is in existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
SECTION 6.6 FURTHER AGREEMENTS. The Seller shall execute and deliver
------------------
to the Purchaser and the Purchaser shall execute and deliver to the Seller such
reasonable and appropriate additional documents, instruments or agreements as
may be necessary or appropriate to effectuate the purposes of this Agreement.
SECTION 6.7 EXECUTION OF AGREEMENT. This Agreement may be executed
----------------------
simultaneously in any number of counterparts. Each counterpart shall be deemed
to be an original, and all such counterparts shall constitute one and the same
instrument. This Agreement shall be deemed binding when executed by both the
Purchaser and the Seller. Telecopy signatures shall be deemed valid and binding
to the same extent as the original.
SECTION 6.8 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
----------------------
inure to the benefit of and be enforceable by the Seller and the Purchaser and
the respective permitted successors and assigns of the Seller and the successors
and assigns of the Purchaser. This Agreement shall not be assigned, pledged or
hypothecated by the Seller without the consent of the Purchaser. This Agreement
may be assigned, pledged or hypothecated or otherwise transferred or encumbered
by the Purchaser, in whole or part, without the consent of the Seller. If the
Purchaser assigns all of its rights as the Purchaser hereunder relating to some
or all of the Mortgage Loans, the assignee of the Purchaser, upon notification
to the Seller, will become the "Purchaser" hereunder with respect to such
Mortgage Loans assigned hereby.
SECTION 6.9 SEVERABILITY CLAUSE. Any part, provision, representation
-------------------
or warranty of this Agreement which is prohibited or which is held to be void or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceablity without invalidating the remaining provisions hereof. Any part,
provision, representation or warranty of this Agreement which is prohibited or
unenforceable or is held to be void or unenforceable in any relevant
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof.
SECTION 6.10 COSTS. The Purchaser shall pay any commissions due its
-----
salesmen and the legal fees and expenses of its attorneys and expenses of its
custodian. All other costs and expenses incurred in connection with the
transfer and delivery of the Mortgage Loans, including recording fees, fees for
title policy endorsements and continuations and the Seller's attorney's fees,
shall be paid by the Seller.
SECTION 6.11 ATTORNEYS' FEES. If any claim, legal action or any
---------------
arbitration or other proceeding is brought for the enforcement of this Agreement
or because of a dispute, breach, default or misrepresentation in connection with
any of the provisions of this Agreement, the successful or prevailing party
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that claim, action or proceeding, in addition to any other relief to which
such party may be entitled.
SECTION 6.12 GOVERNING LAW. This Agreement shall be governed by and
-------------
interpreted in accordance with the laws of the State of California applicable to
agreements entered into and wholly performed within said jurisdiction.
SECTION 6.13 SURVIVAL. All covenants, agreements, representations
--------
and warranties made herein shall survive the execution and delivery of this
Agreement.
19
<PAGE>
SECTION 6.14 ENTIRE AGREEMENT. This Agreement constitutes the entire
----------------
understanding between the parties hereto and supersedes any and all prior or
contemporaneous oral or written communications with respect to the subject
matter hereof, all of which communications are merged herein, except for the
Commitment Letter which shall remain in full force and effect, but only to the
extent not inconsistent herewith. It is expressly understood and agreed that no
employee, agent or other representative of the Seller or the Purchaser has any
authority to bind such party with regard to any statement, representation,
warranty or other expression unless said statement, representation, warranty or
other expression is specifically included within the express terms of this
Agreement or the Commitment Letter. This Agreement shall not, be modified,
amended or in any way altered except by an instrument in writing signed by both
the parties hereto.
SECTION 6.15 CONFIDENTIALITY. The Seller and the Purchaser hereby
---------------
acknowledge and agree that this Agreement shall be kept confidential and its
contents will not be divulged to any party without the other party's consent
except to the extent that it is appropriate for the Seller or the Purchaser to
do so in working with legal counsel, auditors, taxing authorities or other
governmental agencies.
SECTION 6.16 NO SOLICITATION. From and after the Closing Date, the
---------------
Seller agrees that for a period of five (5) years, it will not take any action
or cause any action to be taken by any of its employees, agents or affiliates,
or by any independent contractors acting on the Seller's behalf, to solicit in
any manner whatsoever any Mortgagor to prepay or refinance a Mortgage Loan. It
is understood and agreed by the Seller and the Purchaser that all rights and
benefits relating to the solicitation of any Mortgagors to refinance any
Mortgage Loans shall be transferred to the Purchaser pursuant hereto on the
Closing Date and the Seller shall take no action to undermine these rights and
benefits. The Seller shall use its best efforts to prevent the sale of the name
of any Mortgagor to any person or entity. It is understood that promotions
undertaken by the Seller or Seller's affiliate(s) which are directed to the
general public at large (i.e., newspaper advertisements, radio or T.V. ads,
etc.) and not specifically directed to any Mortgagor or any borrower identified
in any Mortgage Loan shall not constitute a breach of the obligations set forth
in this Section 6.16.
SECTION 6.17 NON-CIRCUMVENTION. The Seller and the Purchaser
-----------------
understand and agree that the Purchaser may introduce prospective buyers of the
Mortgage Loans to the Seller, that such buyers are customers of the Purchaser
and that relationships of the Purchaser to such buyers are confidential. The
Seller agrees with respect to a particular buyer of the Mortgage Loans, the
Seller will not, for the purpose of buying and selling other mortgage loans
communicate with or sell such other mortgage loans to such buyer unless such
buyer is or has been independently introduced to the Seller or the Seller has
had previous dealings (other than any transactions involving the Purchaser) with
such buyer.
[SIGNATURE PAGE FOLLOWS]
20
<PAGE>
IN WITNESS WHEREOF, the Seller and the Purchaser have caused their
names to be signed hereto by their respective officers thereunto duly authorized
as the date first above written.
COUNTRYWIDE HOME LOANS, INC.,
as Purchaser,
By: /s/ MICHAEL W. SCHLOESSMANN
______________________________________
Michael W. Schloessmann
Vice President
PAN AMERICAN BANK, FSB
as Seller
By: /s/ BLAIR F. KENNY
____________________________________
Name:
Title:
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 5,975,000 15,026,000
<INT-BEARING-DEPOSITS> 42,430,000 4,000,000
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 8,230,000
<INVESTMENTS-HELD-FOR-SALE> 0 1,002,000
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 342,448,000 268,537,000
<ALLOWANCE> 8,357,000 6,487,000
<TOTAL-ASSETS> 411,798,000 310,842,000
<DEPOSITS> 300,334,000 233,194,000
<SHORT-TERM> 0 34,237,000
<LIABILITIES-OTHER> 18,469,000 17,472,000
<LONG-TERM> 10,930,000 12,930,000
0 0
0 0
<COMMON> 173,000 110,000
<OTHER-SE> 81,892,000 12,899,000
<TOTAL-LIABILITIES-AND-EQUITY> 411,798,000 310,842,000
<INTEREST-LOAN> 21,169,000 25,872,000
<INTEREST-INVEST> 466,000 639,000
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 21,635,000 26,511,000
<INTEREST-DEPOSIT> 7,123,000 10,095,000
<INTEREST-EXPENSE> 9,474,000 12,411,000
<INTEREST-INCOME-NET> 12,161,000 14,100,000
<LOAN-LOSSES> 1,123,000 507,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 3,310,000 946,000
<INCOME-PRETAX> 9,905,000 10,739,000
<INCOME-PRE-EXTRAORDINARY> 9,905,000 10,739,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,666,000 6,248,000
<EPS-PRIMARY> 0.43 0.58
<EPS-DILUTED> 0.40 0.53
<YIELD-ACTUAL> 12.15 11.41
<LOANS-NON> 9,345,000 6,633,000
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 6,487,000 5,356,000
<CHARGE-OFFS> 1,829,000 2,474,000
<RECOVERIES> 709,000 1,145,000
<ALLOWANCE-CLOSE> 8,357,000 6,487,000
<ALLOWANCE-DOMESTIC> 8,357,000 6,487,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,321,000 593,000
</TABLE>
