<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant was approximately $10,200,000, based upon the closing sales price of
the Common Stock as reported on the Nasdaq National Market on March 17, 1999.
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. Such determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock as of March
17, 1999 was 16,843,750 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the 1999 Annual Meeting of Shareholders to be held April 27, 1999 are
incorporated by reference in PART III hereof. Such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
December 31, 1998.
<PAGE>
UNITED PANAM FINANCIAL CORP.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
Item 1. Business 1
General 1
Recent Events 1
Mortgage Finance 2
Insurance Premium Finance 12
Automobile Finance 18
Pan American Bank, FSB 23
Industry Segments 24
Competition 24
Employees 24
Supervision and Regulation 24
Taxation 34
Subsidiaries 35
Factors That May Affect Future Results of Operations 35
Item 2. Properties 39
Item 3. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security Holders 40
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters 40
Item 6. Selected Financial Data 41
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 67
Item 8. Financial Statements 67
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 67
PART III
Item 10. Directors and Executive Officers of the Registrant 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and Management 68
Item 13. Certain Relationships and Related Transactions 68
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 68
SIGNATURES 77
</TABLE>
<PAGE>
PART I
Certain statements in this Annual Report on Form 10-K, including statements
regarding United PanAm Financial Corp.'s (the "Company") 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; risks relating to the Year 2000; and other
risks identified from time to time in the Company's filings with the Securities
and Exchange Commission (the "SEC"). See "Item 1. Business Factors That May
Affect Future Results of Operations."
Item 1. BUSINESS
GENERAL
The Company was incorporated in California on April 19, 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
("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 and is a wholly-owned subsidiary of UPFC.
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 has
funded its operations to date principally through retail and wholesale deposits,
Federal Home Loan Bank ("FHLB") advances, warehouse lines of credit, and whole
loan sales or securitizations.
The Company commenced operations in 1994, as a Hispanic-controlled
financial institution, by purchasing from the RTC certain assets and assuming
certain liabilities of the Bank's predecessor, Pan American Federal Savings
Bank. The Company has used the Bank as a base for expansion into its current
specialty finance businesses. In 1995, the Company commenced its insurance
premium finance business through a joint venture with BPN Corporation ("BPN").
In 1996, the Company commenced its current mortgage and automobile finance
businesses.
RECENT EVENTS
During November 1998, the Company and BPN, purchased from Norwest Financial
Coast, Inc. ("Coast") for $3.0 million the right to solicit new and renewal
personal and commercial insurance premium finance business from brokers who
previously provided contracts to Coast. The purchase price for the
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agreement was provided 60% by the Company and 40% by BPN. The Company also
acquired the "Coast" name, and certain furniture, equipment and software.
In March 1999, United PanAm Mortgage Corporation completed its second
securitization of approximately $225 million in mortgage loans.
MORTGAGE FINANCE
The Company originates and sells or securitizes subprime mortgage loans
secured primarily by first mortgages on single family residences through United
PanAm Mortgage, a division of the Bank (such business, together with the Bank's
mortgage finance activities are referred to as "UPAM"). UPAM's mortgage
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. UPAM's customers use the proceeds of the mortgage loans
primarily to finance home purchases and improvements, debt consolidation,
education and other consumer needs, and may benefit from consolidating existing
consumer debt through mortgage loans with lower monthly payments.
UPAM's strategy utilizes a balanced retail and wholesale origination
approach. The retail division originates loans through the direct solicitation
of borrowers by mail and telemarketing and accounted for $382.4 million, or 32%,
of UPAM's total loan production during 1998. The wholesale division originates
loans through independent loan brokers and accounted for $807.4 million, or 68%,
of UPAM's total loan production during the same period.
During 1998, UPAM sold its loans with servicing released to other mortgage
companies and investors through whole loan packages offered for bid several
times per month. During 1998, UPAM sold $1.1 billion of loans through whole
loan sales at a weighted average sales price equal to 104.9% of the original
principal balance of the loans sold. UPAM completed its first securitization of
$114.9 million in mortgage loans in December 1997 at a net gain on sale of 5.2%
of the principal amount of loans securitized. In March 1998, the Company sold
its residual interests in this securitization for cash in the amount of $8.3
million which exceeded its carrying value of approximately $8.2 million at the
date of sale. UPAM completed its second securitization of $225 million in
mortgage loans in March 1999.
SUBPRIME MORTGAGE INDUSTRY
The residential mortgage market can be separated into two major segments:
"prime" and "subprime." Prime borrowers comprise greater than 80% of the
market and have credit quality and documentation that satisfy the requirements
of the Government National Mortgage Association ("GNMA"), Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC").
Historically, the subprime mortgage loan market has been a highly
fragmented niche market dominated by local brokers with direct ties to investors
who owned and serviced this relatively higher margin, riskier product. In recent
years, subprime loan origination volume has increased significantly due to
additional loan products, aggressive marketing to consumers leading to more
awareness of subprime loan products, the tremendous growth in the asset-backed
securities ("ABS") market and additional market capacity provided by large well-
capitalized financial institutions that have entered the subprime market
recently.
As a result of disruptions in the capital markets and the international
flight to quality in the ABS market during the fourth quarter of 1998, spreads
on such securities widened considerably causing significant reductions in prices
in the securitization and whole loan sale market. Because UPAM has historically
sold substantially all of its loans in the whole loan sale market, this
reduction in pricing significantly impacted the Company's reported gains on
sales of loans. During the first three quarters of 1998, average sales of loans
were at prices in excess of 105% of the unpaid principal balance of the loan.
This compares with average
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prices in the fourth quarter of 1998 of 102.8% of the unpaid principal balance
of the loan, a decline of over 40%. Mitigating some of the impact of this price
erosion was continued strong consumer demand enabling UPAM to tighten
underwriting standards, reduce loan to value ratios ("LTV"), increase note rates
and fees, and increase prepayment penalties.
BUSINESS STRATEGY
UPAM's strategic objective is to continue to develop its national subprime
residential mortgage business. In order to achieve this objective, UPAM intends
to (i) continue to originate subprime mortgage loans through a balanced retail
and wholesale network, (ii) originate high quality profitable loans to ensure
best pricing in the secondary market, and (iii) continue to develop a lower
cost operating structure. The Company believes that the subprime residential
mortgage market is highly fragmented and that success in this market depends
primarily on the ability to provide superior customer service, and competitive
pricing in a low cost environment. UPAM seeks to (i) locate experienced loan
officers in geographic proximity to large population centers, (ii) issue
conditional loan approvals promptly, generally within 24 hours after receipt of
an application, (iii) avoid imposing unnecessarily restrictive conditions on
loan approvals, (iv) fund loans on a timely basis, generally within 15 to 20
days following conditional approval, and in accordance with approved terms, and
(v) competitively price loans according to risk and market conditions.
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OPERATING SUMMARY
The following table presents a summary of UPAM's key operating results and
statistics on a quarterly basis for 1998.
<TABLE>
<CAPTION>
For the Quarter Ended
--------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------------- --------------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
LOAN ORIGINATION STATISTICS
Loans originated $263,790 $335,026 $358,567 $232,358
Number of loans originated 2,707 3,401 3,597 2,229
Average principal balance per loan $ 97 $ 99 $ 100 $ 104
Weighted average interest rate
Fixed-rate loans 10.33% 10.39% 10.31% 10.40%
Adjustable-rate loans 9.59% 9.58% 9.63% 9.70%
Weighted average loan-to-value ratio 75% 75% 76% 76%
First mortgage loans 96% 95% 96% 97%
Fixed-rate loans 28% 27% 31% 29%
Owner occupied 84% 87% 89% 91%
Retail originations 34% 34% 33% 25%
California 40% 44% 44% 42%
Loans with prepayment penalties
Retail 91% 92% 91% 86%
Wholesale 72% 82% 84% 86%
BORROWER-QUALITY STATISTICS (1)
AA or A- 68% 66% 64% 59%
B or C 28% 30% 32% 38%
C- or D 4% 4% 4% 3%
LOAN SALES STATISTICS
Loans sold or securitized $193,844 $344,578 $347,930 $198,349
Average sales price
(% of principal balance) 105.5% 105.3% 105.2% 102.8%
OPERATING STATISTICS
States loans originated in 33 44 37 40
Retail loan branches 23 22 22 18
Wholesale loan centers 5 6 6 4
</TABLE>
_________
(1) See "--Loan Production by Borrower Risk Classification."
LOAN ORIGINATION
Retail Division. During 1998, the retail division originated $382.4 million
in loans, or 32%, of UPAM's total loan production. As of December 31, 1998, the
retail division employed 69 loan officers, located in 18 retail branches. Ten
of these branches are located in California, two are in Washington, and one each
in Arizona, Colorado, Florida, Illinois, Nevada, and Oregon.
4
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The following table sets forth selected information relating to UPAM's retail
loan originations during the periods shown.
<TABLE>
<CAPTION>
For the Quarter Ended
----------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------------- --------------- ------------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans originated $90,736 $115,231 $117,454 $58,938
Number of loans originated 847 1,076 1,108 545
Average principal balance per loan $ 107 $ 107 $ 106 $ 108
Weighted average interest rate
Fixed-rate loans 9.87% 10.02% 9.82% 9.89%
Adjustable-rate loans 8.82% 8.90% 8.95% 8.99%
Weighted average loan-to-value ratio 74% 73% 73% 74%
First mortgage loans 96% 95% 95% 96%
Owner occupied properties 76% 79% 82% 88%
</TABLE>
Wholesale Division. The wholesale division funded $807.4 million in loans,
or 68% of UPAM's total loan production, during the twelve months ended December
31, 1998. At December 31, 1998, the wholesale division had four loan centers
located in Utah, California, Florida and Ohio, and employed 58 account
executives. These loan centers maintain relationships with brokers that provide
loans to UPAM. During the twelve months ended December 31, 1998, UPAM originated
loans through approximately 1,400 independent mortgage brokers, with the top 37
brokers generating 25% of those loans and the largest broker accounting for
1.82%.
The following table sets forth selected information relating to wholesale
loan originations during the periods shown.
<TABLE>
<CAPTION>
For the Quarter Ended
------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
----------------- ------------- ------------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans originated $173,054 $219,795 $241,113 $173,420
Number of loans originated 1,860 2,325 2,489 1,684
Average principal balance per loan $ 93 $ 94 $ 97 $ 103
Weighted average interest rate
Fixed-rate loans 10.79% 10.69% 10.67% 10.72%
Adjustable-rate loans 9.89% 9.84% 9.85% 9.87%
Weighted average loan-to-value ratio 76% 77% 78% 76%
First mortgage loans 96% 96% 97% 97%
Owner occupied properties 88% 91% 91% 93%
</TABLE>
PRODUCTS AND PRICING
UPAM offers both fixed-rate loans and adjustable rate loans ("ARMs"), as
well as loans with an interest rate that is initially fixed for a period of time
and subsequently converts to an adjustable-rate. Most of the ARMs originated by
UPAM are offered at a lower initial interest rate and are subject to lifetime
interest rate caps. At each interest rate adjustment date, UPAM adjusts the
rate, subject to certain limitations on the amount of any single adjustment,
until the rate charged equals the lower of the fully indexed rate or the
lifetime interest rate cap. There can be no assurance, however, that the
interest rate on these loans will reach the fully indexed rate if interest rates
rise rapidly to the level of the cap, the loans are pre-paid or the loans
migrate to foreclosure. UPAM's borrowers are classified under one of five
subprime risk classifications, and loan products are available at different
interest rates and with different origination points and fees depending on the
particular borrower's risk classification. UPAM's maximum loan amount is
generally $350,000 with an LTV
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of 90%, $500,000 with an LTV of 85% and $750,000 with an LTV of 75%. Loans over
$750,000 are made on a case-by-case basis. Loans originated by UPAM during the
twelve months ending December 31, 1998 had an average loan amount of
approximately $99,000 and an average LTV of approximately 75%. Unless prohibited
by law or otherwise waived by UPAM upon the payment by the borrower of higher
origination fees and a higher interest rate, UPAM generally imposes a prepayment
penalty on the borrower. As of December 31, 1998, approximately 86% of UPAM's
loans included a prepayment penalty.
UNDERWRITING STANDARDS
UPAM originates loans in accordance with underwriting criteria that
generally do not satisfy traditional underwriting standards, such as those
utilized by GNMA, FNMA or FHLMC, and therefore may result in rates of
delinquencies and foreclosures that are higher, and may be substantially higher,
than those rates experienced by loans underwritten in a more traditional manner.
UPAM's underwriting guidelines are intended to evaluate the applicant's credit
history and capacity to repay the loan, the value of the proposed collateral and
the adequacy of such collateral for the loan. UPAM determines the loan terms,
including interest rate and maximum LTV based upon the underwriting guidelines.
Underwriters are required to have had either substantial subprime
underwriting experience or substantial experience with UPAM in other aspects of
the Company's subprime mortgage finance business before becoming part of UPAM's
underwriting department. Underwriters are not given approval authority until
their work has been reviewed by a corporate-based underwriter or a specifically
identified branch underwriter. In addition, a sampling of a new underwriter's
work is reviewed by a corporate level underwriter. No branch-based underwriter
has an approval limit greater than $400,000. All loans over $400,000 require
approval of the Chief Credit Officer or a designated corporate-based
underwriter. Exceptions from these established guidelines are also subject to
approvals, often at the corporate level. This approval process is reviewed
periodically by the Board of Directors. The Chief Credit Officer periodically
re-evaluates the authority levels of all underwriting personnel.
UPAM's underwriting guidelines require a credit report on each applicant
from a credit reporting company. UPAM's underwriters review the applicant's
credit history based on the information contained in the application and reports
available from credit reporting bureaus to determine if the applicant's credit
history meets UPAM's underwriting guidelines. A number of factors determine a
loan applicant's creditworthiness, including debt ratios, payment history and
the combined LTV for all existing mortgages on a property. Based on this review,
the underwriter assigns a preliminary rating to the application.
Assessment of the applicant's ability to pay is one of the principal
elements of UPAM's underwriting philosophy. UPAM's underwriters review the
applicant's credit profile to evaluate whether an impaired credit history is a
result of previous adverse circumstances or a continuing inability or
unwillingness to meet credit obligations in a timely manner.
All mortgaged properties are appraised by qualified independent appraisers
prior to funding of the loan. All appraisals are required to conform to the
Uniform Standards of Professional Appraisal Practice. Review appraisals are
required on substantially all wholesale loans (consistent with industry
standards since the appraiser involved on a wholesale origination would
generally not be on a list of approved appraisers maintained by UPAM) and retail
loans where the appraisal was prepared by an appraiser who has not been approved
by UPAM.
UPAM has a loan quality control process designed to ensure compliance with
its policies and procedures. Prior to funding a loan, UPAM performs a pre-
funding quality control audit which consists of verifying a loan applicant's
credit and employment. UPAM also ensures that the documentation is complete once
the loan is originated to facilitate its subsequent sale.
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The underwriting guidelines set forth in the following table, and the
letter grades applied to each sub-prime borrower category, reflect solely the
Company's internal standards, and may not be comparable to those used by other
subprime mortgage lenders. UPAM continually evaluates its underwriting
guidelines and periodically modifies the underwriting guidelines as required by
investors.
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<TABLE>
<CAPTION>
CREDIT CRITERIA MATRIX (LTV'S UP TO 85%)
-------------------------------------------------------------------------------------------------
AA A- B
----------------------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
MORTGAGE RATING Maximum one 30-day late Maximum two 30-day late Maximum four 30-day late
Last 12 Months payment and no 60 or 90 payments and no 60 or 90 payments and one 60-day
day late payments within day late payments within late payment within last 12
last 12 months. Not more last 12 months. Not more months. Not more than 59
than 29 days delinquent at than 29 days delinquent at days delinquent at closing.
closing. closing.
CONSUMER CREDIT Excellent GOOD SATISFACTORY
----------------------------- ------------------------------ ---------------------------
24-Month History 12-MONTH HISTORY 12-MONTH HISTORY
----------------------------- ------------------------------ ---------------------------
All open and/or active - Excellent credit prior - Good credit prior 12 - Satisfactory credit
accounts in the review 24 months. months. Isolated prior 12 months. Isolated
period, are considered - No accounts currently incidences of minor 60 day incidences of 90 day credit
when calculating the 30 days or more delinquent. delinquencies will be delinquencies will be
ratio of derogatory - less than or equal to 25% considered. considered.
accounts to total of credit report items - Sufficient number of - Demonstrate
accounts. derogatory in last 12 months. accounts paid as agreed to ability/willingness to pay
- No 60 or 90+ day late offset isolated incidences majority of accounts as
payments within last 12 of 60 day delinquencies. agreed.
months. - No accounts currently 30 - No accounts currently 60
days or more delinquent. days or more delinquent are
- less than or equal to 35% of allowed.
credit report items derogatory
in last 12 months. - less than or equal to 45%
of credit report items
derogatory in last 12
- No 60 or 90+ day late months.
payments within last 12 - No 90 day late payments
months. in last 12 months.
BANKRUPTCY 3 years since 2 years since 18 months since
discharge/dismissal. discharge--Chapter 7 and discharge--Chapter 7 and
Re-established excellent Chapter 11. Two years Chapter 11. One year since
("AA") credit since since filing Chapter 13. discharge or 18 months
discharge/dismissal. Must be discharged prior to since filing with evidence
loan application or paid in plan paid as
full through closing. agreed--Chapter 13. Must
Re-established good "A-" be discharged prior to loan
credit since application or paid in full
discharge-dismissal. through closing.
Re-established good ("B")
FORECLOSURE No foreclosures last 3 No foreclosures last 2 No foreclosures last 2
credit since discharge/ years. years.
dismissal. years.
COLLECTIONS No collections, No collections or No collections or
CHARGE-OFFS charge-offs allowed in charge-offs in the last 12 charge-offs in the last 12
last 24 months. months. months.
TAX LIENS No liens, judgments last No liens, judgments last 12 Liens, judgments last 12
JUDGMENTS 24 months. months. months.
</TABLE>
8
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<TABLE>
<CAPTION>
CREDIT CRITERIA MATRIX (LTV'S UP TO 85%)
--------------------------------------------------------------------------
C C-
----------------------------------- -----------------------------------
<S> <C> <C>
MORTGAGE RATING Maximum six 30-day, one 60-day Unlimited number of 30-day,
Last 12 Months and no 90-day late payments 60-day and 90-day late payments
within last 12 months. Not more or one 120-day late payment
than 89 days delinquent at within last 12 months. Current
closing. NOD or cured foreclosure allowed
if LTV is less than 70%. Not more
than 119 days delinquent at
closing.
CONSUMER CREDIT Fair POOR
----------------------------------- -----------------------------------
12-Month History 24-MONTH HISTORY
----------------------------------- -----------------------------------
All open and/or active - Moderate to significant - Majority of credit report
accounts in the review credit derogatories in the past. items derogatory in last 12
period, are considered - Currently delinquent accounts months.
when calculating the ratio allowed. - Percentage of derogatory
of derogatory accounts to - less than or equal to 55% of credit items is not a factor.
total accounts. credit report items derogatory
in last 12 months.
- 30, 60 and 90-day late
payments allowed.
This category applies to
borrowers who do not have at
least three accounts with
payments activity in last 12
months.
BANKRUPTCY 1 year since bankruptcy filing Bankruptcy filed within last 12
date. Must be discharged prior months. Must be discharged
to loan application or, for prior to loan application or,
Chapter 13, paid in full for Chapter 13, paid in full
FORECLOSURE through closing. through closing.
No foreclosures in last 12 Foreclosures cured in last 12
months. months.
COLLECTIONS Collections, charge-offs last 12 Collections, charge-offs last 12
CHARGE-OFFS months allowed. Pay off of months allowed. Pay off of
unpaid accounts required at unpaid accounts required at
underwriters discretion. underwriters discretion.
TAX LIENS Liens, judgments last 12 months. Liens, judgments last 12 months.
JUDGMENTS
</TABLE>
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LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following table sets forth information concerning UPAM's loan
production by subprime borrower risk classification for the periods shown. The
letter grades applied to each subprime borrower category reflect solely the
Company's internal standards, and may not be comparable to those used by other
subprime mortgage lenders.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------------- -------------------
<S> <C> <C>
AA Risk Grade
Percent of total originations 27% 30%
Weighted average loan-to-value ratio 76% 75%
Weighted average interest rate 9.13% 9.25%
A- Risk Grade
Percent of total originations 37% 40%
Weighted average loan-to-value ratio 74% 76%
Weighted average interest rate 9.65% 9.47%
B Risk Grade
Percent of total originations 25% 22%
Weighted average loan-to-value ratio 73% 76%
Weighted average interest rate 10.24% 10.09%
C Risk Grade
Percent of total originations 7% 4%
Weighted average loan-to-value ratio 72% 70%
Weighted average interest rate 10.67% 10.51%
C- Risk Grade
Percent of total originations 2% 2%
Weighted average loan-to-value ratio 71% 68%
Weighted average interest rate 11.83% 11.25%
D Risk Grade
Percent of total originations 2% 2%
Weighted average loan-to-value ratio 69% 62%
Weighted average interest rate 12.72% 12.69%
</TABLE>
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LOAN PRODUCTION BY GEOGRAPHIC DISTRIBUTION
The following table sets forth the percentage of UPAM's loans (based upon
dollar amounts) originated by state for the period shown.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------------- -------------------
<S> <C> <C>
California 43% 47%
Florida 10% 5%
Washington 9% 14%
Ohio 7% 3%
Colorado 6% 7%
Utah 4% 7%
New Jersey 3% 2%
Arizona 2% 5%
Georgia 2% --
Nevada 2% 2%
New Mexico 2% 1%
Oregon 2% 3%
All other combined 8% 4%
----------- -----------
Total 100% 100%
=========== ===========
</TABLE>
LOAN SALES AND SECURITIZATIONS
Whole Loan Sales. During the twelve months ended December 31, 1998, UPAM
sold, for cash paid in full at closing, $1.1 billion of mortgage loans through
whole loan sales at a weighted average sales price equal to 104.9% of the
original principal balance of the loans sold.
Whole loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by UPAM regarding
the underwriting criteria applied by UPAM in the origination process. In the
event of a breach of such representations and warranties, UPAM may be required
to repurchase or substitute loans. In addition, UPAM sometimes commits to
repurchase or substitute a loan if a payment default occurs within the first
month following the date the loan is funded, unless other arrangements are made
between UPAM and the purchaser. UPAM also is required in some cases to
repurchase or substitute a loan if the loan documentation is alleged to contain
fraudulent misrepresentations made by the borrower. During 1998, UPAM
repurchased from investors $21.2 million of loans primarily as a result of early
payment defaults. Such loans have been reported, generally, as non-performing
loans and are included in the Company's held for investment portfolio. On a
case by case basis UPAM has sold some of the non-performing loans and may do so
in the future. Specific loss reserves have been recorded on these loans if the
outstanding principal balance is in excess of its estimated fair value.
UPAM seeks to maximize its premium on whole loan sales revenue by closely
monitoring institutional purchasers' requirements and focusing on originating
the types of loans that meet those requirements and for which institutional
purchasers tend to pay higher premiums. During the twelve months ended December
31, 1998, UPAM sold loans to 20 institutional purchasers, four of which
purchased approximately 84% of the loans sold by UPAM in this period.
Securitizations. UPAM completed its first securitization of mortgage loans
in December 1997, in the principal amount of $114.9 million. No loan
securitizations were completed during 1998. UPAM completed its second
securitization of mortgage loans in March 1999 in the principal amount of
approximately $225
11
<PAGE>
million. Whether, when and how significantly UPAM decides to enter the
securitization market in the future will depend upon economic and secondary
market conditions and available financial resources.
LOAN SERVICING AND DELINQUENCIES
UPAM currently sells most of its loans on a servicing released basis. All
loans are serviced and held by the Bank until sold. The Bank subcontracts with
a third-party sub-servicer to conduct its servicing operations, and monitors the
sub-servicer's activities to ensure that they comply with its guidelines. If
UPAM securitizes additional mortgage loans, it may develop expanded in-house
capabilities for delinquency, foreclosure and REO activities management, while
continuing to use a third-party servicer to perform payment processing, account
maintenance, tax and insurance escrow accounting and other primary servicing
activities.
UPAM began receiving applications for mortgage loans under its regular
lending programs in January 1996 and to date has sold substantially all of its
loans on a whole loan, servicing released basis. Accordingly, UPAM does not have
representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating future
delinquency, loss and prepayment data with respect to its loans.
INSURANCE PREMIUM FINANCE
BUSINESS OVERVIEW
In May 1995, the Company entered into a joint venture with BPN under the
name "ClassicPlan" (such business "IPF"). Under this joint venture, which
commenced operations in September 1995, (i) the Bank underwrites and finances
automobile insurance premiums in California and (ii) BPN markets this financing
primarily to independent insurance agents that sell automobile insurance in
California and, thereafter, services such loans for the Bank. IPF markets to
drivers who are classified by insurance companies as non-standard or high risk
for a variety of reasons, including age, driving record, a lapse in insurance
coverage or ownership of high value or high performance automobiles. Insurance
companies that underwrite insurance for such drivers, including those
participating in the assigned risk programs established by California law,
generally either do not offer financing of insurance premiums or do not offer
terms as flexible as those offered by IPF.
Customers are directed to BPN through a non-exclusive network of insurance
brokers and agents who sell automobile insurance and offer financing through
programs like those offered by IPF. On a typical twelve-month insurance policy,
the borrower makes a cash down payment of 15% or 20% of the premium (plus
certain fees) and the balance is financed under a contract that contains a
payment period of shorter duration than the policy term. In the event that the
insured defaults on the loan, the Bank has the right to obtain directly from the
insurance company the unearned insurance premium held by the insurance company,
which can then be applied to the outstanding loan balance (premiums are earned
by the insurance company over the life of the insurance policy). Each contract
is designed to ensure that, at any point during the term of the underlying
policy, the unearned premium under the insurance policy exceeds the unpaid
principal amount due under the contract. Under the terms of the contract, the
insured grants IPF a power of attorney to cancel the policy in the event the
insured defaults under the contract. Upon cancellation, the insurance company
is required by California law to remit the unearned premium to IPF which, in
turn, offsets this amount against any amounts due from the insured. IPF does
not sell or have the risk of underwriting the underlying insurance policy. IPF
seeks to minimize its credit risk by (i) perfecting a security interest in the
unearned premium, (ii) avoiding concentrations of policies with insurance
companies that are below certain industry ratings, and (iii) doing business to
date only in California which maintains an insurance guaranty fund which
protects consumers and insurance premium finance companies against losses from
failed insurance companies.
In addition to insurance premiums, IPF will also finance broker fees (i.e.,
fees paid by the insured to the agent). If a policy cancels, the agent repays
any unearned broker fee financed by IPF. Broker fee
12
<PAGE>
financing represents approximately 4% of total loans outstanding. At December
31, 1998, approximately 80% of all broker fee financing was to a single
insurance agency. When IPF agrees to finance an agent's broker fees, a credit
limit is established for the agent. Agents are required to maintain deposits
with the Bank to mitigate IPF's possible losses on broker fees financed. To
date, the Bank has not charged-off a broker fee balance.
At December 31, 1998 the aggregate gross amount of insurance premium
finance contracts was $44.7 million with 104,000 contracts outstanding. During
the twelve months ended December 31, 1998, IPF originated 137,743 insurance
premium finance contracts. During the last two years, growth in IPF primarily
resulted from the adoption in California of mandatory automobile insurance on
January 1, 1997 and the purchase in January 1998, with BPN, from Providian
National Bank for $450,000 of the right to solicit new and renewal personal and
commercial insurance premium finance business from brokers who previously
provided contracts to Commonwealth Premium Finance ("CPF"). The purchase price
for the agreement was provided 60% by the Company and 40% by BPN. The
relationship between the Company and BPN continues to be governed by the joint
venture arrangement already in effect. See "Relationship with BPN" below. The
Company also acquired the Commonwealth name and certain equipment and software.
The agreement also provides that Providian National Bank and the servicers of
its insurance premium finance business may not solicit or engage in the
insurance premium finance business in California for a period of three years
from the date of the agreement.
During November 1998, the Company and BPN, purchased from Norwest Financial
Coast, Inc. ("Coast") for $3.0 million the right to solicit new and renewal
personal and commercial insurance premium finance business from brokers who
previously provided contracts to Coast. The purchase price for the agreement
was provided 60% by the Company and 40% by BPN. The Company also acquired the
"Coast" name, and certain furniture, equipment and software. The agreement also
provides that Coast may not solicit or engage in the insurance premium finance
business in California and certain other states for five years from the date of
the agreement. Existing Coast customer receivables were not acquired.
RELATIONSHIP WITH BPN
BPN is headquartered in Chino, California, and markets the Company's
insurance premium finance program under the trade name "ClassicPlan." The
Company believes that IPF is the largest provider of financing for consumer
automobile insurance premiums in California. On a more limited basis, IPF also
finances insurance premiums for businesses purchasing property, casualty and
liability insurance. At December 31, 1998, BPN had 52 employees.
BPN solicits insurance agents and brokers to submit their clients'
financing requests to the Bank. BPN is responsible for monitoring the agents'
performance and assisting with IPF's compliance with applicable consumer
protection, disclosure and insurance laws, and providing customer service, data
processing and collection services to IPF. The Bank pays fees to BPN for these
services. The amount of these fees is based on fixed charges, which include a
loan service fee per contract and cancellation fees charged by the Bank, and the
earnings of the loan portfolio, which include (i) 50% of the interest earned on
portfolio loans after the Bank subtracts a specified floating portfolio interest
rate and (ii) 50% of late fees and returned check fees charged by the Bank.
Additionally, BPN and the Bank share equally (i) certain collection and legal
expenses which may occur from time-to-time, (ii) all net loan losses experienced
on the insurance premium loan portfolio and (iii) all net losses up to $375,000
experienced on the broker fees loan portfolio. BPN bears losses over $375,000
experienced on the broker fees loan portfolio.
The shareholders of BPN have entered into certain guaranty agreements in
favor of the Bank whereby they agree to pay any sums owed to the Bank and not
paid by BPN. The total potential liability of the guarantors to the Bank is
limited to $2,000,000 plus any amounts by which BPN is obligated to indemnify
the
13
<PAGE>
Bank. Under these guaranties, all debts of BPN to the guarantors are
subordinated to the full payment of all obligations of BPN to the Bank.
The Company has entered into an option agreement with BPN and its
shareholders whereby the Company may purchase all of the issued and outstanding
shares of BPN (the "Shares Option") and all additional shares of any BPN
affiliate which may be organized outside of California (the "Affiliate Share
Option"). The option period expires March 31, 2005. The Company has agreed not
to exercise the Share Option prior to April 29, 1999 unless BPN or its
shareholders have breached their outstanding agreements with the Company. Until
the date occurring 90 days after delivery to the Company of a notice stating
that BPN has had $30,000,000 or more in loans outstanding for the six months
preceding delivery of such notice, which notice cannot be delivered prior to
October 29, 1999, the Company may exercise the Share Option for $3,250,000 and
must pay a $750,000 noncompete payment to certain shareholders and key employees
of BPN (the "Noncompete Payment"). If the Share Option is exercised any time
thereafter, the Noncompete Payment will be made and the option exercise price
shall be the greater of (a) $3,250,000 or (b) four times BPN's pre-tax earnings
for the twelve complete consecutive calendar months immediately preceding the
date of exercise less the Noncompete Payment. The Affiliate Share Option may not
be exercised independently of the Share Option. The exercise price of the
Affiliate Share Option will equal the sum of four times BPN Affiliate's pre-tax
earnings for the twelve month period prior to exercise.
In connection with the purchase of the rights to solicit new and renewal
business from Coast, the Bank made loans to two shareholders of BPN in the
aggregate amount of $1.2 million. The loans earn interest at a rate of 9.25%
per annum and are secured by the common stock of BPN. The loans provide for
principal and interest payments over a three-year period.
AUTOMOBILE INSURANCE PREMIUM FINANCE INDUSTRY
Insurance Finance. The private passenger automobile insurance industry in
the United States is estimated by A.M. Best Company ("A.M. Best"), a provider of
independent ratings on the financial strength and claims payment ability of
insurance companies, to have been a $109 billion market in annual premium volume
during 1996, with nonstandard automobile insurance comprising $23 billion of
this market. Although reliable data concerning the size and composition of the
personal lines premium finance market is not available, the Company believes
that the industry is highly fragmented with no independent insurance premium
finance company accounting for a significant share of the market. The Company
believes that the insurance premium finance industry in California is somewhat
more concentrated than elsewhere in the nation, with several long-established
competitors.
California Insurance Laws. Under current law, automobiles in the state of
California cannot be registered without providing proof of insurance or posting
required bonds with the Department of Motor Vehicles.
In California, as in most states, insurance companies fall into two
categories, admitted or non-admitted. All insurance companies licensed to do
business in California are required to be members of the California Insurance
Guarantee Association ("CIGA"), and are classified as "admitted" companies.
CIGA was established to protect insurance policyholders in the event the company
that issued a policy fails financially, and to establish confidence in the
insurance industry. Should an insurance company fail, CIGA is empowered to
raise money by levying member companies. CIGA pays claims against insurance
companies, which protects both the customer and the premium financiers should an
admitted insurance company fail. In such event, CIGA will refund any unearned
premiums. This provides protection to companies, such as IPF, that provide
insurance premium financing. As a result, IPF's policy is to limit financing of
insurance policies issued by non-admitted carriers to less than 5% of its total
portfolio. At December 31, 1998, policies issued by non-admitted carriers
comprised 4.6% of IPF's total portfolio.
14
<PAGE>
Because insurance companies will not voluntarily insure drivers whom they
consider to be excessively high risk, California has a program called the
California Automobile Assigned Risk Program ("CAARP"), to which all admitted
companies writing private passenger automobile insurance policies must belong.
This 43-year-old program is an insurance plan for high risk, accident-prone
drivers who are unable to purchase insurance coverage from regular insurance
carriers. CAARP policies are distributed to the admitted companies in
proportion to their share of California's private passenger automobile insurance
market. The companies participating in CAARP do not have any discretion in
choosing the customers they insure under the program. The customers are
arbitrarily assigned to them by CAARP. Although CAARP offers financing of its
policy premiums, its terms are not as competitive as the insurance premium
finance companies and, therefore, many CAARP policies are financed by others.
At December 31, 1998, approximately 13% of the insurance policies financed by
IPF were issued under CAARP.
BUSINESS STRATEGY
IPF's business strategy is to increase profitably the volume of contracts
originated and maintained in its portfolio by expanding its relationship with
insurance brokers and agents and insurance companies in California and,
potentially, in other states. IPF intends to implement this strategy by:
. Strengthening its relationships with insurance brokers and agents by
offering a variety of high-quality support services (e.g., computer
hardware and software and customer reports) and finance programs
designed to enable them to better serve their customers;
. Investing additional resources to ensure IPF's ability to continue to
provide technologically advanced and efficient contract origination and
servicing systems and support services;
. Expanding its premium financing to other insurance lines of business
(e.g., commercial, property, casualty and liability insurance); and
. Expanding the Company's operations into new states either through joint
ventures or the acquisition of existing insurance premium finance
businesses in those states.
OPERATING SUMMARY
The following table presents a summary of IPF's key operating and
statistical results for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------
1998 1997
------------------------ -------------------------
(Dollars in thousands, except portfolio averages)
<S> <C> <C>
OPERATING DATA
Loan originations $152,998 $145,167
Loans outstanding at period end 44,709 39,990
Average gross yield (1) 19.51% 19.79%
Average net yield (2) 13.90% 14.01%
Allowance for loan losses $ 349 $ 450
LOAN QUALITY DATA
Allowance for loan losses (% of loans outstanding) 0.78% 1.13%
Net charge-offs (% of average loans outstanding) (3) 0.78% 0.35%
Delinquencies (% of loans outstanding) (4) 1.79% 1.64%
PORTFOLIO DATA
Average monthly loan originations (number of loans) 11,501 10,443
Average loan size at origination $ 1,109 $ 1,158
Commercial insurance policies (% of loans outstanding) 13.14% 2.1%
CAARP policies (% of loans outstanding) 13.05% 24.8%
Cancellation rate (% of premiums financed) 42.1% 49.0%
</TABLE>
15
<PAGE>
_____________
(1) Gross yield represents total rates and fees paid by the borrower.
(2) Net yield represents the yield to the Bank after interest and fee sharing
with BPN.
(3) Includes only the Bank's 50% share of charge-offs.
(4) This statistic measures delinquencies on canceled policy balances. Since
IPF seeks recovery of unearned premiums from the insurance companies, which
can take up to 90 days, loans are not considered delinquent until more than
90 days past due.
PRODUCTS AND PRICING
IPF generally charges from 16% to 23% annualized interest (depending on the
amount financed) and a $40 processing fee for each consumer contract, which the
Company believes is competitive in IPF's industry. In addition, contracts
provide for the payment by the insured of a delinquency charge and, if the
default results in cancellation of any insurance policy listed in the contract,
for the payment of a cancellation charge. Certain of these finance charges and
fees are shared with BPN. See "Relationship with BPN." The insured makes a
minimum 15% down payment on an annual policy and pays the remainder in a maximum
of ten monthly payments.
IPF designs its programs so that the unearned premium is equal to or
greater than the remaining principal amount due on the contract by requiring a
down payment and having a contract term shorter than the underlying policy term.
SALES AND MARKETING
IPF currently markets its insurance premium finance program through a
network of over 700 agents, primarily located in Los Angeles, Orange and San
Bernardino counties. Relationships with agents are established by BPN's
marketing representatives. The Company believes that IPF has been able to
attract and maintain its relationship with agents by offering a higher level of
service than its competitors. IPF focuses on providing each agent with up-to-
date information on its customers' accounts, which allows the agent to service
customers' needs and minimize the number of policies that are canceled. Many of
IPF's largest agents have computer terminals provided by BPN in their offices
which allow on-line access to customer information. Agents for IPF receive their
producer fees ($20, equal to 50% of the aforementioned $40 processing fee per
contract), as collateral against early cancellations. IPF does not require
return of this $20 producer fee for early policy cancellation unless the policy
pays off in the first 30 days.
To minimize its exposure to reliance on a limited number of agents, the
Company has instituted portfolio guidelines generally limiting the dollar amount
of contracts originated by any agent to 15% of IPF's total portfolio. The
Company performs a quarterly analysis of all agents based on information
provided by BPN. At December 31, 1998, IPF had one agent that exceeded the 15%
portfolio parameter, accounting for 32.7% of IPF's total portfolio.
UNDERWRITING STANDARDS
IPF is a secured lender, and upon default, relies on its security interest
in the unearned premium held by the insurance company. IPF can, however, suffer
a loss on an insurance premium finance contract for four reasons: (i) loss of
all or a portion of the unearned premium due to its failure to cancel the
contract on a timely basis; (ii) an insolvency of the insurance company holding
the unearned premium not otherwise covered by CIGA; (iii) inadequacy of the
unearned premium to cover charges in excess of unpaid principal amount; and (iv)
cost of collection and administration, including the time value of money,
exceeding the unpaid principal and other charges due under the contract. For the
twelve months ended December 31, 1998, IPF canceled for nonpayment contracts
representing approximately 42.1% of all premiums financed. Careful
administration of contracts is critical to protecting IPF against loss.
16
<PAGE>
Credit application are taken at the insurance agent's office. Given the
secondary source of repayment on unearned premiums due from the insurance
company on a canceled policy, and in most cases, access to CIGA, IPF does not
carry out a credit investigation of a borrower on loans under $25,000. At
December 31, 1998, IPF had one insurance premium finance loan with an original
principal amount over $25,000.
SERVICING AND COLLECTION
The Company believes that an efficient and accurate servicing and
collection system is the most important management tool that an insurance
premium financing company can use to protect itself from losses as a result of
an insured's default on a contract. The insurance premium finance industry is
acutely time sensitive because insurance premiums are earned each day that an
insurance policy remains in effect, thus reducing, on a daily basis, the
collateral support provided by the unearned premium.
During July 1998, BPN purchased and installed a new computer system, a
Proliant 2500, manufactured by Compaq Computer Corporation. In addition, BPN
developed an Oracle-based management information system software which provides
complete online, real-time information processing services. The system also
provides direct electronic processing of many functions that were previously
paper intensive. This system satisfies IPF's current requirements for (i)
application processing, (ii) payment processing and collections, and (iii)
monitoring and reporting, and has significant capacity remaining. The Bank
purchased a 50% interest in the Oracle-based software developed by BPN for
$175,000.
Billing Process. A customer's monthly payments are recorded in BPN's
computer system on the date of receipt. BPN's computer system is designed to
provide protection against principal loss by automatically canceling a policy no
later than 18 days after the customer's latest payment due date. If a payment is
not received on its due date, BPN's computer system automatically prints a
notice of intent to cancel and assesses a late fee which is mailed to the
insured and his or her insurance agent stating that payment must be received
within 18 days after the due date or IPF will cancel the insurance policy. If
payment is received within the 18 day period, BPN's computer system returns the
account to normal status.
Collections Process. If IPF does not receive payment within the statutory
period set forth in the notice of intent to cancel, BPN's computer system will
automatically generate a cancellation notice on the next business day,
instructing the insurance company to cancel the insured's insurance policy and
refund any unearned premium directly to IPF for processing.
Although California law requires the insurance company to refund unearned
premiums within 30 days of the cancellation date, most insurance companies pay
on more extended terms. After cancellation, IPF charges certain allowable fees
and continues to earn interest. Although the gross return premium may not fully
cover the fees and accrued interest owed to IPF by the insured, principal
generally is fully covered. Policies which are canceled in the first two months
generally have a greater risk of loss of fees.
IPF charges against income a general provision for possible losses on
finance receivables in such amounts as management deems appropriate. Case-by-
case direct write-offs, net of recoveries on finance receivables, are charged to
IPF's allowance for possible losses. This allowance amount is reviewed
periodically in light of economic conditions, the status of outstanding
contracts and other factors.
Insurance Company Failure. One of the principal risks involved in financing
insurance premiums is the possible insolvency of an insurance company. Another
risk is that an insurance company's financial circumstances cause it to delay
its refunds of unearned premiums. Either event can adversely affect the yield to
an insurance premium finance company on a contract. Despite the protection
afforded by CIGA, IPF also reviews the ratings assigned to the insurance
companies by A.M. Best or their financial statements. To minimize its exposure
to risks resulting from the insolvency of an insurance company, IPF limits the
number of policies financed that are issued by insurance companies rated "B" or
lower by A.M. Best.
17
<PAGE>
AUTOMOBILE FINANCE
BUSINESS OVERVIEW
The Company entered the subprime automobile finance business in February
1996 through the establishment of United Auto Credit Corporation ("UACC") as a
subsidiary of the Bank. UACC purchases auto contracts primarily from dealers in
used automobiles, approximately 79% of which have been independent dealers and
21% of which have been franchisees of automobile manufacturers. The borrowers on
contracts purchased by UACC are classified as subprime because they typically
have limited credit histories or credit histories that preclude them from
obtaining loans through traditional sources. UACC maintains nine branch offices
located in California and one each in Arizona, Colorado, Florida, Oregon, Utah
and Washington. At December 31, 1998, UACC's portfolio contained 10,654 auto
contracts in the aggregate gross amount of $83.9 million, including unearned
finance charges of $17.4 million.
SUBPRIME AUTOMOBILE FINANCE INDUSTRY
Automobile financing is one of the largest consumer finance markets in the
United States. In general, the automobile finance industry can be divided into
two principal segments: a prime credit market and a subprime credit market.
Traditional automobile finance companies, such as commercial banks, savings
institutions, thrift and loan companies, credit unions and captive finance
companies of automobile manufacturers, generally lend to the most creditworthy,
or so-called prime, borrowers. The subprime automobile credit market, in which
UACC operates, provides financing to borrowers who generally cannot obtain
financing from traditional lenders.
Historically, traditional lenders have not serviced the subprime market or
have done so only through programs that were not consistently available.
Recently, however, independent companies specializing in subprime automobile
financing and subsidiaries of larger financial services companies have entered
this segment of the automobile finance market, but it remains highly fragmented,
with no company having a significant share of the market.
BUSINESS STRATEGY
UACC's business strategy includes controlled growth at the branch level,
with limited volume goals and the gradual addition of new branches. Each branch
is targeted to generate between $650,000 and $750,000 in gross contracts per
month within five months of opening. The Company believes that UACC's strategy
of (i) controlled growth, (ii) disciplined underwriting, (iii) strong internal
audit procedures and (iv) focused servicing and collection efforts at the branch
level, will result in sustainable profitability and lower levels of delinquency
and loss than those experienced by many of its competitors, whose rapid growth
has resulted in portfolio quality problems.
The Company believes that the subprime automobile finance market is
inconsistently or poorly serviced by the consumer finance industry. As a
result, UACC's strategy is to differentiate itself by providing dealers with
consistent, same day decisions and rapid funding of approved contracts. The
Company believes that UACC is also more flexible than some of its competitors in
financing older, higher mileage vehicles and maintenance warranties.
18
<PAGE>
OPERATING SUMMARY
The following table presents a summary of UACC's key operating and
statistical results for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997
------------------------ -----------------------
(Dollars in thousands, except portfolio and other
data)
<S> <C> <C>
OPERATING DATA
Gross contracts purchased $86,098 $44,056
Gross contracts outstanding 83,921 40,877
Unearned finance charges 17,371 10,581
Net contracts outstanding 66,550 30,296
Average purchase discount 9.12% 9.79%
APR to customers 21.31% 21.0%
Allowance for loan losses $ 4,138 $ 1,791
LOAN QUALITY DATA
Allowance for loan losses (% of net contracts) 6.22% 5.91%
Delinquencies (% of net contracts)
31-60 days 0.44% 0.84%
61-90 days 0.16% 0.20%
90+ days 0.08% 0.22%
Net charge-offs (% of average net contracts) 4.56% 4.94%
Repossessions (net) (% of net contracts) 0.72% 0.64%
PORTFOLIO DATA
Used vehicles 99.0% 99.0%
Vehicle age at time of contract (years) 6.2 6.1
Original contract term (months) 40.6 38.4
Gross amount financed to WSBB (1) 117% 116%
Net amount financed to WSBB (2) 106% 105%
Net amount financed per contract $ 7,725 $ 7,517
Down payment 20% 20%
Monthly payment $ 270 $ 270
OTHER DATA
Number of branches 15 10
</TABLE>
___________
(1) WSBB represents Kelly Wholesale Blue Book for used vehicles.
(2) Net amount financed equals the gross amount financed less unearned finance
charges or discounts.
PRODUCTS AND PRICING
UACC targets transactions which involve (i) a used automobile with an
average age of five to eight years and (ii) an average original contract term of
38 to 42 months.
The financial profile of the target transaction includes (i) an amount
financed (before taxes, license, warranty and discount) equal to 95% to 100% of
invoice for new vehicles or current WSBB for used vehicles (after tax, license,
warranty and discount, the amount financed is targeted at 105% to 110%), (ii) a
contract rate and discount which yields 28.5%, (iii) an amount financed of
$7,000 to $10,000 with a down payment of 15% to 20%, and (iv) a monthly payment
from $225 to $325.
19
<PAGE>
The target profile of a UACC borrower includes (i) time on the job of three
to five years, (ii) time at current residence of three to five years, (iii) a
ratio of total debt to total income of 33% to 37%, and (iv) a ratio of total
monthly automobile payments to total monthly income of 12% to 15%.
The application for an auto contract is taken by the dealer. UACC purchases
the auto contract from the dealer at a discount which increases the effective
yield on such contract. For the quarter ended December 31, 1998, the Company
allocated 80% of the discount to the allowance for loan losses, representing 8%
of the net contract amount. Management periodically reviews the portion of the
discount allocated to the allowance for loan losses in light of the Company's
operations and, in January 1999, increased the allocation to 9% of the net
contract amount.
SALES AND MARKETING
UACC markets its financing program to both independent used and franchised
automobile dealers. UACC's marketing approach emphasizes scheduled calling
programs, marketing materials and consistent follow-up. The Company uses
facsimile software programs to send marketing materials to established dealers
and potential dealers on a twice weekly basis in each branch market. UACC's
experienced local staff seeks to establish strong relationships with dealers in
their vicinity.
UACC solicits business from dealers through its branch managers who meet
with dealers and provide information about UACC's programs, train dealer
personnel in UACC's program requirements and assist dealers in identifying
consumers who qualify for UACC's programs. In order to both promote asset growth
and achieve required levels of credit quality, UACC compensates its branch
managers on a salary with a bonus that requires the achievement of delinquency,
charge-off, volume and return on average assets targets established for the
branch, as well as satisfactory audit results.
As of December 31, 1998, UACC directly marketed its programs to dealers
through its 15 branch offices in California, Colorado, Washington, Utah, Oregon,
Arizona and Florida.
<TABLE>
<CAPTION>
GROSS NUMBER OF CONTRACTS
CONTRACTS PURCHASED OVER THE
OUTSTANDING AT YEAR ENDED
DECEMBER 31, DECEMBER 31,
BRANCH LOCATION DATE ESTABLISHED 1998 1998
- --------------- ------------------- ----------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Irvine, CA March 1996 $10,149 620
San Diego, CA June 1996 11,659 867
Riverside, CA September 1996 11,940 869
San Jose, CA November 1996 7,847 593
Los Angeles, CA March 1997 8,978 737
San Fernando, CA May 1997 8,679 830
Upland, CA July 1997 7,312 804
Salt Lake City, UT August 1997 3,517 438
Phoenix, AZ September 1997 4,650 634
Portland, OR December 1997 2,921 454
Denver, CO February 1998 2,296 362
Sacramento, CA May 1998 2,069 200
Tacoma, WA June 1998 1,269 217
Redlands, CA September 1998 635 70
Orlando, FL December 1998 -- --
------------ -----------
$83,921 7,695
============ ===========
</TABLE>
20
<PAGE>
When a UACC branch decides to begin doing business with a dealer, a dealer
profile and investigation worksheet are completed. UACC and the dealer enter
into an agreement that provides UACC with recourse to the dealer in cases of
dealer fraud or a breach of the dealer's representations and warranties. When
UACC holds auto contracts aggregating $50,000 or more from a dealer, UACC
obtains a Dun and Bradstreet Analysis Report for such dealer. Branch management
periodically monitors each dealer's overall performance and inventory to ensure
a satisfactory quality level, and regional managers regularly conduct audits of
the dealer's performance.
The following table sets forth certain data for auto contracts purchased by
UACC for the periods indicated.
<TABLE>
<CAPTION>
For the Quarter Ended
--------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------------- --------------- ------------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Gross amount of contracts $ 17,774 $ 19,881 $ 23,044 $ 25,399
Average original term of contracts (months) 39.2 40.5 40.8 40.8
</TABLE>
At December 31, 1997, 95% of UACC's auto contracts were written by its
California branches. During the last half of 1997 and 1998, UACC expanded into
Salt Lake City, Phoenix, Portland, Denver, Tacoma and Orlando thereby reducing
the level of auto contracts written by its California branches to 73% at
December 31, 1998. In addition to diversifying its geographic concentrations,
UACC intends to maintain a broad dealer base to avoid dependence on a limited
number of dealers. At December 31, 1998, no dealer accounted for more than 2.1%
of UACC's portfolio and the ten dealers from which UACC purchased the most
contracts accounted for approximately 13.6% of its aggregate portfolio.
UNDERWRITING STANDARDS AND PURCHASE OF CONTRACTS
Underwriting Standards and Purchase Criteria. Dealers submit credit
applications directly to UACC's branches. UACC uses credit bureau reports in
conjunction with information on the credit application to make a final credit
decision or a decision to request additional information. Only credit bureau
reports that have been obtained by UACC are acceptable.
UACC's credit policy places specific accountability for credit decisions
directly within the branches. The branch manager or assistant branch manager
reviews all credit applications. In general, no branch manager will have credit
approval authority for contracts greater than $15,000. Any transaction that
exceeds a branch manager's approval limit must be approved by UACC's Regional
Manager, Operations Manager or President.
Verification. Upon approving or conditioning any application, all required
stipulations are presented to the dealer and must be satisfied before funding.
All dealers are required to provide UACC with written evidence of insurance
in force on a vehicle being financed when submitting the contract for purchase.
Prior to funding a contract, the branch must verify by telephone with the
insurance agent the customer's insurance coverage with UACC as loss payee. If
UACC receives notice of insurance cancellation or non-renewal, the branch will
notify the customer of his or her contractual obligation to maintain insurance
coverage at all times on the vehicle. However, UACC will not "force place"
insurance on an account if insurance lapses and, accordingly, UACC bears the
risk of an uninsured loss in these circumstances.
Post-Funding Quality Reviews. UACC's Regional Manager and Operations
Manager complete quality control reviews of the newly originated auto contracts.
These reviews focus on compliance with underwriting
21
<PAGE>
standards, the quality of the credit decision and the completeness of auto
contract documentation. Additionally, UACC's Regional Manager and Operations
Manager complete regular branch audits that focus on compliance with UACC's
policies and procedures and the overall quality of branch operations and credit
decisions.
SERVICING AND COLLECTION
UACC services at the branch level all of the auto contracts it purchases.
Billing Process. UACC sends each borrower a coupon book. All payments are
directed to the customer's respective UACC branch. UACC also accepts payments
delivered to the branch by a customer in person.
Collection Process. UACC's collection policy calls for the following
sequence of actions to be taken with regard to all problem loans: (i) call the
borrower at one day past due; (ii) immediate follow-up on all broken promises to
pay; (iii) branch management review of all accounts at ten days past due; and
(iv) Regional Manager or Operations Manager review of all accounts at 45 days
past due.
UACC will consider extensions or modifications in working a collection
problem. All extensions and modification require the approval of the branch
manager, and are monitored by the Regional Manager and Operations Manager.
Repossessions. It is UACC's policy to repossess the financed vehicle only
when (i) payments are substantially in default, (ii) the customer demonstrates
an intention not to pay or (iii) the customer fails to comply with material
provisions of the contract. All repossessions require the prior approval of the
branch manager. In certain cases, the customer is able to pay the balance due or
bring the account current, thereby redeeming the vehicle.
When a vehicle is repossessed and sold at an automobile auction or through
a private sale, the sale proceeds are subtracted from the net outstanding
balance of the loan with any remaining amount recorded as a loss. UACC generally
pursues all customer deficiencies.
Allowance for Loan Losses. UACC's policy is to place on nonaccrual status
accounts delinquent in excess of 120 days on a contractual basis, and to reverse
all previously accrued but unpaid interest on such accounts. Accounts that have
had their collateral repossessed are placed on nonaccrual by the end of the
month in which they are repossessed regardless of delinquency status. Accounts
are not returned to accrual status until they are brought current.
UACC's policy is to charge-off accounts delinquent in excess of 120 days.
The remaining balance of accounts where the collateral has been repossessed and
sold is charged-off by the end of the month in which the collateral is sold and
the proceeds collected.
Loss reserves based on expected losses over the life of the contract are
established when each contract is purchased from the dealer. The reserve is
provided from the dealer discount that is taken on each transaction. Loss
reserve analyses are performed regularly to determine the adequacy of current
reserve levels. For the quarter ended December 31, 1998, the Company allocated
8% of the net contract purchased to the allowance for loan losses. The loss
allowances recorded at the time of purchase represent an estimate of expected
losses for these loans. If actual experience exceeds estimates, an additional
provision for losses is established as a charge against earnings. Management
periodically reviews the portion of the discount allocated to the allowance for
loan losses in light of the Company's operations and, in January 1999, increased
the allocation to 9% of the net contract amount.
22
<PAGE>
The following table reflects UACC's cumulative losses (i.e., net charge-
offs as a percent of original net contract balances) for each contract pool
(defined as the total dollar amount of net contracts purchased in a six month
period) purchased since UACC's inception.
<TABLE>
<CAPTION>
Number of Mar. 1996 Oct. 1996 Apr. 1997 Oct. 1997 Apr. 1998 Oct. 1998
Months - - - - - -
Outstanding Sept. 1996 Mar. 1997 Sept. 1997 Mar. 1998 Sept. 1998 Dec. 1998
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
3 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
5 0.0% 0.0% 0.1% 0.1% 0.1%
7 0.3% 0.4% 0.5% 0.5% 0.5%
9 1.0% 0.9% 1.1% 1.2% 1.1%
11 2.8% 2.1% 2.3% 2.1%
13 4.4% 3.1% 3.3% 2.9%
15 5.9% 4.1% 4.2% 3.7%
17 6.8% 4.8% 4.8%
19 7.7% 5.4% 5.3%
21 8.5% 5.8% 5.7%
23 8.7% 6.3%
25 9.1% 6.6%
27 9.2% 7.2%
29 9.3%
31 9.6%
33 9.9%
Original Pool ($000) $ 4,885 $ 9,297 $ 15,575 $ 22,488 $ 30,271 $ 17,951
======= ======= ======== ========= ======== ========
Remaining Pool ($000) $ 953 $ 2,953 $ 7,499 $ 14,768 $ 24,783 $ 16,505
======= ======= ======== ========= ======== ========
(%) 19% 32% 48% 66% 82% 92%
======= ======= ======== ========= ======== ========
</TABLE>
UACC purchased its first auto contracts in March 1996 and, accordingly, a
maximum of 33 months of loss history was available at December 31, 1998.
PAN AMERICAN BANK, FSB
BUSINESS OVERVIEW
The Bank is a federally chartered stock savings bank formed in 1994 to
purchase from the RTC certain assets and to assume certain liabilities of the
Bank's predecessor, Pan American Federal Savings Bank. The Bank has been the
principal funding source to date for the Company's residential mortgage,
insurance premium and automobile finance businesses primarily through its
deposits, FHLB advances, warehouse lines of credit and whole loan sales. In
addition, the Bank holds a portfolio of primarily traditional residential
mortgage loans acquired from the RTC in 1994 and 1995 at a discount from the
unpaid principal balance of such loans, which loans aggregated $32.3 million
(before unearned discounts and premiums) at December 31, 1998. The Bank has
focused its branch marketing efforts on building a middle income customer base,
including efforts targeted at local Hispanic communities. The Bank has bilingual
employees in each of its branches, and key members of the Company's and the
Bank's Board of Directors and management are of Hispanic heritage and are active
in communities served by the Bank. In addition to operating its retail banking
business at four branches located in Northern California and one in Southern
California, the Bank provides, subject to appropriate cost sharing arrangements,
compliance, risk management, executive, financial, facilities and human
resources management to other business units of the Company. The business of the
Bank is subject to substantial government supervision and regulatory
requirement. See "--Supervision and Regulation - Business Savings Bank
Regulation."
23
<PAGE>
INDUSTRY SEGMENTS
Information regarding industry segments is set forth in Footnote Number 21
to the Consolidated Financial Statements included in Item 8 to this Annual
Report on Form 10-K.
COMPETITION
Each of the Company's businesses is highly competitive. Competition in the
Company's markets can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms of
the loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company's competitors in
subprime mortgage finance include other consumer finance companies, mortgage
banking companies, commercial banks, credit unions, savings associations and
insurance companies. The Company competes in the insurance premium finance
business with other specialty finance companies, independent insurance agents
who offer premium finance services, captive premium finance affiliates of
insurance companies and direct bill plans established by insurance companies.
The Company competes in the subprime automobile finance industry with commercial
banks, the captive finance affiliates of automobile manufacturers, savings
associations and companies specializing in subprime automobile finance, many of
which have established relationships with automobile dealerships and may offer
dealerships or their customers other forms of financing, including dealer floor
plan financing and lending, which are not offered by the Company. In attracting
deposits, the Bank competes primarily with other savings institutions,
commercial banks, brokerage firms, mutual funds, credit unions and other types
of investment companies.
The historical profitability of the subprime lending industry and the low
barriers to entry has attracted competitors. Certain large, national finance
companies and mortgage originators have announced their intention to adapt their
mortgage loan origination programs and allocate resources to the origination of
subprime loans. The Company and its competitors may also face increasing
competition from governmental-sponsored entities, such as FNMA and FHLMC. FHLMC
currently purchases what it terms "Alternative-A" mortgage loans and may
establish a program to purchase so-called "B" and "C" mortgage loans in the
future. FHLMC also has purchased securities backed by subprime mortgage loans
and has re-securitized them for resale. Additional competition may lower the
rates the Company can charge borrowers, reduce the volume of the Company's loan
origination and increase demand for the Company's key employees with the
potential that such employees will leave the Company for its competitors.
Fluctuations in interest rates and general and localized economic
conditions also may affect the competition the Company faces. Competitors with
lower costs of capital have a competitive advantage over the Company. During
periods of declining interest rates, competitors may solicit the Company's
customers to refinance their loans. In addition, during periods of economic
slowdown or recession, the Company's borrowers may face financial difficulties
and be more receptive to offers of the Company's competitors to refinance their
loans. As the Company seeks to expand into new geographic markets, it will face
additional competition from lenders already established in these markets.
EMPLOYEES
At December 31, 1998, the Company had 592 full-time equivalent employees.
The Company believes its relations with its employees are satisfactory.
SUPERVISION AND REGULATION
Set forth below is a brief description of various laws and regulations
affecting the operations of the Company and its subsidiaries. The description of
laws and regulations contained herein does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations. Any
change in
24
<PAGE>
applicable laws, regulations or regulatory policies may have a material effect
on the business, operations and prospects of the Company.
HOLDING COMPANY REGULATION
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the Office of Thrift Supervision (the "OTS"). For
purposes of this discussion, the description of holding company regulation also
applies to PAFI, a direct subsidiary of the Company and the parent of the Bank.
As such, the Company is required to register and file reports with the OTS and
is subject to regulation and examination by the OTS. In addition, the OTS has
enforcement authority over the Company and its subsidiaries, which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association. This regulation is intended
primarily for the protection of depositors and the Savings Association Insurance
Fund ("SAIF") and not for the benefit of shareholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or meets the
definition of domestic building and loan association pursuant to section 7701 of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other SAIF-
insured savings association) would become subject to restrictions applicable to
bank holding companies unless such other associations each also qualify as a QTL
or domestic building and loan association and were acquired in a supervisory
acquisition. See "- Business Savings Bank Regulation - Qualified Thrift Lender
Test."
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings association without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval. These provisions also prohibit, among other things, any director
or officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of a savings and loan holding
company, from acquiring control of any savings association not a subsidiary of
the savings and loan holding company, unless the acquisition is approved by the
OTS.
REGULATION OF MORTGAGE FINANCE OPERATION
The consumer financing industry is a highly regulated industry. UPAM's
business is subject to extensive and complex rules and regulations of, and
examinations by, various federal, state and local government authorities. These
rules and regulations impose obligations and restrictions on UPAM's loan
origination, credit activities and secured transactions. In addition, these
rules limit the interest rates, finance charges and other fees UPAM may assess,
mandate extensive disclosure to UPAM's customers, prohibit discrimination and
impose multiple qualification and licensing obligations on UPAM. Failure to
comply with these requirements may result in, among other things, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits, administrative enforcement actions and
civil and criminal liability. Management of UPAM believes that UPAM is in
compliance with these rules and regulations in all material respects.
25
<PAGE>
UPAM's loan origination activities are subject to the laws and regulations
in each of the states in which those activities are conducted. UPAM's lending
activities are also subject to various federal laws, including those described
below.
UPAM is subject to certain disclosure requirements under the Truth in
Lending Act ("TILA") and the Federal Reserve Board's Regulation Z promulgated
thereunder. TILA is designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loan and credit
transactions. TILA also guarantees consumers a three-day right to cancel certain
credit transactions, including loans of the type originated by UPAM. Such three-
day right to rescind may remain unexpired for up to three years if the lender
fails to provide the requisite disclosures to the consumer.
UPAM originates loans which are subject to the Home Ownership and Equity
Protection Act of 1994 (the "High Cost Mortgage Act"), which makes certain
amendments to TILA. The High Cost Mortgage Act generally applies to consumer
credit transactions secured by the consumer's principal residence, other than
residential mortgage transactions, reverse mortgage transactions or transactions
under an open-end credit plan, in which the loan has either (i) total points and
fees upon origination in excess of the greater of eight percent of the loan
amount or $435 or (ii) an annual percentage rate of more than ten percentage
points higher than United States Treasury securities of comparable maturity
("Covered Loans"). The High Cost Mortgage Act imposes additional disclosure
requirements on lenders originating Covered Loans. In addition, it prohibits
lenders from, among other things, originating Covered Loans that are
underwritten solely on the basis of the borrower's home equity without regard to
the borrower's ability to repay the loan and including prepayment fee clauses in
Covered Loans to borrowers with a debt-to-income ratio in excess of 50% or
Covered Loans used to refinance existing loans originated by the same lender.
The High Cost Mortgage Act also restricts, among other things, certain balloon
payments and negative amortization features. UPAM commenced originating Covered
Loans during 1996.
UPAM is also required to comply with the Equal Credit Opportunity Act
("ECOA") and the Federal Reserve Board's Regulation B promulgated thereunder,
the Fair Credit Reporting Act ("FCRA"), the Real Estate Settlement Procedures
Act of 1974 ("RESPA") and the Home Mortgage Disclosure Act ("HMDA"). Regulation
B restricts creditors from requesting certain types of information from loan
applicants. FCRA requires lenders, among other things, to supply an applicant
with certain information if the lender denies the applicant credit. RESPA
requires lenders, among other things, to supply an applicant with certain
disclosures concerning settlement fees and changes and mortgage servicing
transfer practices. It also prohibits the payment or receipt of kickbacks or
referral fees in connection with the performance of settlement services. In
addition, beginning with loans originated in 1994, UPAM must file an annual
report with the Department of Housing and Urban Development pursuant to HMDA,
which requires the collection and reporting of statistical data concerning loan
transactions.
In the course of its business, UPAM may acquire properties securing loans
that are in default. There is a risk that hazardous or toxic waste could be
found on such properties. In such event, UPAM could be held responsible for the
cost of cleaning up or removing such waste, and such cost could exceed the value
of the underlying properties.
Because UPAM's business is highly regulated, the laws, rules and
regulations applicable to UPAM are subject to regular modification. There are
currently proposed various laws, rules and regulations which, if adopted, could
materially affect UPAM's business. There can be no assurance that these proposed
laws, rules and regulations, or other such laws, rules or regulations, will not
be adopted in the future which could make compliance much more difficult or
expensive, restrict UPAM's ability to originate, broker or sell loans, further
limit or restrict the amount of commissions, interest and other charges earned
on loans originated, brokered or sold by UPAM, or otherwise adversely affect the
business or prospects of UPAM.
26
<PAGE>
REGULATION OF INSURANCE PREMIUM FINANCE COMPANIES
The auto insurance premium finance industry is subject to state
regulations. The regulatory structure of each state places certain restrictions
on the terms of loans made to finance insurance premiums. These restrictions,
among other things, generally provide that the lender must provide certain
cancellation notices to the insured and the insurer in order to exercise an
assigned right to cancel an automobile insurance policy in the event of a
default under an insurance premium finance agreement and to obtain in connection
therewith a return from the insurer of any unearned premiums that have been
assigned by the insured to the lender. Such state laws also require that certain
disclosures be delivered by the insurance agent or broker arranging for such
credit to the insured regarding the amount of compensation to be received by
such agent or broker from the lender.
REGULATION OF SUBPRIME AUTOMOBILE LENDING
UACC's automobile lending activities are subject to various federal and
state consumer protection laws, including TILA, ECOA, FCRA, the Federal Fair
Debt Collection Practices Act, the Federal Trade Commission Act, the Federal
Reserve Board's Regulations B and Z, and state motor vehicle retail installment
sales acts. Retail installment sales acts and other similar laws regulate the
origination and collection of consumer receivables and impact UACC's business.
These laws, among other things, (i) require UACC to obtain and maintain certain
licenses and qualifications, (ii) limit the finance charges, fees and other
charges on the contracts purchased, (iii) require UACC to provide specified
disclosures to consumers, (iv) limit the terms of the contracts, (v) regulate
the credit application and evaluation process, (vi) regulate certain servicing
and collection practices, and (vii) regulate the repossession and sale of
collateral. These laws impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may give rise to a defense to payment
of the consumer's obligation. In addition, certain of the laws make the assignee
of a consumer installment contract liable for the violations of the assignor.
See "--Regulation of Mortgage Finance Operation."
Each dealer agreement contains representations and warranties by the dealer
that, as of the date of assignment, the dealer has compiled with all applicable
laws and regulations with respect to each contract. The dealer is obligated to
indemnify UACC for any breach of any of the representations and warranties and
to repurchase any non-conforming contracts. UACC generally verifies dealer
compliance with usury laws, but does not audit a dealer's full compliance with
applicable laws. There can be no assurance that UACC will detect all dealer
violations or that individual dealers will have the financial ability and
resources either to repurchase contracts or indemnify UACC against losses.
Accordingly, failure by dealers to comply with applicable laws, or with their
representations and warranties under the dealer agreement, could have a material
adverse affect on UACC.
UACC believes it is currently in compliance in all material respects with
applicable laws, but there can be no assurance that UACC will be able to
maintain such compliance. The failure to comply with such laws, or a
determination by a court that UACC's interpretation of any such law was
erroneous, could have a material adverse effect upon UACC. Furthermore, the
adoption of additional laws, changes in the interpretation and enforcement of
current laws or the expansion of UACC's business into jurisdictions that have
adopted more stringent regulatory requirements than those in which UACC
currently conducts business, could have a material adverse affect upon UACC.
If a borrower defaults on a contract, UACC, as the servicer of the
contract, is entitled to exercise the remedies of a secured party under the
Uniform Commercial Code as adopted in a particular state (the "UCC"), which
typically includes the right to repossession by self-help unless such means
would constitute a breach of the peace. The UCC and other state laws regulate
repossession and sales of collateral by requiring reasonable notice to the
borrower of the date, time and place of any public sale of collateral, the date
after which any private sale of the collateral may be held and the borrower's
right to redeem the financed vehicle prior to any such sale, and by providing
that any such sale must be conducted in a commercially reasonable manner.
27
<PAGE>
Financed vehicles repossessed generally are resold by UACC through unaffiliated
wholesale automobile networks or auctions which are attended principally by used
automobile dealers.
BUSINESS SAVINGS BANK REGULATION
As a federally chartered, SAIF-insured savings association, the Bank is
subject to extensive regulation by the OTS and the Federal Deposit Insurance
Corporation ("FDIC"). Lending activities and other investments of the Bank must
comply with various statutory and regulatory requirements. The Bank is also
subject to certain reserve requirements promulgated by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board").
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies found in the operations of the Bank. The relationship between the
Bank and depositors and borrowers is also regulated by federal and state laws,
especially in such matters as the ownership of savings accounts and the form and
content of mortgage documents utilized by the Bank.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Bank, and
their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF, as administered by the FDIC, up to the maximum amount permitted by
law. Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC or the institution's
primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system as of December 31, 1995, SAIF members paid within a range of 23
cents to 31 cents per $100 of domestic deposits, depending upon the
institution's risk classification. This risk classification is based on an
institution's capital group and supervisory subgroup assignment. Pursuant to
the Economic Growth and Paperwork Reduction Act of 1996 (the "Paperwork
Reduction Act"), the FDIC imposed a special assessment on SAIF members to
capitalize the SAIF at the designated reserve level of 1.25% as of October 1,
1996. Based on the Bank's deposits as of March 31, 1995, the date for measuring
the amount of the special assessment pursuant to the Paperwork Reduction Act,
the Bank paid a special assessment of $820,000 (pre-tax) to recapitalize the
SAIF. This expense was accrued in December 1996 and paid in June 1997.
Pursuant to the Paperwork Reduction Act, the Bank pays, in addition to its
normal deposit insurance premium as a member of the SAIF ranging from 0 to 27
basis points as of October 1, 1996, an amount equal to approximately 6.4 basis
points toward the retirement of the Financing Corporation bonds ("Fico Bonds")
issued in the 1980s to assist in the recovery of the savings and loan industry.
Members of the Bank Insurance Fund ("BIF"), by contrast, pay, in addition to
their normal deposit insurance premium, approximately 1.3 basis points. Under
the Paperwork Reduction Act, the FDIC also is not permitted to establish SAIF
assessment rates that are lower than comparable BIF assessment rates. Beginning
no later than January 1, 2000, the rate paid to retire the Fico Bonds will be
equal for members of the BIF and the SAIF. The Paperwork Reduction Act also
28
<PAGE>
provided for the merging of the BIF and the SAIF by January 1, 1999 provided
there were no financial institutions still chartered as savings associations at
that time. Although legislation to eliminate the savings association charter
had been proposed, at January 1, 1999, financial institutions such as the Bank
were still chartered as savings associations. Should the insurance funds be
merged before January 1, 2000, the rate paid by all members of this new fund to
retire the Fico Bonds would be equal.
Regulatory Capital Requirements. OTS capital regulations require savings
associations to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) leverage capital (core capital) equal to 3% of
total adjusted assets, and (3) risk-based capital equal to 8.0% of total risk-
based assets. The Bank must meet each of these standards in order to be deemed
in compliance with OTS capital requirements. In addition, the OTS may require a
savings association to maintain capital above the minimum capital levels.
Under OTS regulations, a savings association with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is
measured, generally, as the decline in an institution's net portfolio value that
would result from a 200 basis point increase or decrease in market interest
rates (whichever would result in lower net portfolio value), divided by the
estimated economic value of the savings association's assets. The interest rate
risk component to be deducted from total capital is equal to one-half of the
difference between an institution's measured exposure and "normal" IRR exposure
(which is defined as 2%), multiplied by the estimated economic value of the
institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation. Based on information voluntarily supplied
to the OTS, at December 31, 1998, the Bank would not have been required to
deduct an IRR component in calculating total risk-based capital had the IRR
component of the capital regulations been in effect.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries, or other persons, or savings associations
with which it has significant business relationships. The Bank is not subject
to any such individual minimum regulatory capital requirement.
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As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of December 31, 1998.
<TABLE>
<CAPTION>
Percent of
Amount Adjusted Assets
---------------------- ---------------------
(Dollars in Thousands)
<S> <C> <C>
GAAP Capital............................................. $ 31,654 7.47%
TANGIBLE CAPITAL: (1)
Regulatory requirement................................... $ 6,321 1.50%
Actual capital........................................... 29,251 6.94%
----------- -----------
Excess................................................ $ 22,930 5.44%
=========== ===========
LEVERAGE (CORE) CAPITAL: (1)
Regulatory requirement................................... $ 12,642 3.00%
Actual capital........................................... 29,251 6.94%
----------- -----------
Excess................................................ $ 16,609 3.94%
=========== ===========
RISK-BASED CAPITAL: (2)
Regulatory requirement................................... $ 24,625 8.00%
Actual capital........................................... 33,154 10.77%
----------- -----------
Excess................................................ $ 8,529 2.77%
=========== ===========
</TABLE>
____________
(1) Regulatory capital reflects modifications from GAAP capital due to goodwill
and other intangible assets and a portion of deferred tax assets not
permitted to be included in regulatory capital.
(2) Based on risk-weighted assets of $307.8 million.
The Home Owners' Loan Act ("HOLA") permits savings associations not in
compliance with the OTS capital standards to seek an exemption from certain
penalties or sanctions for noncompliance. Such an exemption will be granted
only if certain strict requirements are met, and must be denied under certain
circumstances. If an exemption is granted by the OTS, the savings association
still may be subject to enforcement actions for other violations of law or
unsafe or unsound practices or conditions.
Prompt Corrective Action. The prompt corrective action regulation of the
OTS, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings association that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
risk-based capital, leverage capital, and tangible capital ratios are used to
determine an institution's capital classification. At December 31, 1998, the
Bank met the capital requirements of a "well capitalized" institution under
applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept Brokered Deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew, or roll-over Brokered
Deposits.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
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reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
Loans-to-One Borrower. Savings associations generally are subject to the
lending limits applicable to national banks. With certain limited exceptions,
the maximum amount that a savings association or a national bank may lend to any
borrower (including certain related entities of the borrower) at one time may
not exceed 15% of the unimpaired capital and surplus of the institution, plus an
additional 10% of unimpaired capital and surplus for loans fully secured by
readily marketable collateral. Savings associations are additionally authorized
to make loans to one borrower, for any purpose, in an amount not to exceed
$500,000 or, by order of the Director of OTS, in an amount not to exceed the
lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided: (i) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (ii) the savings
association is in compliance with its fully phased-in capital requirements;
(iii) the loans comply with applicable loan-to-value requirements, and (iv) the
aggregate amount of loans made under this authority does not exceed 150% of
unimpaired capital and surplus. At December 31, 1998, the Bank's loans-to-one-
borrower limit was $4.4 million based upon the 15% of unimpaired capital and
surplus measurement.
Qualified Thrift Lender Test. Savings associations must meet a QTL test,
which test may be met either by maintaining a specified level of assets in
qualified thrift investments as specified in HOLA or by meeting the definition
of a "domestic building and loan association" in section 7701 of the Code. If
the Bank maintains an appropriate level of certain specified investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL or a domestic
building and loan association, it will continue to enjoy full borrowing
privileges from the Federal Home Loan Bank ("FHLB"). The required percentage of
investments under HOLA is 65% of assets while the Code requires investments of
60% of assets. An association must be in compliance with the QTL test or the
definition of domestic building and loan association on a monthly basis in nine
out of every 12 months. Associations that fail to meet the QTL test will
generally be prohibited from engaging in any activity not permitted for both a
national bank and a savings association. As of December 31, 1998, the Bank was
in compliance with its QTL requirement and met the definition of a domestic
building and loan association.
Affiliate Transactions. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates.
In addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction"
is defined to include a loan or extension of credit to an affiliate; a purchase
of investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings association
may not purchase or invest in securities of an affiliate other than shares of a
subsidiary; a
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savings association and its subsidiaries may not purchase a low-quality asset
from an affiliate; and covered transactions and certain other transactions
between a savings association or its subsidiaries and an affiliate must be on
terms and conditions that are consistent with safe and sound banking practices.
With certain exceptions, each loan or extension of credit by a savings
association to an affiliate must be secured by collateral with a market value
ranging from 100% to 130% (depending on the type of collateral) of the amount of
the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.
Capital Distribution Limitations. OTS regulations impose limitations upon
all capital distributions by savings associations, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The OTS recently adopted an amendment to these capital
distribution limitations. Under the new rule, a savings association in certain
circumstances may be required to file an application and await approval from the
OTS prior to making a capital distribution, may be required to file a notice 30
days prior to the capital distribution, or may be permitted to make the capital
distribution without notice or application to the OTS.
An application is required (1) if the savings association is not eligible
for expedited treatment of its other applications under OTS regulations; (2) the
total amount of all of capital distributions (including the proposed capital
distribution) for the applicable calendar year exceeds net income for that year
to date plus retained net income for the preceding two years; (3) the savings
association would not be at least adequately capitalized, under the prompt
corrective action regulations of the OTS following the distribution; or (4) the
savings association's proposed capital distribution would violate a prohibition
contained in any applicable statute, regulation, or agreement between the
savings association and the OTS (or the FDIC), or violate a condition imposed on
the savings association in an OTS-approved application or notice.
A notice of a capital distribution is required if a savings association is
not required to file an application, but: (1) would not be well capitalized
under the prompt corrective action regulations of the OTS following the
distribution; (2) the proposed capital distribution would reduce the amount of
or retire any part of your common or preferred stock or retire any part of debt
instruments such as notes or debentures included in capital (other than regular
payments required under a debt instrument approved by the OTS); or (3) the
savings association is a subsidiary of a savings and loan holding company.
If neither the savings association nor the proposed capital distribution
meet any of the above listed criteria, no application or notice is required for
the savings association to make a capital distribution. The OTS may prohibit
the proposed capital distribution that would otherwise be permitted if the OTS
determines that the distribution would constitute an unsafe or unsound practice.
Activities of Subsidiaries. Federally chartered savings associations, such
as the Bank, are permitted to invest up to 2% of their assets in the capital
stock of, or secured or unsecured loans to, subsidiary service corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under the 2% limitation,
the Bank was permitted to invest up to approximately $8.5 million at December
31, 1998. A savings association seeking to establish a new subsidiary, acquire
control of an existing company or conduct a new activity through a subsidiary
must provide 30 days prior notice to the FDIC and the OTS and conduct any
activities of the subsidiary in accordance with regulations and orders of the
OTS. The OTS has the power to require a savings association to divest any
subsidiary or terminate any activity conducted by a subsidiary that the OTS
determines to pose a serious threat
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to the financial safety, soundness or stability of the savings association or to
be otherwise inconsistent with sound banking practices.
Recent Legislation. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. The Treasury Department has been
studying the development of a common charter for federal savings associations
and commercial banks. Pursuant to the Paperwork Reduction Act, if the thrift
charter is eliminated after January 1, 1999, the Paperwork Reduction Act would
require the merger of the BIF and the SAIF into a single Deposit Insurance Fund
on that date. In the absence of appropriate "grandfather" provisions,
legislation eliminating the thrift charter could have a material adverse effect
on the Bank and the Company because, among other things, the regulatory,
capital, and accounting treatment for national and state banks and savings
associations differs in certain significant respects. The Bank cannot determine
whether, or in what form, such legislation may eventually be enacted and there
can be no assurance that any legislation that is enacted would contain adequate
grandfather rights for the Bank and the Company.
Year 2000 Compliance. The Federal Financial Institutions Examination
Council issued an interagency statement to the chief executive officers of all
federally supervised financial institutions regarding year 2000 project
management awareness. It is expected that unless financial institutions address
the technology issues relating to the coming of the year 2000, there will be
major disruptions in the operations of financial institutions. The statement
provides guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies intend to conduct year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. If a
federal banking agency determines that the Bank is operating in an unsafe and
unsound manner, the Bank may be required to submit a compliance plan. Failure
to submit a compliance plan or to implement an accepted plan may result in
enforcement action being taken, which may include a cease and desist order and
fines. To date, the OTS has completed three regular examinations of the Bank's
Year 2000 compliance programs, and it is expected that they will complete two
additional examinations by the end of 1999.
Community Reinvestment Act and the Fair Lending Laws. Savings associations
have a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the ECOA and the
Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities and the denial of certain applications, and failure to comply with
the Fair Lending Laws could result in enforcement actions by the OTS, as well as
other federal regulatory agencies and the Department of Justice.
Federal Home Loan Bank System. The Bank is a member of the FHLB system.
Among other benefits, each FHLB serves as a reserve or central bank for its
members within its assigned region. Each FHLB is financed primarily from the
sale of consolidated obligations of the FHLB system. Each FHLB makes available
to members loans (i.e., advances) in accordance with the policies and procedures
established by the Board of Directors of the individual FHLB.
As a member, the Bank is required to own capital stock in an FHLB in an
amount equal to the greater of: (i) 1% of its aggregate outstanding principal
amount of its residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, (ii) 0.3% of total assets,
or (iii) 5% of its FHLB advances (borrowings). At December 31, 1998, the Bank
had $2.1 million in FHLB stock, which was in compliance with this requirement.
Liquidity Requirements. Under OTS regulations, a savings association is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers'
33
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acceptances, certain government obligations, and certain other investments) in
each calendar quarter of not less than 4% of either (1) its liquidity base
(consisting of certain net withdrawable accounts plus short-term borrowings) as
of the end of the preceding calendar quarter, or (2) the average daily balance
of its liquidity base during the preceding quarter. This liquidity requirement
may be changed from time to time by the OTS to any amount between 4.0% to 10.0%,
depending upon certain factors, including economic conditions and savings flows
of all savings associations. The Bank maintains liquid assets in compliance with
these regulations. Monetary penalties may be imposed upon an institution for
violations of liquidity requirements.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1998, the Bank was in compliance with these requirements.
TAXATION
FEDERAL
General. The Company and the Bank report their income on a consolidated
basis using the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Company has not been audited by the Internal Revenue
Service. For its 1998 taxable year, the Company is subject to a maximum federal
income tax rate of 34.0%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Code were permitted to use certain favorable provisions to
calculate their deductions from taxable income for annual additions to their bad
debt reserve. A reserve could be established for bad debts on qualifying real
property loans (generally secured by interests in real property improved or to
be improved) under (i) the Percentage of Taxable Income Method or (ii) the
Experience Method. The reserve for non-qualifying loans was computed using the
Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture certain
portions of their accumulated bad debt reserves. The 1996 Act repeals the
reserve method of accounting for bad debts effective for tax years beginning
after 1995. Thrift institutions that would be treated as small banks are allowed
to utilize the Experience Method applicable to such institutions, while thrift
institutions that are treated as large banks (those generally exceeding $500
million in assets) are required to use only the specific charge-off method.
To the extent the allowable bad debt reserve balance using the thrift's
historical computation method exceeds the allowable bad debt reserve method
under the newly enacted provisions, such excess is required to be recaptured
into income under the provisions of Code Section 481(a). Any Section 481(a)
adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable year period.
Under the 1996 Act, the Bank is permitted to use the Experience Method to
compute its allowable addition to its reserve for bad debts for the current
year. The Bank's bad debt reserve as of December 31, 1995 was computed using the
permitted Experience Method computation and was therefore not subject to the
recapture of any portion of its bad debt reserve as discussed above.
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STATE
The California franchise tax applicable to the Bank is computed under a
formula which results in a rate higher than the rate applicable to non-financial
corporations because it reflects an amount "in lieu" of local personal property
and business license taxes paid by such corporation (but not generally paid by
banks or financial corporations such as the Bank). The variable tax rate was
10.84% in 1998 and 1997. The Company and its wholly owned subsidiaries file a
California franchise tax return on a combined reporting basis. The Company has
not been audited by the Franchise Tax Board.
SUBSIDIARIES
Pan American Financial, Inc., a wholly-owned subsidiary of the Company,
acts as the parent company of Pan American Bank, FSB and is the obligor on loans
obtained from the RTC in connection with the Minority Interim Capital Assistance
Program provided under the Federal Home Loan Bank Act.
United PanAm Mortgage Corporation, a wholly-owned subsidiary of the
Company, acts as agent for the Bank in secondary marketing activities.
United Auto Credit Corporation, a wholly-owned subsidiary of the Bank,
holds for investment and services subprime retail automobile installment sales
contracts.
Pan American Service Corporation, a wholly-owned subsidiary of the Bank,
acts as trustee under certain deeds of trust originated through the Bank's
mortgage lending activities.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements,
including statements regarding the Company's strategies, plans, objectives,
expectations and intentions, which are subject to a variety of risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set from in the "Factors That May Affect Results of Operations"
and elsewhere in this Annual Report. The cautionary statements made in this
Annual Report should be read as being applicable to all related forward-looking
statements wherever they appear in this Annual Report .
The following discusses certain factors which may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
LIMITED OPERATING HISTORY
The Company purchased certain assets and assumed certain liabilities of Pan
American Federal Savings Bank from the RTC in 1994. In 1995, the Company
commenced its insurance premium finance business through a joint venture with
BPN, and in 1996 the Company commenced its subprime mortgage and automobile
finance businesses. Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CREDIT-IMPAIRED BORROWERS
Loans made to borrowers who cannot obtain financing from traditional
lenders generally entail a higher risk of delinquency and default and higher
losses than loans made to borrowers with better credit. 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
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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, mortgage warehouse lines 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 7.
Management's Discussion and Analysis of Financial Condition and Results of
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 performance of the
Company's loans may be affected by changes in California's economic and business
conditions, including its residential real estate market. The occurrence of
adverse economic conditions or natural disasters in California could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects.
RELIANCE ON SYSTEMS AND CONTROLS
The Company depends heavily upon its systems and controls, some of which
have been designed specifically for a particular business, to support the
evaluation, acquisition, monitoring, collection and administration of that
business. There can be no assurance that these systems and controls, including
those specially designed and built for the Company, are adequate or will
continue to be adequate to support the Company's growth. A failure of the
Company's automated systems, including a failure of data integrity or accuracy,
could have a material adverse effect upon the Company's financial condition,
results of operations and business prospects.
RELIANCE ON KEY EMPLOYEES AND OTHERS
The Company is dependent upon the continued services of its key employees
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
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<PAGE>
companies, mortgage banking companies, commercial banks, credit unions, savings
associations and insurance companies. The Company competes in the insurance
premium finance business with other specialty finance companies, independent
insurance agents who offer premium finance services, captive premium finance
affiliates of insurance companies and direct bill plans established by insurance
companies. The Company competes in the subprime automobile finance industry with
commercial banks, the captive finance affiliates of automobile manufacturers,
savings associations and companies specializing in subprime automobile finance,
many of which have established relationships with automobile dealerships and may
offer dealerships or their customers other forms of financing, including dealer
floor plan financing and lending, which are not offered by the Company. In
attracting deposits, the Bank competes primarily with other savings
institutions, commercial banks, brokerage firms, mutual funds, credit unions and
other types of investment companies.
Fluctuations in interest rates and general and localized economic
conditions also may affect the competition the Company faces. Competitors with
lower costs of capital have a competitive advantage over the Company. During
periods of declining interest rates, competitors may solicit the Company's
customers to refinance their loans. In addition, during periods of economic
slowdown or recession, the Company's borrowers may face financial difficulties
and be more receptive to offers of the Company's competitors to refinance their
loans.
As the Company expands into new geographic markets, it will face additional
competition from lenders already established in these markets. There can be no
assurance that the Company will be able to compete successfully with these
lenders.
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 interest income. Further, a
significant increase in market rates of interest could adversely affect demand
for the Company's financial products and services. Interest rates are highly
sensitive to many factors, including governmental monetary policies and domestic
and international economic and political conditions, which are beyond the
Company's control. The Company's liabilities generally have shorter terms and
are more interest rate sensitive than its assets. Accordingly, changes in
interest rates could have a material adverse effect on the profitability of the
Company's lending activities. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations "Management of Internal Rate
Risk."
MANAGEMENT OF GROWTH
The Company has experienced rapid growth in each of its businesses and
intends to pursue growth for the foreseeable future, particularly in its
mortgage and automobile finance businesses. In addition, the Company intends to
broaden its product offerings to include additional types of consumer or, in the
case of IPF, commercial loans. Further, the Company may enter other specialty
finance businesses. This growth strategy will require additional capital,
systems development and human resources. 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.
DEPENDENCE ON LOAN SALE AND SECURITIZATION MARKETS
The Company generates substantial revenues from whole loan sales or
securitizations. There can be no assurance that whole loan purchasers will
continue to purchase the Company's loans, or that they will continue to purchase
loans at present prices, and failure to do so could have a material adverse
effect on the Company's
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financial condition, results of operations and business prospects. Further,
adverse conditions in the asset-backed securitization market could adversely
affect the Company's ability to sell or securitize loans at present prices.
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 completed its second securitization of mortgage loans in March
1999. 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 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
38
<PAGE>
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.
YEAR 2000 COMPLIANCE
Most of the Company's operations are dependent on the efficient functioning
of the Company's computer systems and software. Computer system failures or
disruption could have a material adverse effect on the Company's business,
financial condition and results of operations.
Many computer programs were designed and developed utilizing only two
digits in date fields, thereby creating the inability to recognize the year 2000
or years thereafter. Beginning in the year 2000, these date codes will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. This year 2000 issue creates risks for the Company from unforeseen or
unanticipated problems in its internal computer systems as well as from computer
systems of the Federal Reserve Bank, correspondent banks, customers and
suppliers. Failures of these systems or untimely corrections could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's computer systems and programs are designed and supported by
companies specifically in the business of providing such products and services.
The Company's year 2000 plan includes evaluating existing hardware, software,
vaults, alarm systems, communication systems and other electrical devices,
testing critical application programs and systems, both internally and
externally, establishing a contingency plan and upgrading hardware and software
as necessary. The initial phase of the project was to assess and identify all
internal business processes requiring modification and to develop comprehensive
renovation plans as needed. This phase was largely completed in 1998. The second
phase was to execute those renovation plans and begin testing systems by
simulating year 2000 data conditions. This phase was also largely completed in
1998. Testing and implementation is planned to be completed during the first
half of 1999. Failure to be year 2000 compliant or incurrence of significant
costs to render the Company year 2000 compliant could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is evaluating its major customers and suppliers to determine if
they are year 2000 compliant. Failure of any material customer or supplier to be
year 2000 compliant could have a material adverse effect on the Company.
OTHER RISKS
From time to time, the Company details other risks with respect to its
business and financial results in its filings with the Securities and Exchange
Commission.
ITEM 2. PROPERTIES
The Company's principal executive offices occupy approximately 9,000 square
feet of office space located at 1300 South El Camino Real, San Mateo, California
94402. As of December 31, 1998, the Company maintained five branches for its
banking business, 22 branches for its mortgage finance business, 15 branches for
its automobile finance business and one branch for its insurance premium finance
business. The size of the branches typically range from 250 square feet to
19,081 square feet. All of the Company's leased properties are leased for terms
expiring on dates ranging from the date hereof to March 2006, many with
39
<PAGE>
options to extend the lease term. The net investment in premises, equipment and
leaseholds totaled $4.8 million at December 31, 1998 compared to $3.1 million at
December 31, 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
conduct of its businesses. The Company currently is not a party to any material
pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock has been traded on the Nasdaq National Market under the
symbol "UPFC" since the Company completed its initial public offering on April
23, 1998. As of March 17, 1999, the Company had approximately 320 shareholders
of record and 16,843,750 outstanding shares of common stock. The following
table sets forth the high and low sales prices per share of Common Stock as
reported on the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
QUARTER ENDED High Low
- ------------- ---- ---
<S> <C> <C>
June 30, 1998 $ 13.94 $ 9.75
September 30, 1998 $ 11.69 $ 5.50
December 31, 1998 $ 5.63 $ 3.38
</TABLE>
The Company has never paid a cash dividend on the Common Stock. The Company
does not anticipate paying cash dividends on the Common Stock in the foreseeable
future. The payment of dividends is within the discretion of the Company's Board
of Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions on the payment of dividends and general business conditions.
Federal regulations restrict the Bank's ability to declare or pay any dividends
to the Company. See "Item 1. Business Supervision and Regulation Business
Savings Bank Regulation Capital Distribution Limitations." In addition, certain
interim capital assistance loan agreements among the Bank, PAFI and the RTC
prohibit the Bank from declaring or paying any dividends, except under limited
circumstances, until all of the obligations of the Bank and PAFI to the RTC have
been discharged. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations RTC Notes Payable."
On April 23, 1998, the Company's Registration Statement on Form S-1 (File
No. 333-39941) for the initial public offering of 5,500,000 shares of its Common
Stock was declared effective by the SEC.
40
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's consolidated financial position as of December 31, 1998 and 1997 and
its results of operations for the years ended December 31, 1998, 1997 and 1996
has been derived from the Company's audited consolidated financial statements
appearing elsewhere in this Annual Report. This information should be read in
conjunction with such consolidated financial statements and notes thereto. The
selected financial data with respect to the Company's consolidated financial
position as of December 31, 1996, 1995 and 1994 and its results of operations
for the year ended December 31, 1995 and for the annualized period from April
29, 1994 (inception) to December 31, 1994 has been derived from the Company's
audited financial statements, which are not presented in this Annual Report.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
At or For the
Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Interest income $ 45,345 $ 26,511 $ 16,561 $ 13,533
Interest expense 19,246 12,411 7,853 7,727
--------------- ------------- ------------- -------------
Net interest income 26,099 14,100 8,708 5,806
Provision for loan losses 5,853 507 194 120
--------------- ------------- ------------- -------------
Net interest income after provision for loan
losses 20,246 13,593 8,514 5,686
--------------- ------------- ------------- -------------
Non-interest income
Gain on sale of loans 50,130 26,526 2,333 90
Other non-interest income 936 702 443 228
--------------- ------------- ------------- -------------
Total non-interest income 51,066 27,228 2,776 318
--------------- ------------- ------------- -------------
Non-interest expense
Compensation and benefits 36,833 19,043 5,248 2,750
SAIF special assessment -- -- 820 --
Other expense 22,725 11,039 3,581 2,412
--------------- ------------- ------------- -------------
Total non-interest expense 59,558 30,082 9,649 5,162
--------------- ------------- ------------- -------------
Income before income taxes 11,754 10,739 1,641 842
Income taxes 4,991 4,491 691 384
--------------- ------------- ------------- -------------
Net income $ 6,763 $ 6,248 $ 950 $ 458
=============== ============= ============= =============
Net income per share basic (1) $0.44 $0.58 $0.09 $0.04
=============== ============= ============= =============
Net income per share diluted (1) $0.42 $0.53 $0.09 $0.04
=============== ============= ============= =============
Weighted average shares outstanding basic (1) 15,263 10,739 10,669 10,669
=============== ============= ============= =============
Weighted average shares outstanding diluted (1) 16,143 11,875 10,669 10,669
=============== ============= ============= =============
BALANCE SHEET DATA
Total assets $425,559 $310,754 $188,743 $159,581
Loans 133,718 148,535 134,821 131,794
Loans held for sale 214,406 120,002 20,766 --
Allowance for loan losses (10,183) (6,487) (5,356) (5,250)
Deposits 321,668 233,194 159,061 141,924
Notes payable 10,930 12,930 10,930 10,930
FHLB advances -- 28,000 4,000 --
Warehouse lines of credit -- 6,237 -- --
Shareholders' equity 82,913 13,009 6,761 5,811
<CAPTION>
April 29, 1994
(Inception)
Through
December 31,
1994
---------------
<S> <C>
STATEMENT OF OPERATIONS DATA
Interest income $ 6,882
Interest expense 3,573
---------------
Net interest income 3,309
Provision for loan losses 50
---------------
Net interest income after provision for loan
losses 3,259
---------------
Non-interest income
Gain on sale of loans 3
Other non-interest income 95
---------------
Total non-interest income 98
---------------
Non-interest expense
Compensation and benefits 1,564
SAIF special assessment --
Other expense 1,579
---------------
Total non-interest expense 3,143
---------------
Income before income taxes 214
Income taxes 98
---------------
Net income $ 116
===============
Net income per share basic (1) $ 0.01
===============
Net income per share diluted (1) $ 0.01
===============
Weighted average shares outstanding basic (1) 10,669
===============
Weighted average shares outstanding diluted (1) 10,669
===============
BALANCE SHEET DATA
Total assets $ 180,024
Loans 53,176
Loans held for sale --
Allowance for loan losses (378)
Deposits 163,114
Notes payable 10,930
FHLB advances --
Warehouse lines of credit --
Shareholders' equity 5,270
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) April 29, 1994
(Inception)
At or For the Through
Year Ended December 31, December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Return on average assets(2) 1.56% 2.48% 0.56% 0.27% 0.11%
Return on average shareholders' equity(2) 12.00% 71.84% 16.10% 8.51% 3.44%
Net interest margin 6.57% 6.07% 5.44% 3.61% 3.24%
Shareholders' equity to assets 19.48% 4.19% 3.58% 3.64% 2.93%
Tangible capital ratio of Bank 6.94% 7.27% 8.85% 9.89% 8.50%
Core capital ratio of Bank 6.94% 7.27% 8.85% 9.89% 8.50%
Risk-based capital ratio of Bank 10.77% 12.34% 16.36% 17.19% 27.53%
ASSET QUALITY DATA
Nonaccrual loans, net(3) $ 18,632 $ 6,633 $ 5,835 $ 5,240 $1,439
Real estate owned 1,877 562 988 298 --
Total non-performing assets 20,509 7,195 6,823 5,538 1,439
Non-performing assets to total assets 4.82% 2.31% 3.61% 3.47% 0.80%
Allowance for credit losses to loans held for investment 7.62% 4.37% 3.97% 3.98% 0.71%
SUBPRIME MORTGAGE FINANCE DATA
Loan origination activities(4)
Wholesale originations $ 807,382 $359,236 $58,456 -- --
Retail originations 382,359 219,386 13,055 -- --
-------------------------------------------------------------------
Total loan originations 1,189,741 $578,622 $71,511 -- --
Percent of loans secured by first mortgages 96% 96% 95% -- --
Weighted average initial loan-to-value ratio 75% 75% 72% -- --
Originations by product type
Adjustable-rate mortgages 71% 82% 85% -- --
Fixed-rate mortgages 29% 18% 15% -- --
Weighted average interest rate
Adjustable-rate mortgages 9.62% 9.48% 9.55% -- --
Fixed-rate mortgages 10.35% 10.67% 10.76% -- --
Average balance per loan $ 99 $ 104 $ 100 -- --
Loans sold through whole loan transactions(5) 1,084,701 $360,210 $50,142 -- --
Loan securitizations -- $114,904 -- -- --
Number of retail branches and wholesale loan centers 22 22 5 -- --
INSURANCE PREMIUM FINANCE DATA
Loans originated $ 152,998 $145,167 $99,012 $21,676 --
Loans outstanding at period end $ 44,709 $ 39,990 $32,058 $16,975 --
Number of loans originated 137,743 125,315 83,839 21,137 --
Average net yield on loans originated 13.90% 14.01% 13.62% 15.77% --
Average loan size at origination $ 1.11 $ 1.16 $ 1.18 $ 1.03 --
Net charge-offs to average loans 0.78% 0.35% 0.39% -- --
AUTOMOBILE FINANCE DATA
Gross contracts purchased $ 86,098 $ 44,056 $12,216 -- --
Number of contracts purchased 7,695 4,187 1,177 -- --
Average discount on contracts purchased 9.12% 9.79% 10.00% -- --
Net charge-offs to average contracts 4.56% 4.94% 1.50% -- --
Number of branches 15 10 4 -- --
</TABLE>
______________
(1) Net income per share - basic is based on the weighted average shares of
Common Stock outstanding during the period adjusted for the 1,875-for-1
stock split effective in November 1997. Net income per share - diluted is
based on the weighted average shares of Common Stock and Common Stock
equivalents outstanding during the period adjusted for a 1,875-for-1 stock
split effective in November 1997.
(2) Information for the period from April 29, 1994 (inception) to December 31,
1994 is annualized for comparability with full year information.
42
<PAGE>
(3) Nonaccrual loans are net of specific loss allowances.
(4) Does not include conforming loans purchased from the RTC in the aggregate
principal amount of $75.9 million and $57.2 million in the year ended
December 31, 1995 and from April 29, 1994 (Inception) through December 31,
1994, respectively, and conforming loan originations of $4.5 million in the
year ended December 31, 1995.
(5) Does not include $3.5 million in conforming loan sales in the year ended
December 31, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain statements in this Annual Report on Form 10-K 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 1. Business - Factors That May Affect Future Results of Operations"
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,
FHLB advances, a mortgage warehouse line of credit, loan securitizations, and
whole loan sales at the Bank.
The Company commenced operations in 1994 by purchasing from the RTC certain
assets and assuming certain liabilities of the Bank's predecessor, Pan American
Federal Savings Bank. The Company has used the Bank as a base for expansion
into its current specialty finance businesses. In 1995, the Company commenced
its insurance premium finance business through a joint venture with BPN. In
1996, the Company commenced its current mortgage and automobile finance
businesses.
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 or securitizes subprime mortgage loans
collateralized 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, mortgage warehouse lines of credit, the sale of its mortgage loan
43
<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. In March
1999, the Company completed its second securitization of mortgage loans.
To date, 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 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 13% of loans outstanding at
December 31, 1998, and it is expected that this business may increase to
approximately 15% of loans outstanding.
During November 1998, the Company and BPN, purchased from Norwest Financial
Coast, Inc. ("Coast") for $3.0 million the right to solicit new and renewal
personal and commercial insurance premium finance business from brokers who
previously provided contracts to Coast. The purchase price for the agreement
was provided 60% by the Company and 40% by BPN. The Company also acquired the
"Coast" name, and certain furniture, equipment and software.
44
<PAGE>
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 advances, a mortgage warehouse line of credit and loan sales and
securitizations. As of December 31, 1998, the Bank was a five-branch federal
savings bank with $321.7 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 $32.3 million in principal amount (before unearned
discounts and premiums) at December 31, 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 short term investments 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.
45
<PAGE>
AVERAGE BALANCE SHEETS
The following tables set forth information relating to the Company for the
years ended December 31, 1998, 1997 and 1996. The yields and costs are derived
by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. The yields and costs include fees which
are considered adjustments to yields.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance (1) Interest Cost Balance (1) Interest Cost
------------ ----------- ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
ASSETS
Interest earnings assets
Investment securities $ 25,672 $ 1,346 5.24% $ 9,763 $ 639 6.55%
Mortgage loans, net(2) 277,453 26,255 9.46% 161,667 15,240 9.43%
IPF loans, net(3) 49,138 6,579 13.39% 43,923 6,179 14.07%
Automobile installment contracts, net(4) 44,809 11,165 24.92% 16,980 4,453 26.22%
------------ ----------- ------------ --------
Total interest earning assets 397,072 45,345 11.42% 232,333 26,511 11.41%
----------- ---------- -------- ---------
Non-interest earnings assets(4) 35,969 19,778
============ ============
Total assets $433,041 $252,111
============ ============
LIABILITIES AND EQUITY
Interest bearing liabilities
Customer deposits 297,628 15,329 5.15% 198,405 10,095 5.09%
Notes payable 11,545 623 5.40% 11,541 669 5.80%
FHLB advances 13,057 666 5.10% 18,526 1,103 5.95%
Warehouse lines of credit 43,759 2,628 6.01% 8,914 544 6.10%
------------ ----------- ------------ --------
Total interest bearing
liabilities 365,989 19,246 5.26% 237,386 12,411 5.23%
----------- ---------- -------- ---------
Non-interest bearing liabilities 10,711 6,028
------------ ------------
Total liabilities 376,700 243,414
Equity 56,341 8,697
------------ ------------
Total liabilities and equity $433,041 $252,111
============ =============
Net interest income before provision
for loan losses $26,099 $14,100
=========== ========
Net interest rate spread(5) 6.16% 6.18%
Net interest margin(6) 6.57% 6.07%
Ratio of interest earning assets to
interest bearing liabilities 108.5% 97.9%
<PAGE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996
-------------------------------------
Average
Average Yield/
Balance (1) Interest Cost
------------ --------- ---------
<S> <C> <C> <C>
ASSETS
Interest earnings assets
Investment securities $ 11,050 $ 706 6.39%
Mortgage loans, net(2) 117,877 11,150 9.46%
IPF loans, net(3) 28,795 4,026 13.98%
Automobile installment contracts,
net(4) 2,488 679 27.29%
------------ ----------
Total interest earning assets 160,210 16,561 10.34%
----------
Non-interest earnings assets(4) 8,124
------------
Total assets $168,334
============
LIABILITIES AND EQUITY
Interest bearing liabilities
Customer deposits 146,160 7,225 4.94%
Notes payable 10,930 556 5.09%
FHLB advances 1,170 72 6.15%
Warehouse lines of credit -- -- --
------------ ----------
Total interest bearing
liabilities 158,260 7,853 4.96%
--------- ---------
Non-interest bearing liabilities 4,173
------------
Total liabilities 162,433
Equity 5,901
------------
Total liabilities and equity $168,334
============
Net interest income before provision
for loan losses $ 8,708
==========
Net interest rate spread(5) 5.38%
Net interest margin(6) 5.44%
Ratio of interest earning assets to
interest bearing liabilities 101.2%
</TABLE>
_______________
(1) Average balances are measured on a month-end basis.
(2) Net of deferred loan origination fees, unamortized discounts, premiums and
allowance for estimated loan losses; includes loans held for sale and non-
performing loans.
(3) Net of allowance for estimated losses; includes non-performing loans.
(4) Net of unearned finance charges, allowance for estimated losses; includes
non-performing loans.
(5) Net interest rate spread represents the difference between the yield on
interest earning assets and the cost of interest bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest earning assets.
46
<PAGE>
RATE AND VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------- --------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
----------------------------------- --------------------------------
VOLUME RATE NET VOLUME RATE NET
----------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Investment securities $ 806 $ (99) $ 707 $4,128 $ (38) $4,090
Mortgage loans, net (1) 10,956 59 11,015 2,128 25 2,153
IPF loans, net 674 (274) 400 3,799 (26) 3,773
Automobile installment contracts, net 6,923 (211) 6,712 (85) 19 (66)
----------- ---------- ---------- ---------- --------- ---------
Total interest earning assets 19,359 (525) 18,834 9,970 (20) 9,950
----------- ---------- ---------- ---------- --------- ---------
Interest bearing liabilities
Customer deposits 5,109 125 5,234 2,653 217 2,870
Notes payable -- (46) (46) 32 81 113
FHLB advances (294) (143) (437) 1,033 (2) 1,031
Warehouse line of credit 2,092 (8) 2,084 272 272 544
----------- ---------- ---------- ---------- --------- ---------
Total interest bearing liabilities 6,907 (72) 6,835 3,990 568 4,558
----------- ---------- ---------- ---------- --------- ---------
Change in net interest income $12,452 $(453) $11,999 $5,980 $(588) $5,392
=========== ========== ========== ========== ========= =========
</TABLE>
__________
(1) Includes interest on loans held for sale.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
GENERAL
Net income increased from $6.2 million for the twelve months ended December
31, 1997 to $6.8 million for the twelve months ended December 31, 1998. The
increase was due primarily to the growth in the Company's mortgage, insurance
premium and auto finance businesses during 1998. Contributing to the increase
in net income were increases in the Company's net interest income and non-
interest income offset by increases in provision for loan losses and non-
interest expense. Net interest income was favorably impacted during 1998 by
using the net proceeds from the Company's initial public offering of common
stock to finance a portion of its mortgage operations.
Growth in the Company's finance businesses resulted in an increase in
mortgage loan originations from $578.6 million for the twelve months ended
December 31, 1997 to $1.2 billion for the twelve months ended December 31, 1998,
while insurance premium finance originations increased from $145.2 million to
$153.0 million, respectively, and auto contracts purchased increased from $44.1
million to $86.1 million, respectively. Sales of mortgage loans were $1.1
billion for the twelve months ended December 31, 1998 and $475.1 million for the
comparable period in 1997.
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INTEREST INCOME
Interest income increased from $26.5 million for the twelve months ended
December 31, 1997 to $45.3 million for the twelve months ended December 31, 1998
due primarily to a $164.7 million increase in average earning assets and a 0.01%
increase in the average yield on earning assets. The largest components of
growth in average earning assets were mortgage loans, auto contracts and
investment securities, which increased $115.8 million, $27.8 million and $15.9
million, respectively. The increase in mortgage loans receivable was a result
of an increase in loans held for sale, which increased from $120.0 million at
December 31, 1997 to $214.4 million at December 31, 1998. This increase is a
direct result of the increase in UPAM's mortgage loan originations during the
year. The increase in auto contracts principally resulted from the opening of
new branch offices and the purchasing of additional dealer contracts in these
new market areas. The growth in investment securities resulted from an increase
in the Company's liquidity and short-term investment portfolio reflecting the
overall growth in total assets.
INTEREST EXPENSE
Interest expense increased from $12.4 million for the twelve months ended
December 31, 1997 to $19.2 million for the twelve months ended December 31,
1998, due to a $128.6 million increase in average interest bearing liabilities
and a 0.03% increase in the weighted average interest rate on interest bearing
liabilities. The largest component of growth in interest bearing liabilities
was deposits with the Bank, which increased from an average balance of $198.4
million for the twelve months ended December 31, 1997 to $297.6 million for the
twelve months ended December 31, 1998. The average cost of deposits increased
from 5.09% for the twelve months ended December 31, 1997 to 5.15% for the twelve
months ended December 31, 1998.
The increase in deposits resulted from the use of retail and wholesale CDs
to finance the Company's lending growth and the increase in the average yield on
the Bank's deposits reflects the repricing of accounts to higher rates.
The second largest component of growth in interest bearing liabilities was
the increase in the Company's warehouse lines of credit from an average balance
of $8.9 million during the year ended December 31, 1997 to $43.8 million for the
year ended December 31, 1998. This increase reflects the use of short-term
third party warehouse lines of credit to provide interim financing for the
Company's mortgage loans between the date of origination and date of sale into
the secondary mortgage market.
PROVISION FOR LOAN LOSSES
Provision for loans losses increased from $507,000 for the twelve months
ended December 31, 1997 to $5.9 million for the twelve months ended December 31,
1998. The increase in the provision reflects management's decision to increase
general valuation allowances as a result of the increase in loans made by the
Company as well as an increase in non-performing loans during 1998. The total
allowance for loan losses was $10.2 million at December 31, 1998 or 7.62% of
loans compared to $6.50 million at December 31, 1997 or 4.37% of loans. The
increase is attributable to the additional provision for losses recorded during
the twelve months ended December 31, 1998 and $4.6 million in acquisition
discounts related to the Company's purchase of auto contracts. The Company
allocates the estimated amount of discounts attributable to credit risk to the
allowance for loan losses. Net loan charge-offs were $6.7 million or 1.73% of
total average loans during the twelve months ended December 31, 1998 compared to
$1.3 million, or 0.60% of total average loans during 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,
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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 $23.9 million, from $27.2 million for the
twelve months ended December 31, 1997 to $51.1 million for the twelve months
ended December 31, 1998. This increase resulted from gains on sales of mortgage
loans and is due primarily to a substantial increase in the volume of loans sold
by UPAM, offset by a decline in the gross sales premium received on such loans.
During the twelve months ended December 31, 1997, the Company sold or
securitized $475.1 million in mortgage loans compared to $1.1 billion in
mortgage loans sold during the comparable period in 1998. The gross sales
premium received on loans sold was 104.9% of the outstanding loan balance in
1998 compared to 105.7% in 1997 and, as a result of the decline in gross sales
premiums, gains on sales of loans, as a percentage of loans sold, were 4.48% for
the twelve months ended December 31, 1998 compared to 5.58% for the twelve
months ended December 31, 1997. The decline in the gross sales premium during
1998 resulted primarily from price erosion occurring in the third and fourth
quarters of 1998 caused by disruptions in the capital and ABS markets. In March
1998, the Company sold its residual interests from its first securitization for
cash in the amount of $8.3 million, which exceeded the carrying value of
approximately $8.2 million as of the date of sale. While the Company did not
securitize any loans during 1998, it may securitize mortgage loans on a periodic
basis in the future.
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 $234,000 from $702,000 for the twelve months ended December 31, 1997
to $936,000 for the twelve months ended December 31, 1998.
NON-INTEREST EXPENSE
Non-interest expense increased $29.5 million, from $30.1 million for the
twelve months ended December 31, 1997 to $59.6 million for the twelve months
ended December 31, 1998. This increase primarily reflects an increase in
salaries, loan commissions, employee benefits and other personnel costs of $17.8
million associated with the expansion of the Company's mortgage and automobile
finance operations. In addition, occupancy expense increased $2.6 million,
reflecting the costs associated with maintaining and expanding the branch
offices in both the mortgage and auto finance lending areas. Marketing expense
was $3.6 million for the twelve months ended December 31, 1998 compared to $1.7
million for the twelve months ended December 31, 1997, an increase of 108%.
This increase is attributable to the Company's retail mortgage lending
operations, which use extensive direct mail and telemarketing campaigns to
target prospective borrowers. Retail loan originations were $382.4 million in
1998 compared to $219.4 million in 1997, an increase of 74%. 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 $6.4 million during the twelve
months ended December 31, 1998 compared to the same period in 1997.
Included in non-interest expense for 1998 is a charge of $800,000 related
to the closure of certain lending offices. As a result of a reduction in loan
production experienced during the fourth quarter of 1998, the Company closed
five underperforming retail loan offices and consolidated two wholesale loan
processing centers into its remaining four centers. Accordingly, the Company
accrued as additional expense in 1998, the estimated costs associated with the
remaining lease obligations for these offices.
INCOME TAXES
Income taxes increased $500,000 from $4.5 million for the twelve months
ended December 31, 1997 to $5.0 million for the twelve months ended December 31,
1998. This increase occurred as a result of a $1.0
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million increase in income before income taxes between the two periods and an
increase in the effective tax rate from 41.8% for 1997 to 42.5% for 1998.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets increased $114.8 million, from $310.8 million at December 31,
1997 to $425.6 million at December 31, 1998. This increase occurred primarily
as a result of a $79.6 million increase in loans receivable, from $268.5
million at December 31, 1997 to $348.1 million at December 31, 1998. The
increase in loans was comprised of a $94.4 million increase in mortgage loans
held for sale, a $36.3 million increase (net of unearned finance charges) in
auto contracts and a $4.7 million increase in insurance premium finance loans
offset by a $49.7 million decrease in loans purchased from the RTC.
Cash and cash equivalents increased $33.2 million, from $19.0 million at
December 31, 1997 to $52.2 million at December 31, 1998, primarily as a result
of an increase in the Company's short-term investments.
Residual interests in securitizations were $8.2 million at December 31,
1997 and were sold during March 1998 for cash in an amount exceeding carrying
value. The Company did not complete any loan securitizations during 1998,
accordingly, there were no residual interests in securitizations at December 31,
1998.
Premises and equipment increased from $3.1 million at December 31, 1997 to
$4.8 million at December 31, 1998 as a result of purchases of furniture and
equipment for the Company's lending branch offices and the overall growth in
lending operations.
Deposit accounts at the Bank increased $88.5 million, from $233.2 million
at December 31, 1997 to $321.7 million at December 31, 1998, due primarily to an
increase in CDs of $75.0 million, from $197.1 million at December 31, 1997 to
$272.1 million at December 31, 1998. Included in deposits at December 31, 1998
are brokered deposits of $10.3 million compared to $17.5 million at December 31,
1997. The growth in deposits reflects the continued financing of the Company's
mortgage, insurance premium and auto finance 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 period ends. At December 31, 1998
there were no FHLB advances or warehouse lines of credit outstanding. At
December 31, 1997 there were $28.0 million in FHLB advances and $6.2 million in
warehouse lines of credits.
Net deferred tax assets were $3.0 million at December 31, 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 as
compared to financial statement reporting where loans are recorded at the lower
of cost or market.
Shareholders' equity increased form $13.0 million at December 31, 1997 to
$82.9 million at December 31, 1998, as a result of the Company's net income of
$6.8 million for the year ended December 31,1998, the net proceeds received of
$63.0 million from the Company's initial public offering completed in the second
quarter of 1998 and $140,000 related to the exercise of stock options and the
issuance of restricted stock.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL
Net income increased from $950,000 for the twelve months ended December 31,
1996 to $6.2 million for the twelve months ended December 31, 1997. This
increase was due primarily to the expansion of the
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Company's mortgage, insurance premium and auto finance businesses, all of which
showed improved operating results in 1997. Also contributing to the favorable
operating results was in increase of $24.2 million in gain on sales of loans
from the Company's mortgage finance operations offset by an increase in non-
interest expense of $20.4 million which also resulted primarily from the
expansion of mortgage finance and other lending operations.
As a result of the expansion of the Company's lending operations, mortgage
loan originations increased from $71.5 million for the twelve months ended
December 31, 1996 to $578.6 million for the twelve months ended December 31,
1997, while insurance premium financing originations increased from $99.0
million to $145.2 million, respectively, and auto contracts purchased increased
from $12.2 million to $44.1 million, respectively. Sales of mortgage loans were
$50.1 million for the twelve months ended December 31, 1996 and $475.1 million
for the comparable period in 1997.
INTEREST INCOME
Interest income increased from $16.6 million for the twelve months ended
December 31, 1996 to $26.5 million for the twelve months ended December 31, 1997
due primarily to a $72.1 million increase in average earning assets and a 1.07%
increase in the average yield on earning assets. The largest components of
growth in average earning assets were mortgage loans, insurance premium finance
loans and auto contracts, which increased $43.8 million, $15.1 million and $14.5
million, respectively. The increase in the average yield on earning assets was
attributable to an increase in the origination or purchase of higher yielding
loans during 1997 principally related to the expansion and growth of the
mortgage, insurance premium and automobile finance businesses. The increase in
mortgage loan receivables was a result of an increase in loans held for sale,
which increased from $20.8 million at December 31, 1996 to $120.0 million at
December 31, 1997. Generally, these loans are originated for sale in the
secondary mortgage market. The growth of IPF loans was primarily a result of new
loan originations associated with changes the California's automobile insurance
laws effective January 1, 1997, while the increase in auto contracts principally
resulted from the opening of new branch offices and the purchasing of additional
dealer contracts in these new markets.
INTEREST EXPENSE
Interest expense increased from $7.9 million for the twelve months ended
December 31, 1996 to $12.4 million for the twelve months ended December 31,
1997, due to a $79.1 million increase in average interest bearing liabilities
and a 0.27% increase in the weighted average interest rate on interest bearing
liabilities. The largest component of growth in interest bearing liabilities was
deposits with the Bank, which increased from an average balance of $146.2
million for the twelve months ended December 31, 1996 to $198.4 million for the
twelve months ended December 31, 1997. The average cost of deposits increased
from 4.94% for the twelve months ended December 31, 1996 to 5.09% for the twelve
months ended December 31, 1997.
The increase in deposits resulted from the use of retail and wholesale CDs to
finance the Company's lending operation, and the increase in the average yield
on the Bank's deposits reflects the repricing of accounts to higher rates.
The second largest component of growth in interest bearing liabilities was
FHLB advances to the Bank, which increased from an average balance of $1.2
million for the twelve months ended December 31, 1996 to $18.5 million for the
comparable period in 1997. This increase reflects the use of short-term
borrowings to support the growth of the Company's lending businesses.
PROVISION FOR LOAN LOSSES
Provision for loan losses increased from $194,000 for the twelve months ended
December 31, 1996 to $507,000 for the twelve months ended December 31, 1997. The
increase in the provision reflects
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management's decision to increase general valuation allowances as a result of
the increase in loans made by the Company. The total allowance for loan losses
was $5.4 million at December 31, 1996 compared to $6.5 million at December 31,
1997. The increase is attributable to the additional provision for losses
recorded during the twelve months ended December 31, 1997 and $2.0 million in
acquisition discounts related to the Company's purchase of auto contracts. The
Company allocates the estimated amount of discounts attributable to credit risk
to the allowance for loan losses. Net loan charge-offs were $444,000 in the
twelve months ended December 31, 1996 compared to $1.3 million in the twelve
months ended December 31, 1997.
A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loan portfolio and the adequacy of its allowance for
loan losses. While management believes it has adequately provided for losses and
does not expect any material loss on its loans in excess of allowances already
recorded, no assurance can be given that economic or real estate market
conditions or other circumstances will not result in increased losses in the
loan portfolio.
NON-INTEREST INCOME
Non-interest income increased $24.4 million, from $2.8 million for the twelve
months ended December 31, 1996 to $27.2 million for the twelve months ended
December 31, 1997. This increase resulted from gain on sale of mortgage loans
and is due primarily to a substantial increase in the volume of loans sold by
UPAM. During the twelve months ended December 31, 1996, the Company sold $50.1
million in mortgage loans compared to $475.1 million in mortgage loans sold or
securitized during the comparable period in 1997. Net gains on sales of loans,
as a percentage of loans sold, were 4.65% for the twelve months ended December
31, 1996, compared to 5.58% for the twelve months ended December 31, 1997.
During the twelve months ended December 31, 1997, the Company sold $360.2
million as whole loan sales and completed its first securitization of $114.9
million in mortgage loans in December 1997. The Company may sell or securitize
mortgage loans on a periodic basis in the future.
As part of its securitization, the Company recorded a net gain on sale of $5.9
million and recorded residual interests in securitizations of $8.2 million
consisting of beneficial interests in the form of an interest-only strip
representing the subordinated right to receive cash flows from the pool of
securitized loans after payment of required amounts to the holders of the
securities and certain costs associated with the securitization.
The Company classifies its residual interests in securitizations as trading
securities and records them at fair market value with any unrealized gains or
losses recorded in the results of operations.
Valuations of the residual interests in securitizations at each reporting
period are based on discounted cash flow analyses. Cash flows are estimated as
the amount of the excess of the weighted-average coupon on the loans sold over
the sum of the pass-through on the senior certificates, a servicing fee, an
estimate of annual future credit losses and prepayment assumptions and other
expenses associated with the securitization, discounted at an interest rate
which the Company believes is commensurate with the risks involved. The Company
uses prepayment and default assumptions that market participants would use for
similar instruments subject to prepayment, credit and interest rate risks. The
assumptions used by the Company for valuing the residual interests in
securitizations arising from its December securitization included a prepayment
assumption of 5% for the first year increasing to 25% thereafter, an annual
credit loss assumption of 0.75% and a discount rate of 15%. In March 1998, the
Company sold its residual interest 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.
In connection with its securitization transaction, an overcollateralization
amount is required to be maintained which serves as credit enhancement to the
senior certificate holders. The overcollateralization amount initially consists
of the excess of the principal balance of the mortgage loans sold, less the
principal balance of the certificates sold to investors. The
overcollateralization is required to be maintained at a specific target level of
the principal balance of the certificates and can be increased as specified in
the related
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securitization documents. Cash flows received in excess of the obligations to
the senior certificate holders and certain costs of the securitization are
deposited into a trust account until the overcollateralization target is
reached. Once this target is reached, distributions of excess cash from the
trust account are remitted to the Company.
Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income. The total of all of these items
increased $259,000 from $443,000 for the twelve months ended December 31, 1996
to $702,000 for the twelve months ended December 31, 1997.
NON-INTEREST EXPENSE
Non-interest expense increased $20.5 million, from $9.6 million for the twelve
months ended December 31, 1996 to $30.1 million for the twelve months ended
December 31, 1997. This increase primarily reflects an increase in salaries,
loan commissions, employee benefits and other personnel costs of $13.8 million
associated with the expansion of the Company's mortgage and automobile finance
operations. In addition, occupancy expense increased $2.1 million, reflecting an
increase in the number of mortgage and automobile lending offices. Marketing
expense was $1.7 million for the twelve months ended December 31, 1997, compared
to $171,000 for the twelve months ended December 31, 1996. This increase is
attributable to the Company's retail mortgage lending operations which use
extensive direct mail and telemarketing campaigns to target prospective
borrowers. Also, as a result of growth in the Company's mortgage finance and
automobile lending operations, other operating expense, including stationery and
supplies, data processing, insurance, telephone and postage, increased $3.8
million during the twelve months ended December 31, 1997 compared to the same
period in 1996.
The Company significantly expanded its mortgage and automobile finance
operations, resulting in an increase from 54 employees in five offices and 25
employees in four offices, respectively, as of December 31, 1996 to 359
employees in 22 offices and 60 employees in ten offices, respectively, as of
December 31, 1997.
INCOME TAXES
Income taxes increased $3.8 million from $691,000 for the twelve months ended
December 31, 1996 to $4.5 million for the twelve months ended December 31, 1997.
This increase occurred as a result of a $9.1 million increase in income before
income taxes between the two periods offset by a decrease in the effective tax
rate from 42.1% for 1996 to 41.8% for 1997.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets increased $122.1 million, from $188.7 million at December 31,
1996 to $310.8 million at December 31, 1997. This increase occurred primarily
as a result of a $112.9 million increase in loans receivable, from $155.6
million at December 31, 1996 to $268.5 million as of December 31, 1997. The
increase in loans was comprised of a $99.2 million increase in mortgage loans
held for sale, a $22.7 million increase (net of unearned finance charges) in
auto contracts and a $7.9 million increase in insurance premium finance loans,
offset by a $20.7 million decrease in loans purchased from the RTC as a result
of scheduled principal amortizations and prepayments.
Cash and cash equivalents decreased $7.1 million, from $26.1 million at
December 31, 1996 to $19.0 million at December 31, 1997, primarily as a result
of funding for the Company's origination of loans.
Residual interests in securitizations were $8.2 million at December 31, 1997
which were entirely attributable to the Company's first securitization in
December 1997. There were no residual interests in securitizations at December
31, 1996.
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Premises and equipment increased from $822,000 at December 31, 1996 to $3.1
million at December 31, 1997 as a result of purchases of furniture and equipment
for the Company's new branch offices and the overall growth in lending
operations.
Deposit accounts at the Bank increased $74.1 million, from $159.1 million at
December 31, 1996 to $233.2 million at December 31, 1997, due primarily to an
increase in CDs of $65.7 million, from $131.4 million at December 31, 1996 to
$197.1 million at December 31, 1997. Included in deposits at December 31, 1997
are $17.5 million in brokered CDs. There were no brokered CDs outstanding at
December 31, 1996.
Other interest bearing liabilities include the RTC notes payable which
remained unchanged at $10.9 million between period ends, FHLB advances which
increased from $4.0 million as of December 31, 1996 at a weighted average
interest rate of 5.70% to $28.0 million at December 31, 1997 at a weighted
average interest rate of 7.07%, notes payable from shareholders which increased
$2.0 million between period ends and a warehouse line of credit of $6.2 million
at December 31, 1997.
Net deferred tax assets were $3.1 million at December 31, 1997 due principally
to temporary differences in the recognition of gain on sale of loans for federal
and state income tax reporting and financial statement reporting purposes. For
income tax purposes, loans held for sale are marked-to-market.
Shareholders' equity increased from $6.8 million at December 31, 1996 to $13.0
million at December 31, 1997, solely as a result of the Company's net income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL
Net income increased from $458,000 for the year ended December 31, 1995 to
$950,000 for the year ended December 31, 1996. This increase was due primarily
to the expansion of the Company's insurance premium and mortgage finance
businesses which commenced in the later part of 1995 and early 1996,
respectively. Partially offsetting this increase in net income was an increase
in operating costs incurred by UPAM as well as those incurred as a result of the
commencement in early 1996 of UACC's operations.
INTEREST INCOME
Interest income increased from $13.5 million for the year ended December 31,
1995 to $16.6 million for the year ended December 31, 1996 due primarily to a
1.9% increase in the average yield on earning assets. While average earning
assets decreased $577,000, the components of this balance changed significantly
with the average balance of insurance premium finance loans increasing from $2.6
million for the year ended December 31, 1995 to $28.8 million for the comparable
period in 1996, and mortgage loans increasing from $105.8 million to $117.9
million, respectively. These increases in average earning assets were offset by
a decline in average investments from $52.4 million for the year ended December
31, 1995 to $11.1 million for the year ended December 31, 1996. The changes in
average earning assets resulted from the Company's strategy of reinvesting in
higher yielding loans, such as subprime mortgage and insurance premium finance
loans, rather than investment securities and traditional mortgage loans which
dominated the Company's balance sheet in the early years of its operations.
INTEREST EXPENSE
Interest expense increased from $7.7 million for the year ended December 31,
1995 to $7.9 million for the year ended December 31, 1996 due primarily to a
$1.3 million decrease in average interest bearing liabilities, offset by a 0.11%
increase in the weighted average interest rate on interest bearing liabilities.
The largest component of change in interest bearing liabilities was deposits,
which decreased from an average
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balance of $148.6 million for the year ended December 31, 1995 to $146.2 million
for the year ended December 31, 1996. The average cost of deposits increased
from 4.87% for the year ended December 31, 1995 to 4.94% for the year ended
December 31, 1996.
Other interest bearing liabilities include the RTC Notes Payable, which
remained unchanged at $10.9 million at both December 31, 1995 and 1996, and FHLB
advances which increased to $4.0 million at December 31, 1996 with a weighted
average interest rate of 5.70%. The Bank had no FHLB advances at December 31,
1995.
PROVISION FOR LOAN LOSSES
Provision for loan losses increased from $120,000 for the year ended December
31, 1995 to $194,000 for the year ended December 31, 1996. This increase was
due primarily to the growth in 1996 of the Company's insurance premium finance
business. The total allowance for loan losses was $5.3 million at December 31,
1995 compared to $5.4 million at December 31, 1996. The increase is
attributable to the additional provision for loses recorded during the year
ended December 31, 1996 and $356,000 in acquisition discounts related to the
Company's purchase of automobile contracts. The Company allocated the estimated
amount of discounts attributable to credit risk to the allowance for loan
losses. Net loan charge-offs were $108,000 in the year ended December 31, 1995
compared to $444,000 in the year ended December 31, 1996.
A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loan portfolio and the adequacy of its allowance for
loan losses. While management believes it has adequately provided for losses
and does not expect any material loss on its loans in excess of allowances
already recorded, no assurance can be given that economic or real estate market
conditions or other circumstances will not result in increased losses in the
loan portfolio.
NON-INTEREST INCOME
Non-interest income increased $2.5 million, from $318,000 for the year ended
December 31, 1995 to $2.8 million for the year ended December 31, 1996. This
increase resulted from gain on sale of loans and is due primarily to a
substantial increase in the volume of mortgage loans sold by the Company. During
the year ended December 31, 1995, the Company sold $3.5 million in mortgage
loans compared to $50.1 million during the comparable period in 1996. Net gains
on sales of loans, as a percentage of loans sold, were 2.57% for the year ended
December 31, 1995 compared to 4.65% for the year ended December 31, 1996. All
loans sold during the year ended December 31, 1996 and 1995 were sold as whole
loans with servicing released to the investor.
Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income. The total of all of these items
increased $215,000 from $228,000 for the year ended December 31, 1995 to
$443,000 for the year ended December 31, 1996.
NON-INTEREST EXPENSE
Non-interest expense increased $4.4 million, from $5.2 million for the year
ended December 31, 1995 to $9.6 million for the year ended December 31, 1996.
This increase primarily reflects an increase in salaries, loan commissions,
employee benefits and other personnel costs of $2.5 million associated with the
Company's mortgage and automobile finance operations which commenced in early
1996. In addition, occupancy expense increased $402,000 also reflecting an
increase in the number of mortgage and automobile finance offices. As a result
of growth in mortgage and automobile finance operations, other operating
expenses, including stationery and supplies, data processing, insurance,
telephone and postage increased $800,000 during the year ended December 31, 1996
compared to the same period in 1995.
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As stated above, the Company commenced its subprime mortgage finance and
automobile finance businesses in early 1996, and by December 31, 1996 these
operations grew to 64 employees in five offices and 25 employees in four
offices, respectively.
Also included in 1996 non-interest expense is a one-time special assessment in
the amount of $820,000 to recapitalize the SAIF. This assessment of 0.657% of
the Bank's assessment base as of March 31, 1995 was enacted through federal
legislation and paid by SAIF insured institutions. As a result of this
recapitalization, the Bank's future deposit insurance assessments will decrease
significantly.
INCOME TAXES
Income taxes increased $307,000 from $384,000 for the year ended December 31,
1995 to $691,000 for the year ended December 31, 1996. This increase occurred
as a result of a $799,000 increase in income before income taxes between the two
years offset by a decrease in the effective tax rate from 45.6% in 1995 to 42.1%
in 1996.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Total assets increased $29.1 million, from $159.6 million as of December 31,
1995 to $188.7 million as of December 31, 1996. This increase occurred
primarily as a result of a $23.8 million increase in loans, from $131.8 million
for the year ended December 31, 1995 to $155.6 million for the year ended
December 31, 1996. The increase in loans was comprised of a $20.8 million
increase in mortgage loans held for sale, a $7.6 million increase (net of
unearned finance charges) in auto contracts and a $15.1 million increase in
insurance premium finance loans, offset by a $21.8 million decrease in loans
purchased from the RTC, resulting from scheduled principal amortization and
prepayments.
Cash and cash equivalents increased $2.5 million, from $23.6 million as of
December 31, 1995 to $26.1 million as of December 31, 1996, as a result of
increased liquidity from the Company's sale of mortgage loans.
Deposit accounts increased $17.2 million, from $141.9 million as of December
31, 1995 to $159.1 million as of December 31, 1996 due primarily to an increase
in CDs of $15.6 million, from $115.8 million as of December 31, 1995 to $131.4
million as of December 31, 1996. The Company uses CDs, in part, to finance the
growth of its lending operations.
Other interest-bearing liabilities include the RTC Notes Payable which
remained unchanged at $10.9 million at December 31, 1995 and 1996, and FHLB
advances which increased to $4.0 million at December 31, 1996 with a weighted
average interest rate of 5.70%. There were no FHLB advances at December 31,
1995.
Shareholders' equity increased $950,000 from $5.8 million as of December 31,
1995 to $6.8 million as of December 31, 1996, solely as a result of the
Company's net income for the year.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Company's interest rate risk management program
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.
56
<PAGE>
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 adjustable
rate mortgages 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 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 September 30, 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 130 basis points and would result in
a $7.1 million increase in the NPV of the Bank and (ii) a 200 basis point
increase in interest rates was 68 basis points and would result in a $3.7
million decrease in the NPV of the Bank. At September 30, 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.
57
<PAGE>
The following table shows the NPV and projected change in the NPV of the Bank
at September 30, 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.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
NPV as % of Portfolio
Net Portfolio Value Value of Assets
- ----------------------------------- -------------------------------------------- ----------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio % Change
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $42,872 $(11,393) -21% 9.96% -220 bp
+300 bp $47,398 $ (6,867) -13% 10.87% -129 bp
+200 bp $50,532 $ (3,733) -7% 11.48% -68 bp
+100 bp $52,427 $ (1,838) -3% 11.83% -33 bp
0 bp $54,265 -- -- 12.16% --
- -100 bp $57,404 $ 3,139 +6% 12.74% 58 bp
- -200 bp $61,339 $ 7,074 +13% 13.46% 130 bp
- -300 bp $66,166 $ 11,901 +22% 14.33% 217 bp
- -400 bp $70,800 $ 16,535 +30% 15.14% 298 bp
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's primary sources of funds have been deposits at the Bank, FHLB
advances, financing under secured warehouse lines 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 short-term investments 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.
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. The net proceeds from the initial public
offering were used for general corporate purposes, including financing the
growth of the Company's mortgage and automobile operations, and to repay $2.0
million in indebtedness to certain shareholders.
Sales and securitizations of loans have been one of the primary sources of
funds for the Company. During the twelve months ended December 31, 1998 and
1997, cash flows from sales of loans were $1.2 billion, and $493.5 million,
respectively.
Another source of funds consists of deposits obtained through the Bank's five
retail branches in California. The Bank offers checking accounts, various money
market accounts, regular passbook accounts and 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,
58
<PAGE>
service fees and withdrawal penalties are established by the Bank periodically
based on liquidity and financing requirements, rates paid by competitors, growth
goals and federal regulations. At December 31, 1998, such retail deposits were
$249.3 million or 77.5% of total deposits.
The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at December 31, 1998, wholesale deposits were $62.1 million
or 19.3% of total deposits while broker-originated deposits were $10.3 million
or 3.2% 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.
The following table sets forth the average balances and rates paid on each
category of deposits for the dates indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
--------------- ------------- --------------- ------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 31,476 3.80% $ 21,452 3.44% $ 14,665 2.39%
Checking accounts 9,820 1.50% 9,910 1.32% 10,060 1.33%
Certificates of deposit
Under $100,000 177,491 5.51% 134,961 5.53% 117,055 5.55%
$100,000 and over 78,656 5.67% 31,984 5.90% 4,372 5.88%
--------- --------- --------
Total $ 297,443 5.24% $ 198,307 5.15% $146,152 4.95%
========= ========= ========
</TABLE>
The following table sets forth the time remaining until maturity for all CDs
at December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
-------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Maturity within one year $242,447 $181,858 $103,369
Maturity within two years 29,548 14,984 26,819
Maturity within three years 154 298 1,177
------------- ---------- ----------
Total certificates of deposit $272,149 $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 December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with (i) tangible capital of $29.3 million, or 6.94% of total
adjusted assets, which is above the required level of $6.3 million, or 1.50%;
(ii) core capital of $29.3 million, or 6.94% of total adjusted assets, which is
above the required level of $12.6 million, or 3.00%; and (iii) risk-based
capital of $33.2 million, or 10.77% of risk-weighted assets, which is above the
required level of $24.6 million, or 8.00%
Under the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), the
Bank is deemed to be "well capitalized" at December 31, 1998.
59
<PAGE>
The Company has other sources of liquidity, including FHLB advances, warehouse
lines of credit and its liquidity and short-term investments portfolio. 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 December 31, 1998, the Bank's available borrowing
capacity under this credit facility was $4.0 million.
The Bank has $300 million in warehouse lines of credit under which it may sell
and repurchase at a set price mortgage loans pending the sale or securitization
of such loans. These agreements may be terminated at any time at the option of
either party. At December 31, 1998, there were no balances outstanding under
these warehouse lines of credit.
Other borrowings of the Company at December 31, 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 lines
of credit) at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or For Years Ended
December 31,
----------------------------------------
1998 1997 1996
---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
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 13,057 18,526 1,170
Weighted average interest rate on balance at end of period --% 7.07% 5.70%
Weighted average interest rate on average balance for period 5.10% 5.95% 6.15%
Warehouse lines of credit
Maximum month-end balance $95,000 $64,359 $ --
Balance at end of period -- 6,237 --
Average balance for period 43,759 8,914 --
Weighted average interest rate on balance at end of period --% 6.70% --%
Weighted average interest rate on average balance for period 6.01% 6.10% --%
</TABLE>
The Company had no material contractual obligations or commitments for capital
expenditures at December 31, 1998. At December 31, 1998, the Company had
outstanding commitments to originate loans of $23.3 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 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
60
<PAGE>
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 primarily non-
recourse, servicing released basis. As a result, upon sale, risks and rewards
of ownership 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. All loan sales in 1998 were
whole loan sales with servicing released to the purchaser. In March 1999, the
Company completed its second securitization of mortgage loans.
Summary of Loan Portfolio. At December 31, 1998, the Company's loan portfolio
constituted $348.1 million, or 81.8% of the Company's total assets, of which
$133.7 million, or 38.4%, were held for investment and $214.4 million, or 61.6%,
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>
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS
Mortgage loans (purchased primarily from RTC)
Held for sale $ 18,289 $ -- $ -- $ -- $ --
Held for investment 14,039 81,995 102,733 124,483 57,274
--------------------------------------------------------------------------
Total mortgage loans 32,328 81,995 102,733 124,483 57,274
--------------------------------------------------------------------------
Subprime mortgage loans
Held for sale 196,117 120,002 20,766 -- --
Held for investment 17,570 5,375 1,294 -- --
--------------------------------------------------------------------------
Total subprime mortgage loans 213,687 125,377 22,060 -- --
--------------------------------------------------------------------------
Total mortgage loans 246,015 207,372 124,793 124,483 57,274
--------------------------------------------------------------------------
CONSUMER LOANS
Automobile installment contracts 83,921 40,877 10,830 -- --
Insurance premium financing 44,709 39,990 32,058 16,975 --
Other consumer loans 1,245 267 230 31 235
--------------------------------------------------------------------------
Total consumer loans 129,875 81,134 43,118 17,006 235
--------------------------------------------------------------------------
Total loans 375,890 288,506 167,911 141,489 57,509
Unearned discounts and premiums (212) (2,901) (3,697) (4,445) (4,333)
Unearned finance charges (17,371) (10,581) (3,271) -- --
Allowance for loan losses (10,183) (6,487) (5,356) (5,250) (378)
--------------------------------------------------------------------------
Total loans, net $348,124 $268,537 $155,587 $131,794 $52,798
==========================================================================
</TABLE>
61
<PAGE>
Loan Maturities. The following table sets forth the dollar amount of loans
maturing in the Company's loan portfolio at December 31, 1998 based on scheduled
contractual amortization. Loan balances are reflected before unearned discounts
and premiums, unearned finance charges and allowance for losses.
<TABLE>
<CAPTION>
At December 31, 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
-------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans held
for investment $ -- $ 29 $ 59 $ 82 $ 3,593 $ 27,846 $ 31,609
Mortgage loans held
for sale 19 579 1,500 4,483 24,116 183,709 214,406
Consumer loans 46,396 40,909 41,398 1,172 -- -- 129,875
---------------------------------------------------------------------------------------------------------
Total $46,415 $41,517 $42,957 $5,737 $27,709 $211,555 $375,890
=========================================================================================================
</TABLE>
The following table sets forth, at December 31, 1998, the dollar amount of
loans receivable that were contractually due after one year and indicates
whether such loans have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1999
---------------------------------------------------------------
Fixed Adjustable Total
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans held for investment $ 3,495 $ 28,114 $ 31,609
Mortgage loans held for sale 49,225 165,162 214,387
Consumer loans 83,479 -- 83,479
---------------------------------------------------------------
Total $136,199 $193,276 $329,475
===============================================================
</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,
conditions and values, questionable and there is a high possibility of loss.
Loss assets are considered uncollectible and of such little value that
continuance as an asset is not warranted. Assets which do have weaknesses but
do not currently have sufficient risk to warrant classification in one of the
categories described above are designated as "special mention."
At December 31, 1998, the Company had $1.3 million in assets classified as
special mention, $22.1 million of assets classified as substandard, $47,000 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 December
31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Loan December 31, % 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 $ 9,743 2.8% $ 356 0.1% $1,941 1.2%
60 to 89 days 8,161 2.3% 994 0.4% 109 0.1%
90+ days 11,424 3.3% 7,101 2.6% 6,430 3.9%
-------------------------------------------------------------------------------------------------------------
Total $29,328 8.4% $8,451 3.1% $8,480 5.2%
=============================================================================================================
</TABLE>
62
<PAGE>
Nonaccrual and Past Due Loans. The Company's general policy is to discontinue
accrual of interest on a mortgage loan when it is two payments or more
delinquent, accordingly, loans are placed on non-accrual status generally when
they are 60-89 days delinquent. A non-mortgage loan is placed on nonaccrual
status when it is delinquent for 120 days or more. When a loan is reclassified
from accrual to nonaccrual status, all previously accrued interest is reversed.
Interest income on nonaccrual loans is subsequently recognized only to the
extent that cash payments are received or the borrower's ability to make
periodic interest and principal payments is in accordance with the loan terms,
at which time the loan is returned to accrual status. Accounts which are deemed
fully or partially uncollectible by management are generally fully reserved or
charged off for the amount that exceeds the estimated fair value (net of
selling costs) of the underlying collateral. The Company does not generally
modify, extend or rewrite loans and at December 31, 1998 had no troubled debt
restructured loans.
The following table sets forth the aggregate amount of nonaccrual loans (net
of unearned discounts and premiums and unearned finance charges) at December 31,
1998, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Single-family residential $19,242 $5,766 $5,504 $ 5,086 $1,439
Multi-family residential and commercial 214 605 605 154 --
Consumer and other loans 1,168 1,426 928 -- --
---------------------------------------------------------
Total $20,624 $7,797 $7,037 $ 5,240 $1,439
=========================================================
Nonaccrual loans as a percentage of
Total loans held for investment 15.42% 5.25% 5.22% 3.85% 2.73%
Total assets 4.85% 2.51% 3.73% 3.28% 0.80%
Allowance for loan losses as a percentage of
Total loans held for investment 7.62% 4.37% 3.97% 3.98% 0.72%
Nonaccrual loans 49.37% 83.20% 76.11% 100.19% 26.27%
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the amount of interest
income that would have been recognized on nonaccrual loans if such loans had
continued to perform in accordance with their contractual terms was $1.1
million, $337,000 and $370,000, respectively. The total amount of interest
income recognized on nonaccrual loans was $470,000, $212,000 and $364,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. Accruing loans
over 90 days past due were $19,000 and $66,000 at December 31, 1998 and 1997.
There were no accruing loans over 90 days past due at December 31, 1996.
Real Estate Owned. Real estate acquired through foreclosure or by deed in
lieu of foreclosure ("REO") is recorded at the lower of cost or fair value at
the time of foreclosure. Subsequently, an allowance for estimated losses is
established when the recorded value exceeds fair value less estimated selling
costs. Holding and maintenance costs related to real estate owned are recorded
as expenses in the period incurred. At December 31, 1998, 1997 and 1996, real
estate owned was $1.9 million, $562,000 and $988,000, respectively, and
consisted entirely of one to four family residential properties.
63
<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 April 29, 1994
Year Ended (Inception) to
December 31, December 31,
----------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 6,487 $ 5,356 $5,250 $ 378 $ --
Provision for loan losses 5,853 507 194 120 50
Charge-offs
Mortgage loans held for investment (4,536) (373) (285) (108) --
Mortgage loans held for sale -- -- -- -- --
Consumer loans (3,793) (2,101) (433) -- --
--------------------------------------------------- --------------
(8,329) (2,474) (718) (108) --
Recoveries
Mortgage loans held for investment 452 77 -- -- --
Mortgage loans held for sale -- -- -- -- --
Consumer loans 1,138 1,068 274 -- --
--------------------------------------------------- --------------
1,590 1,145 274 -- --
--------------------------------------------------- --------------
Net charge-offs (6,739) (1,329) (444) (108) --
Acquisition discounts allocated to loss
allowance 4,582 1,953 356 4,860 328
--------------------------------------------------- --------------
Balance at end of period $10,183 $ 6,487 $5,356 $5,250 $ 378
=================================================== ==============
Annualized net charge-offs to average loans 1.73% 0.60% 0.30% 0.10% --
Ending allowance to period end loans, net 7.62% 4.37% 3.97% 3.98% 0.72%
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------
Percent of Loans in Percent of Loans in Percent of Loans
Each Category to Each Category to in Each Category
Amount Total Loans Amount Total Loans Amount to Total Loans
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Distribution of end of
period allowance by
loan type
Mortgage loans held
for investment $ 5,676 21.8% $3,653 51.9% $4,295 70.7%
Consumer loans 4,507 78.2% 2,246 48.1% 1,061 29.3%
Unallocated -- -- 588 -- -- --
------- ------ ------ ----- ------ -----
$10,183 100.0% $6,487 100.0% $5,356 100.0%
======= ====== ====== ===== ====== =====
</TABLE>
The Company's policy is to maintain an allowance for loan losses to absorb
future losses which may be realized on its loan portfolio. These allowances
include specific reserves for identifiable impairments of individual loans and
general valuation allowances for estimates of probable losses not specifically
identified. In addition, the Company's allowance for loan losses is also
increased by its allocation of acquisition discounts related to the purchase of
automobile installment contracts.
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.
The Bank's current year examination by its regulatory agencies was completed
recently and no adjustments to the Bank's allowance for loan losses was
required.
64
<PAGE>
CASH EQUIVALENTS AND SECURITIES PORTFOLIO
The Company's cash equivalents and securities portfolios are used primarily
for liquidity purposes and secondarily for investment income. Cash equivalents
and securities, which generally have maturities of less than 90 days, satisfy
regulatory requirements for liquidity.
The following is a summary of the Company's cash equivalents and securities
portfolios as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Balance at end of period
Overnight deposits $47,000 $4,000 $21,000
U.S. agency securities -- 1,002 --
------- ------ -------
Total $47,000 $5,002 $21,000
======= ====== =======
Weighted average yield at end of period
Overnight deposits 3.00% 3.50% 5.02%
U.S. agency securities -- 6.54% --
Weighted average maturity at end of period
Overnight deposits 1 day 1 day 1 day
U.S. agency securities -- 24 months --
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"), which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
YEAR 2000 COMPLIANCE
State of Readiness. The Company is working to resolve the potential impact of
the Year 2000 on the ability of the Company's computerized information systems
to accurately process information that may be date-sensitive. Any of the
Company's programs that recognize a date using "00" as the Year 1900 rather than
the Year 2000 could result in errors or system failures. The Company utilizes a
number of computer programs across its entire operations.
The Company established a Year 2000 project management team in 1997 to ensure
that its operating systems will be fully capable of processing its transactions.
The Company also adopted a Year 2000 operating plan in accordance with the
guidelines prescribed by the OTS and the Federal Financial Institutions
Examination Council. The assessment and awareness phases of the plan have been
completed and the Company is now in the testing phase for its third-party
service providers. Substantially all internal computer applications were tested
and validated during 1998.
The Company relies upon third-party software vendors and service providers for
a substantial amount of its electronic data processing. Thus, one of the
Company's Year 2000 focuses is to monitor the progress of its primary software
vendors and service providers towards compliance with Year 2000 issues and
prepare to test actual data of the Company on simulated processing of future
sensitive dates. It is expected that all critical systems provided by third
party service providers will be tested and validated by June 1999.
65
<PAGE>
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. The company's borrowers
and customers are generally consumers which mitigates much of the Year 2000
risk. As of this time, the Company has not identified any significant issues
with its major customers or vendors.
Costs to Address the Year 2000 Issue. The Company has budgeted expenditures
of approximately $600,000 to ensure that its systems are ready for processing
information in the Year 2000. The majority of these expenditures relate to the
cost of fully dedicated Year 2000 project management team resources, some of
whom are third party contractors. The Company estimates that it has incurred
approximately $325,000 of its Year 2000 budget expenditures through December 31,
1998 and will incur an additional $250,000 by the end of 1999. In addition,
the Company has incurred, and will continue to incur, certain costs relating to
the temporary reallocation of its internal resources to address Year 2000
issues.
Risks Presented by the Year 2000 Issue. Should the Company and/or its third-
party software vendors and service providers upon whom the Company relies fail
to timely identify, address and correct material Year 2000 issues, such failure
could have a material adverse impact on the Company's ability to operate. The
range of adverse impacts may include the requirement to pay significant overtime
to manually process certain transactions and added costs to process certain
financing activity through a centralized administrative function. In addition,
if corrections made by such third-party software vendors and service providers
to address Year 2000 issues are incompatible with the Company's systems, the
Year 2000 issue could have a material adverse impact on the Company's
operations.
Despite the Company's activities in regards to the Year 2000 issue, there can
be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software will not have a material adverse
effect on the Company's business, financial condition, results of operations and
business prospects.
Contingency Plans. The Year 2000 project management team currently is
developing contingency plans in the event of an unanticipated business
interruption as a result of a Year 2000 systems failure. These plans will
address how the Company operates its critical activities in a business
interruption resulting from any Year 2000 issues. An initial draft of the plan
was completed in 1998 with final plans to be adopted by June 1999. There can be
no assurance, however, that such contingency plans will be successful.
ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and displaying
comprehensive income and its components in the consolidated financial
statements. SFAS 130 does not, however, require a specific format for
presenting such information, but requires the Company to display an amount
representing total comprehensive income for the periods presented in that
financial statement. For the years ended December 31, 1998, 1997 and 1996, the
Company had no items of comprehensive income to report other than net income.
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. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.
66
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding Quantitative and Qualitative Disclosures About Market
Risk is set forth under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations Management of Interest Rate Risk"
of Item 7 to this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
<S> <C>
Index to Consolidated Finance Statements F-1
Independent Auditors' Report F-2
Consolidated Statements of Financial Condition
as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the
years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows, Continued for the
years ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
United PanAm Financial Corp. intends to file with the Securities and Exchange
Commission a definitive proxy statement (the "Proxy Statement") pursuant to
Regulation 14A. Incorporated herein by this reference is the information
required by this Item 10 set forth in the Sections entitled "Discussion of
Proposals Recommended by the Board Proposal 1: Elect Seven Directors
Nominees," "Information About Directors and Executive Officers Executive
Officers and Key Employees," and "Did Directors, Executive Officers and
Greater-Than-10% Shareholders Comply With Section 16(a) Beneficial Ownership
Reporting in 1998" contained in the 1999 Proxy Statement to be filed with the
SEC 120 days after December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by this reference is the information required by this Item
11 set forth in the Sections entitled "Information About Directors and Executive
Officers" contained in the 1999 Proxy Statement, to be filed with the SEC 120
days after December 31, 1998.
67
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by this reference is the information required by this Item
12 set forth in the Section entitled "Information About UPFC Stock Ownership"
contained in the 1999 Proxy Statement, to be filed with the SEC 120 days after
December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by this reference is the information set forth in the
Section entitled "Information About Directors and Executive Officers
Relationships and Related Transactions" contained in the 1999 Proxy Statement,
to be filed with the SEC 120 days after December 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. Reference is made to the Index to
Consolidated Financial Statements on page F-1 for a list of financial statements
filed as a part of this Annual Report.
(2) FINANCIAL STATEMENT SCHEDULES. All financial statement schedules
are omitted because of the absence of the conditions under which they are
required to be provided or because the required information is included in the
financial statements listed above and/or related notes.
(3) LIST OF EXHIBITS. The following is a list of exhibits filed as a
part of this Annual Report.
Exhibit No. Description
- ----------- -----------
3.1.2* Articles of Incorporation of the Registrant, as amended.
3.2.2* Bylaws of the Registrant
10.1* Insurance Premium Financing Management Agreement dated May 17, 1995,
between Pan American Bank, FSB and BPN Corporation.
10.2* First Amendment to Insurance Premium Financing Management Agreement
and Guaranties dated October 1995, between Pan American Bank, FSB and
BPN Corporation .
10.3* Second Amendment to Insurance Premium Financing Management Agreement
and Guaranties dated February 28, 1996, among Pan American Bank, FSB,
BPN Corporation, Cornelius J. O'Shea, Peter Walski and Barbara Walski.
10.4* Guaranty dated May 17, 1995 by Peter Walski and Barbara Walski to Pan
American Bank, FSB.
10.5* Guaranty dated May 17, 1995 by Cornelius J. O'Shea to Pan American
Bank, FSB.
10.6* Stock Option Agreement dated May 17, 1995, among BPN Corporation, Pan
American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J.
O'Shea and The Walski Family Trust.
68
<PAGE>
Exhibit No. Description
- ----------- -----------
10.7* First Amendment to Stock Option Agreement dated October 1, 1997, among
BPN Corporation, Pan American Group, Inc., Peter A. Walski, Barbara R.
Walski, Cornelius J. O'Shea and The Walski Family Trust.
10.8* Interim Capital Assistance Agreement dated September 9, 1994, among
Pan American Financial, Inc., Pan American Bank, FSB and the
Resolution Trust Corporation.
10.9* Amendment No. 1 to Interim Capital Assistance Agreement dated May 1,
1997, among Pan American Financial, Inc., Pan American Bank, FSB and
the Federal Deposit Insurance Corporation.
10.10* Interim Capital Assistance Agreement dated April 29, 1994, among Pan
American Financial, Inc., Pan American Bank, FSB and the Resolution
Trust Corporation.
10.10.1* Standard Purchase and Assumption Terms and Conditions, Theta Version,
dated July 26, 1993.
10.11* Letter agreement dated March 2, 1995, between Pan American Bank, FSB
and the Resolution Trust Corporation.
10.12* Promissory Note dated September 9, 1994 in the amount of $4 million by
Pan American Financial, Inc. to the Resolution Trust Corporation.
10.13* Stock Pledge Agreement dated September 9, 1994, between Pan American
Financial, Inc. and the Resolution Trust Corporation.
10.14* Limited Branch Purchase and Assumption Agreement dated September 9,
1994, between the Resolution Trust Corporation as receiver of Western
Federal Savings Bank and Pan American Bank, FSB.
10.15* Lead Acquiror Waiver and Reimbursement Agreement dated September 9,
1994, between Home Savings of America, FSB and Pan American Bank, FSB.
10.16* Indemnity Agreement dated September 9, 1994, between the Resolution
Trust Corporation and Pan American Bank, FSB.
10.17* Whole Purchase and Assumption Agreement dated April 29, 1994, between
the Resolution Trust Corporation and Pan American Bank, FSB.
10.18* Indemnity Agreement dated April 29, 1994, between the Resolution Trust
Corporation and Pan American Bank, FSB.
10.19* Promissory Note dated April 29, 1994 in the amount of $6,930,000 by
Pan American Financial, Inc. to the Resolution Trust Corporation.
10.20* Stock Pledge Agreement dated April 29, 1994, between Pan American
Financial, Inc. and the Resolution Trust Corporation.
10.21* Advances and Security Agreement dated January 29, 1996, between the
Federal Home Loan Bank of San Francisco and Pan American Bank, FSB.
69
<PAGE>
Exhibit No. Description
- ----------- -----------
10.22* Retail CD Brokerage Agreement dated April 30, 1996, between Pan
American Bank, FSB and Merrill Lynch, Pierce, Fenner & Smith,
Incorporated.
10.23* Fixed Rate Interest bearing--3 Months and Longer Retail Certificate of
Deposit of Pan American, FSB, Master Certificate No. 2 dated May 12,
1997.
10.24* Fixed Rate Interest bearing--3 Months and Longer Retail Certificate of
Deposit of Pan American Bank, FSB, Master Certificate No. 3 dated May
12, 1997.
10.25* License, Services, and Purchase Agreement dated December 1996, between
Associated Software Consultants, Inc. and Pan American, FSB and all
addendums thereto.
10.26* Agreement for Remote Computing Services dated April 4, 1995, between
Pan American Bank, FSB and Fiserv Fresno, Inc.
10.27* Amendment to Computer Operating Agreement between Pan American Bank,
FSB and Fiserv Fresno, Inc.
10.28* Addendum No. 2 to Agreement for Remote Computing Services effective as
of April 1, 1996, between Pan American Bank, FSB and Fiserv Fresno,
Inc.
10.29* Item Processing Agreement dated April 26, 1993, between Systematics
Financial Services, Inc. and Pan American Savings Bank, FSB.
10.30* Support Services Agreement dated October 31, 1995, between Alan King
and Company, Inc. and Pan American Savings Bank, FSB.
10.31* Technical Support Services Agreement dated May 1, 1995, between Alan
King and Company, Inc. and Pan American Savings Bank, FSB.
10.32* License Agreement dated May 1, 1995, between Alan King and Company,
Inc. and Pan American Savings Bank, FSB.
10.33* Subservicing Agreement dated March 2, 1995, between Pan American Bank,
FSB and Dovenmuehle Mortgage, Inc.
10.34* Interim Operating Agreement dated July 1, 1997, between United PanAm
Mortgage Corporation and Pan American Bank, FSB.
10.34.1* Amended and Restated Interim Operating Agreement dated as of December
31, 1997, between United PanAm Mortgage Corporation and Pan American
Bank, FSB.
10.35* Inter-Company Agreement dated May 1, 1994, between Pan American
Financial, Inc. and Pan American Bank, FSB.
10.36* Inter-Company Agreement dated August 1, 1994, between Pan American
Group, Inc. and Pan American Bank, FSB.
70
<PAGE>
Exhibit No. Description
- ----------- -----------
10.37* Employment Agreement dated May 7, 1996, between Pan American Bank,
FSB and Ray C. Thousand.
10.38* Employment Agreement dated May 1, 1994, between Pan American Bank, FSB
and Lawrence J. Grill.
10.39* Employment Agreement dated October 1, 1997, among the Predecessor, Pan
American Bank, FSB and Lawrence J. Grill.
10.39.1* Amendment No. 1 to Employment Agreement dated November 1, 1997, among
the Predecessor, Pan American Bank, FSB and Lawrence J. Grill.
10.40* Employment Agreement dated October 1, 1997, between the Predecessor
and Guillermo Bron.
10.40.1* Amendment No. 1 to Employment Agreement dated November 1, 1997,
between the Predecessor and Guillermo Bron.
10.41* Employment Agreement dated October 1, 1997, between United PanAm
Mortgage Corporation and John T. French.
10.41.1* First Amendment to Employment Agreement dated November 14, 1997
between United PanAm Mortgage Corporation and John T. French.
10.42* Salary Continuation Agreement dated October 1, 1997, between Pan
American Bank, FSB and Lawrence J. Grill.
10.43* Salary Continuation Agreement dated October 1, 1997, between Pan
American Bank, FSB and Guillermo Bron.
10.44* Form of Indemnification Agreement between the Predecessor and Ms.
Bucci and each of Messrs. Bron, French, Grill, Haley, Kaufman, Maizel,
Thousand and Villanueva .
10.45* Agreement and Mutual General Release dated March 5, 1997, between Pan
American Bank, FSB and Robert Wilson.
10.46* Pan American Group, Inc. 1994 Stock Option Plan, together with forms
of incentive stock option and non-qualified stock option agreements.
10.47* Pan American Group, Inc. 1997 Stock Incentive Plan, together with
forms of incentive stock option, non-qualified stock option and
restricted stock agreements.
10.48* Pan American Bank, FSB Management Incentive Plan.
10.48.1* Pan American Bank, FSB Retail Bank Management Incentive Plan.
10.48.2* Pan American Bank, FSB Corporate Management Incentive Plan.
10.49* Pan American Bank, FSB 401(k) Profit Sharing Plan, as amended.
71
<PAGE>
Exhibit No. Description
- ---------- -----------
10.50* Income Tax Allocation Agreement dated October 19, 1994, between
Pan American Bank, FSB, Pan American Financial, Inc. and the
Predecessor.
10.51* Lease Agreement dated September 26, 1994, between the Resolution
Trust Corporation and Old Stone Bank of California and Pan
American Bank, FSB.
10.52* First Amendment to Lease Agreement dated November 19, 1995,
between the Resolution Trust Corporation and Old Stone Bank of
California and Pan American Bank, FSB.
10.53* Office Lease dated March 4, 1997, between Spieker Properties, L.P.
and Pan American Bank, FSB.
10.54* Office Space Lease dated January 18, 1996, between The Irvine
Company and Pan American Bank, FSB.
10.55* First Amendment to Office Space Lease dated July 2, 1996, between
The Irvine Company and Pan American Bank, FSB.
10.56* Standard Office Lease dated April 25, 1997, between CAL Portfolio
VI, L.L.C. and Pan American Bank, FSB.
10.57* Office Lease Agreement dated February 28, 1997, between P.R.A.
Biltmore Investments, L.L.C. and Pan American Bank, FSB.
10.58* Office Lease dated December 9, 1996, between Bernal Corporate Park
and Pan American Bank, FSB.
10.59* Bernal Corporate Park Lease First Amendment to Lease dated January
27, 1997.
10.60* Shopping Center Sublease dated September 22, 1995, between
Panorama Towne Center, L.P. and Pan American Bank, FSB.
10.61* Promissory Note in the principal amount of $225,000 dated October
15, 1997 by Lawrence J. Grill to the Predecessor.
10.62* Loan and Stock Pledge Agreement dated October 15, 1997, between
Lawrence J. Grill and the Predecessor.
10.63* Promissory Note in the principal amount of $1,628,000 dated July
1, 1997 by the Predecessor to Pan American Financial, L.P.
10.63.1* Amended and Restated Promissory Note in the principal amount of
$1,628,000 dated January 15, 1998 by the Predecessor to Pan
American Financial, L.P.
10.64* Promissory Note in the principal amount of $258,000 dated July 1,
1997 by the Predecessor to BVG West Corporation.
10.64.1* Amended and Restated Promissory Note in the principal amount of
$258,000 dated January 15, 1998 by the Predecessor to BVG West
Corporation.
72
<PAGE>
Exhibit No. Description
- ----------- -----------
10.65* Promissory Note in the principal amount of $52,500 dated July 1,
1997 by the Predecessor to Lawrence J. Grill.
10.65.1* Amended and Restated Promissory Note in the principal amount of
$52,500 dated January 15, 1998 by the Predecessor to Lawrence J.
Grill.
10.66* Promissory Note in the principal amount of $33,000 dated July 1,
1997 by the Predecessor to Robert Wilson.
10.66.1* Amended and Restated Promissory Note in the principal amount of
$33,000 dated January 15, 1998 by the Predecessor to Robert
Wilson.
10.67* Promissory Note in the principal amount of $28,500 dated July 1,
1997 by the Predecessor to Villanueva Management, Inc.
10.67.1* Amended and Restated Promissory Note in the principal amount of
$28,500 dated January 15, 1998 by the Predecessor to Villanueva
Management, Inc.
10.68* Master Repurchase Agreement Governing Purchases and Sales of
Mortgage Loans dated as of October 31, 1997, between Lehman
Commercial Paper Inc. and Pan American Bank, FSB.
10.69* Custodial Agreement dated November 6, 1997, among Lehman
Commercial Paper Inc., Pan American Bank, FSB and Bankers Trust
Company of California, N.A.
10.70* Loan Purchase and Sale Agreement dated April 1, 1997, among Aames
Capital Corporation, Aames Funding Corporation and Pan American
Bank, FSB.
10.71* Continuing Loan Purchase Agreement dated February 27, 1997,
between AMRESCO Residential Capital Markets, Inc. and Pan American
Bank, FSB.
10.72* Mortgage Loan Purchase Agreement dated May 28, 1997, between Saxon
Mortgage, Inc. and Pan American Bank, FSB.
10.73* Letter Agreement dated as of January 6, 1998, by and among the
Predecessor, NIPF Holding Company and Providian National Bank.
10.74* Master Assignment Agreement dated as of January 21, 1998 by and
between Pan American Bank, FSB d/b/a "Classic Plan" and Providian
National Bank d/b/a "Commonwealth," and National IPF Company.
10.75* Pooling and Servicing Agreement dated as of December 1, 1997, by
and among United PanAm Mortgage Corporation, Lehman ABS
Corporation, Pan American Bank, FSB and Bankers Trust Company of
California, N.A.
10.76* Mortgage Loan Purchase and Sale Agreement dated as of December 1,
1997, by and among United PanAm Mortgage Corporation, Pan American
Bank, FSB and Lehman ABS Corporation.
73
<PAGE>
Exhibit No. Description
- ----------- -----------
10.77* Insurance and Indemnity Agreement dated as of December 1, 1997, by
and among United PanAm Mortgage Corporation, Lehman ABS
Corporation, Pan American Bank, FSB and Financial Security
Assurance Inc.
10.78* Indemnification Agreement dated as of December 22, 1997, by and
among United PanAm Mortgage Corporation, Financial Security
Assurance Inc., Pan American Bank, FSB, Lehman ABS Corporation and
Lehman Brothers Inc.
10.79* Subservicing Agreement dated as of December 1, 1997, by and
between Pan American Bank, FSB and Ocwen Federal Bank, FSB.
10.80* Premium Letter by and among United PanAm Mortgage Corporation,
Lehman ABS Corporation and Financial Security Assurance Inc.
10.81* Indemnification Agreement dated as of December 30, 1997 among
United PanAm Mortgage Corporation, Pan American Bank, FSB and
Lehman Brothers Inc.
10.82* Certificate and Prepayment Fee Purchase Agreement dated March 25,
1998 between Pan American Bank, FSB and Ocwen Partnership, L.P.
10.83* Residential Flow Servicing Agreement dated effective as of
November 10, 1997, by and between Ocwen Federal Bank FSB,
Servicer, and Pan American Bank, FSB and United PanAm Mortgage
Corporation.
10.84* United PanAm Mortgage Corporation 1998 Management Incentive Plan.
10.85* United Auto Credit Corporation 1998 Management Incentive Plan.
10.85.1* Forms of Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement.
10.86** Mortgage Loan Purchase and Interim Servicing Agreement dated June
23, 1998, between Pan American Bank, FSB and Countrywide Home
Loans, Inc.
10.87*** Assignment, Assumption and Recognition Agreement dated August 14,
1998, between Countrywide Home Loans, Inc., Associates Home Equity
Services, Inc. and Pan American Bank, FSB.
10.88*** Assignment, Assumption and Recognition Agreement dated August 14,
1998, between Countrywide Home Loans, Inc., Fidelity Federal Bank,
FSB and Pan American Bank, FSB.
10.89*** Assignment, Assumption and Recognition Agreement dated September
15, 1998 between Countrywide Home Loans, Inc., Southern Mortgage
Acquisitions, Inc. and Pan American Bank, FSB.
10.90*** Assignment, Assumption and Recognition Agreement dated September
30, 1998, between Countrywide Home Loans, Fidelity Federal Bank,
FSB and Pan American Bank, FSB.
10.91*** Employment Agreement dated July 6, 1998, between United PanAm
Mortgage Corporation and Edward Pollard.
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<PAGE>
Exhibit No. Description
- ----------- -----------
10.92 Agreement for Assignment of Software dated November 5, 1998
between Pan American Bank, FSB and BPN Corporation.
10.93 Loan and Stock Pledge Agreement dated November 5, 1998 by and
among Barbara R. Walski, Peter A. Walski, and the Walski Family
Trust u/d/t/ dated August 30, 1989, BPN Corporation and Pan
American Bank, FSB.
10.94 Loan and Stock Pledge Agreement dated November 5, 1998 by and
among Cornelius J. O'Shea and the Cornelius J. O'Shea Living
Trust, BPN Corporation and Pan American Bank, FSB.
10.95 Promissory Note in the principal amount of $780,000 dated November
5, 1998 by and between Peter A. Walski, Barbara R. Walski, and the
Walski Family Trust u/d/t/ dated August 30, 1989 and Pan American
Bank, FSB.
10.96 Promissory Note in the principal amount of $420,000 dated November
5, 1998 by and between Cornelius J. O'Shea and the Cornelius J.
O'Shea Living Trust and Pan American Bank, FSB.
10.97 Agreement for Purchase of Assets dated November 5, 1998 by and
between Norwest Financial Coast, Inc., Pan American Bank, FSB and
BPN Corporation.
10.98 Continuing Master Loan Repurchase Agreement dated October 2, 1995
between Advanta Mortgage Conduit Services, Inc. and Pan American
Bank, FSB.
10.99 Assignment, Assumption and Recognition Agreement dated September
30, 1998 between Countrywide Home Loans, Inc. and Pan American
Bank, FSB.
10.100 Whole Loan Sale Agreement dated December 23, 1998 between Fremont
Investment and Loan and Pan American Bank, FSB.
10.101 Employment Agreement dated December 8, 1998, between Pan American
Bank, FSB and Ray C. Thousand
10.102 On-line Computer Service Agreement dated June 19, 1998 between DHI
Computing, Inc. and Pan American Bank, FSB
21.1* Subsidiaries.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
- ------
* Incorporated herein by reference from the Exhibits to Form S-1 Registration
Statement, declared effective on April 23, 1998, Registration No. 333-
39941.
** Incorporated herein by reference from the Exhibits to Form 10-Q for the
quarter ended June 30, 1998.
*** Incorporated herein by reference from the Exhibits to Form 10-Q for the
quarter ended September 30, 1998.
75
<PAGE>
(b) REPORTS ON FORM 8-K. None
(c) EXHIBITS. Reference is made to the Exhibit Index and exhibits filed
as a part of this report.
(d) ADDITIONAL FINANCIAL STATEMENTS. Not applicable.
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
United PanAm Financial Corp.
By: /s/ LAWRENCE J. GRILL
-------------------------------
Lawrence J. Grill
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND SECRETARY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ GUILLERMO BRON CHAIRMAN OF THE BOARD MARCH 22, 1999
- -------------------------
/S/ LAWRENCE J. GRILL PRESIDENT, CHIEF EXECUTIVE MARCH 22, 1999
OFFICER, SECRETARY AND
DIRECTOR (PRINCIPAL EXECUTIVE
OFFICER)
/S/ CAROL M. BUCCI SENIOR VICE PRESIDENT MARCH 22, 1999
- -------------------------
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL
FINANCIAL AND ACCOUNTING
OFFICER)
/S/ STEPHEN W. HALEY SENIOR VICE PRESIDENT - MARCH 22, 1999
- -------------------------
COMPLIANCE AND RISK
MANAGEMENT
/S/ JOHN T. FRENCH DIRECTOR MARCH 22, 1999
- -------------------------
/S/ EDMUND M. KAUFMAN DIRECTOR MARCH 22, 1999
- -------------------------
/S/ DANIEL L. VILLANUEVA DIRECTOR MARCH 22, 1999
- -------------------------
/S/ LUIS MAIZEL DIRECTOR MARCH 22, 1999
- -------------------------
/S/ GEORGE L. FARINSKY DIRECTOR MARCH 22, 1999
- -------------------------
</TABLE>
77
<PAGE>
EXHIBIT INDEX
EXHIBITS. Reference is made to the Exhibit Index and exhibits filed as a
part of this report.
78
<PAGE>
UNITED PANAM FINANCIAL CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Statements of Financial Condition
as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the
years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United PanAm Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of United PanAm Financial Corp. and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1998. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United PanAm
Financial Corp. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows, for each of the years in the
three year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 2 of the Consolidated Financial Statements, effective
January 1, 1997, the Company adopted Statement of Financial Accounting Standards
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities".
/s/ KPMG LLP
San Francisco, California
January 29, 1999
F-2
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
(Dollars in thousands) 1998 1997
--------------------- ---------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,211 $ 15,026
Short term investments 47,000 4,000
--------------------- ---------------------
Cash and cash equivalents 52,211 19,026
Securities available for sale, at fair value -- 1,002
Residual interests in securitizations, at fair value -- 8,230
Loans, net 133,718 148,535
Loans held for sale 214,406 120,002
Premises and equipment, net 4,803 3,085
Federal Home Loan Bank stock, at cost 2,120 1,945
Accrued interest receivable 2,034 1,494
Real estate owned, net 1,877 562
Deferred tax assets 2,953 3,083
Goodwill and other intangible assets 2,349 457
Other assets 9,088 3,333
--------------------- ---------------------
Total assets $425,559 $310,754
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $321,668 $233,194
Notes payable 10,930 12,930
Federal Home Loan Bank advances -- 28,000
Warehouse lines of credit -- 6,237
Accrued expenses and other liabilities 10,048 17,384
--------------------- ---------------------
Total liabilities 342,646 297,745
--------------------- ---------------------
Commitments and contingencies -- --
Common stock (no par value):
Authorized, 20,000,000 shares
Issued and outstanding, 17,375,000 and 10,950,000 shares at
December 31, 1998 and 1997, respectively 68,378 5,237
Retained earnings 14,535 7,772
--------------------- ---------------------
Total shareholders' equity 82,913 13,009
--------------------- ---------------------
Total liabilities and shareholders' equity $425,559 $310,754
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Years Ended December 31,
---------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
INTEREST INCOME
- ---------------
Loans $43,999 $25,872 $15,855
Short term investments 1,346 639 706
----------------- ----------------- -----------------
Total interest income 45,345 26,511 16,561
----------------- ----------------- -----------------
INTEREST EXPENSE
- ----------------
Deposits 15,329 10,095 7,225
Warehouse lines of credit 2,628 544 --
Federal Home Loan Bank advances 666 1,103 72
Notes payable 623 669 556
----------------- ----------------- -----------------
Total interest expense 19,246 12,411 7,853
----------------- ----------------- -----------------
Net interest income 26,099 14,100 8,708
Provision for loan losses 5,853 507 194
----------------- ----------------- -----------------
Net interest income after provision for
loan losses 20,246 13,593 8,514
----------------- ----------------- -----------------
Non-interest Income
- -------------------
Gain on sale of loans, net 50,130 26,526 2,333
Loan related charges and fees 135 422 116
Service charges and fees 672 230 272
Other income 129 50 55
----------------- ----------------- -----------------
Total non-interest income 51,066 27,228 2,776
----------------- ----------------- -----------------
NON-INTEREST EXPENSE
- --------------------
Compensation and benefits 36,833 19,043 5,248
Occupancy expense 5,456 2,891 809
SAIF special assessment -- -- 820
Other expenses 17,269 8,148 2,772
----------------- ----------------- -----------------
Total non-interest expense 59,558 30,082 9,649
----------------- ----------------- -----------------
Income before income taxes 11,754 10,739 1,641
Income taxes 4,991 4,491 691
----------------- ----------------- -----------------
Net income $ 6,763 $ 6,248 $ 950
================= ================= =================
Earnings per share-basic $ 0.44 $ 0.58 $ 0.09
================= ================= =================
Earnings per share-diluted $ 0.42 $ 0.53 $ 0.09
================= ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Number Common Retained Shareholders'
(Dollars in thousands) of Shares Stock Earnings Equity
--------------- --------------- --------------- --------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 10,668,750 $ 5,237 $ 574 $ 5,811
Net income -- -- 950 950
--------------- --------------- --------------- --------------------
Balance, December 31, 1996 10,668,750 5,237 1,524 6,761
Net income -- -- 6,248 6,248
Exercise of stock options 281,250 225 -- 225
Note receivable from shareholder -- (225) -- (225)
--------------- --------------- --------------- --------------------
Balance, December 31, 1997 10,950,000 5,237 7,772 13,009
Net income -- -- 6,763 6,763
Exercise of stock options 100,000 80 -- 80
Issuance of stock options -- 10 -- 10
Issuance of restricted stock -- 50 -- 50
Initial public offering of common
stock 6,325,000 63,001 -- 63,001
--------------- --------------- --------------- --------------------
Balance, December 31, 1998 17,375,000 $68,378 $14,535 $82,913
=============== =============== =============== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,763 $ 6,248 $ 950
Adjustments to reconcile net income
to net cash used in operating activities:
Gain on sale of loans (50,130) (26,526) (2,333)
Origination of loans held for sale (1,192,869) (582,433) (71,848)
Sales of loans held for sale 1,153,541 493,526 52,224
Net proceeds from sale of residual interests in securitizations 8,302 -- --
Provision for loan losses 5,853 507 194
Accretion of discount on loans (596) (722) (696)
Depreciation and amortization 1,840 842 270
FHLB stock dividend (114) (95) (74)
(Increase) decrease in accrued interest receivable (540) (649) 324
Increase in other assets (5,667) (2,159) (117)
Deferred income taxes 130 (1,678) (420)
(Decrease) increase in accrued expenses and other liabilities (7,424) 9,380 6,127
Other, net 140 -- --
--------------- -------------- --------------
Net cash used in operating activities (80,771) (103,759) (15,399)
--------------- -------------- --------------
Cash flows from investing activities:
Proceeds from maturities of investment securities 1,002 1,000 --
Originations, net of repayments, of mortgage loans 40,630 22,431 19,538
Originations, net of repayments, of non-mortgage loans (39,982) (29,782) (22,485)
Purchase of securities available for sale -- (2,002) --
Purchase of premises and equipment (3,320) (2,975) (776)
Purchase of FHLB stock, net (61) (563) (448)
Increase in goodwill and other intangible assets (2,130) -- --
Proceeds from sale of real estate owned 2,579 2,243 923
--------------- -------------- --------------
Net cash used in investing activities (1,282) (9,648) (3,248)
--------------- -------------- --------------
Cash flows from financing activities:
Net increase in deposits 88,474 74,133 17,137
Proceeds (repayments) from warehouse lines of credit (6,237) 6,237 --
Proceeds (repayments) from notes payable (2,000) 2,000 --
Proceeds from initial public offering of common stock, net 63,001 -- --
Proceeds (repayments) from FHLB advances (28,000) 24,000 4,000
--------------- -------------- --------------
Net cash provided by financing activities 115,238 106,370 21,137
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 33,185 (7,037) 2,490
Cash and cash equivalents at beginning of period 19,026 26,063 23,573
--------------- -------------- --------------
Cash and cash equivalents at end of period $ 52,211 $ 19,026 $ 26,063
=============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $19,410 $12,087 $7,856
--------------- --------------- ---------------
Taxes $ 8,285 $ 5,360 $1,512
--------------- --------------- ---------------
Supplemental schedule of non-cash investing and financing activities:
Acquisition of real estate owned through foreclosure of related mortgage
loans $ 3,893 $ 1,817 $1,613
--------------- --------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
ORGANIZATION
- ------------
United PanAm Financial Corp. (the "Company") was 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 (the "Purchase Agreement") of Pan American Federal
Savings Bank from the Resolution Trust Corporation (the "RTC") on April 29,
1994. The Company, PAFI and the Bank are considered to be minority owned. PAFI
is a wholly-owned subsidiary of the Company and the Bank is a wholly-owned
subsidiary of PAFI. United PanAm Mortgage Corporation ("UPAM") 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.
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 was declared
effective by the United States Securities and Exchange Commission. On May 22,
1998, the underwriters' over-allotment option for 825,000 shares of Common Stock
was exercised.
These financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing these financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and the reported amount of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
In 1997, the Company changed its fiscal year end from June 30 to December
31 for both financial and income tax reporting purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of the Company,
PAFI, UPAM and the Bank. Substantially all of the Company's revenues are
derived from the operations of the Bank and UPAM and they represent
substantially all of the Company's consolidated assets and liabilities as of
December 31, 1998 and 1997. Significant inter-company accounts and transactions
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
- -------------------------
For financial statement purposes, cash and cash equivalents include cash on
hand, non-interest-bearing deposits, certificates of deposit, Federal funds
sold, Commercial Paper and highly liquid interest-bearing deposits with
maturities of three months or less.
In accordance with regulations, the Bank must maintain an amount equal to
4% of the sum of total deposits and short-term borrowings in cash and U.S.
Government and other approved securities that are readily convertible to cash.
The Bank exceeded these requirements at December 31, 1998 and 1997.
SECURITIES
- ----------
Securities are classified in one of three categories; held to maturity,
trading, or available for sale. Investments classified as held to maturity are
carried at amortized cost because management has both the intent and ability to
hold these investments to maturity. Investments classified as trading are
carried at fair value with any gains and losses reflected in earnings. All
other investments are classified as available for sale
F-8
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and are carried at fair value with any unrealized gains and losses included as a
separate component of stockholders' equity, net of applicable taxes.
LOANS
- -----
The Company originates and purchases loans for investment as well as for
sale in the secondary market. At the date of acquisition, mortgage loans are
designated as either held for sale or held for investment, and accounted for
accordingly. Loans held for sale are reported at the lower of cost or market
value applied on an aggregate basis. Market values of loans held for sale are
based upon prices available in the secondary market for similar loans. Loans
which are held for investment are reported at cost, net of unamortized discounts
or premiums, unearned loan origination fees and allowances for losses.
Transfers of loans from the held for sale portfolio to the held for investment
portfolio are recorded at the lower of cost or market value on the transfer
date.
INTEREST INCOME
- ---------------
Interest income is accrued as it is earned. Loan origination fees and
certain direct loan origination costs are deferred and recognized in interest
income over the contractual lives of the related loans using the interest
method. When a loan is paid-off or sold, the unamortized balance of these
deferred fees and costs is recognized in income. The Company ceases to accrue
interest on mortgage loans that are delinquent 90 days or more and on non-
mortgage loans delinquent 120 days or more, or earlier, if the ultimate
collectibility of the interest is in doubt. Interest income deemed
uncollectible is reversed. The Company ceases to amortize deferred fees on non-
performing loans. Income is subsequently recognized only to the extent cash
payments are received, until in management's judgment, the borrower's ability to
make periodic interest and principal payments is in accordance with the loan
terms, at which time the loan is returned to accrual status.
RESIDUAL INTERESTS IN SECURITIZATIONS
- --------------------------------------
In December 1997, the Company completed a securitization and sale of
approximately $115.0 million in mortgage loans held for sale and recorded a net
gain on sale of $5.9 million. As a result of this securitization, the Company
recorded residual interests in securitizations consisting of beneficial
interests in the form of an interest-only strip representing the subordinated
right to receive cash flows from the pool of securitized loans after payment of
required amounts to the holders of the securities and certain costs associated
with the securitization.
The Company classifies its residual interests in securitizations as trading
securities and records them at fair market value with any unrealized gains or
losses recorded in the results of operations. In March 1998, the Company sold
its residual interests in securitizations for cash in an amount exceeding book
value.
Valuations of the residual interests in securitizations at each reporting
period are based on discounted cash flow analyses. Cash flows are estimated as
the amount of the excess of the weighted-average coupon on the loans sold over
the sum of the interest pass-through on the senior certificates, a servicing
fee, an estimate of annual future credit losses and prepayment assumptions and
other expenses associated with the securitization, discounted at an interest
rate which the Company believes is commensurate with the risks involved. The
Company uses prepayment and default assumptions that market participants would
use for similar instruments subject to prepayment, credit and interest rate
risks.
GAIN ON SALE OF LOANS
- ---------------------
Gains or losses resulting from sales of mortgage loans are recognized at
settlement and are based on the difference between the sales proceeds and the
carrying value of the related loans sold. Non-refundable fees and direct costs
associated with the origination of mortgage loans are deferred and recognized
when the loans are sold. For securitizations, the gain on sale is calculated
based on the excess of cash received and
F-9
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
residual interests retained over net book value of the loans sold. The retained
interest in the securitization is measured by allocating the previous carrying
value between the loans sold and the interest retained, based on their relative
fair values at the date of securitization.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The Company charges current earnings with a provision for estimated losses
on loans. The provision consists of losses identified specifically with certain
problem loans and a general provision for losses not specifically identified in
the loan portfolio. In addition, the allowance for loan losses includes a
portion of acquisition discounts from the Company's purchase of automobile
installment contracts. Management's determination of the adequacy of the
allowance for loan losses takes into consideration numerous factors, including
an assessment of the credit risk inherent in the portfolio, prior loss
experience, the levels and trends of non-performing loans, the concentration of
credit, current and prospective economic conditions and other factors.
Additionally, regulatory authorities, as an integral part of their examination
process, review the Company's allowance for estimated losses based on their
judgment of information available to them at the time of their examination and
may require the recognition of additions to the allowance.
PREMISES AND EQUIPMENT
- ----------------------
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed on the straight-
line method over the shorter of the estimated useful lives of the related assets
or terms of the leases. Furniture, equipment, computer hardware, software and
data processing equipment are currently depreciated over 3-5 years.
PURCHASE ACCOUNTING
- -------------------
The Company applied business combinations purchase accounting principles to
its acquisition of assets and liabilities from the RTC. The purchase price was
allocated primarily to the assets acquired by the Company. The fair value was
determined based on management's best estimates in conformity with Accounting
Principles Board Opinion ("APB") No. 16 "Business Combinations".
Loan discount resulting from the valuation of the Company's loan portfolio
under purchase accounting requirements at the acquisition date is netted against
loans. The discount is being amortized over the contractual terms of the
related loans using the interest method.
GOODWILL AND OTHER INTANGIBLE ASSETS
- ------------------------------------
Goodwill and other intangible assets consists of core deposit premiums
arising from the acquisition of deposits and the excess of cost over the fair
value of certain net assets acquired.
In 1994, the Company purchased deposits from the RTC and recorded core
deposit premiums in conjunction with the acquisition. At December 31, 1998 and
1997 core deposit premiums totaling $330,000 and $457,000, respectively, are
being amortized over seven years, the estimated life of the acquired deposit
base, using the straight-line method.
In January 1998, the Company purchased from Providian National Bank and
others the rights to solicit new and renewal personal and commercial insurance
premium finance business from brokers who previously provided contracts to
Providian National Bank. The excess of the cash consideration paid over the
fair value of the assets acquired of $330,000 was considered goodwill. At
December 31, 1998, goodwill of $219,000 is being amortized over three years, the
estimated life of the acquired assets, using the straight-line method.
In November 1998, the Company purchased from Norwest Financial Coast
("Coast") the rights to solicit new and renewal personal and commercial
insurance premium finance business from brokers who
F-10
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
previously provided contracts to Coast. The excess of the cash consideration
paid over the fair value of the assets acquired of $1.8 million was considered
goodwill. This goodwill is being amortized over five years, the estimated life
of the acquired assets, using the straight-line method.
REAL ESTATE OWNED
- -----------------
Real estate owned consists of properties acquired through foreclosure and
is recorded at the lower of cost or fair value at the time of foreclosure.
Subsequently, allowance for estimated losses are established when the recorded
value exceeds fair value less estimated costs to sell. As of December 31, 1998
and 1997, there were no such allowances. Real estate owned at December 31, 1998
and 1997 consisted of one to four unit residential real estate.
INCOME TAXES
- ------------
The Company uses the asset/liability method of accounting for income taxes.
Under the asset/liability method, deferred tax assets and liabilities are
recognized for the future consequences of differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases (temporary differences). Deferred tax assets and
liabilities are measured using tax rates expected to apply to taxable income in
the years in which those temporary differences are recovered or settled. The
effect of deferred tax assets and liabilities from a change in tax rate is
recognized in income in the period of enactment. For income tax return
purposes, the Company files as part of a consolidated group. Income taxes are
allocated to the group members in accordance with an income tax allocation
agreement adopted by each party in the group.
EARNINGS PER SHARE
- ------------------
At December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share.
Under SFAS No. 128, basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted from issuance of common
stock.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 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 years ended December 31, 1998
and 1997, the Company had no items of comprehensive income to report other than
net income.
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. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets, and distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. In December 1996, SFAS No.
127, "Deferral of the
F-11
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127") was
issued as an amendment of SFAS No. 125. On January 1, 1997, the Company adopted
SFAS 125.
3. SECURITIES AVAILABLE FOR SALE
Securities available for sale are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998 December 31, 1997
---------------------------------- ------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
U. S. Agency securities $ -- $ -- $1,002 $1,002
</TABLE>
The weighted average yield on U. S. agency securities was 6.54% at December
31, 1997. At December 31, 1997 there were no gross unrealized gains or losses.
4. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------
(Dollars in thousands) 1998 1997
-------------- ----------
<S> <C> <C>
Mortgage loans:
Fixed rate $ 3,495 $ 16,480
Adjustable rate 28,114 70,890
-------------- ----------
31,609 87,370
-------------- ----------
Consumer loans:
Insurance premium financing 44,709 39,990
Automobile installment contracts 83,921 40,877
Other 1,245 267
-------------- ----------
129,875 81,134
-------------- ----------
Total loans 161,484 168,504
Less:
Unearned discounts and premiums (212) (2,901)
Unearned finance charges (17,371) (10,581)
Allowance for loan losses (10,183) (6,487)
-------------- ----------
Total loans, net $133,718 $148,535
============== ==========
Contractual weighted average interest rate 17.07% 13.01%
-------------- ----------
</TABLE>
At December 31, 1998 and 1997, approximately 97% and 99%, respectively, of
the Company's mortgage loans were collateralized by first deeds of trust on one-
to-four family residences. At December 31, 1998 and 1997, approximately 83% and
82%, respectively, of the Company's loan portfolio is related to collateral or
borrowers located in California.
In connection with the purchase of the rights to solicit new and renewal
personal and commercial insurance premium finance business from Coast, the
Company made loans in the amount of $1.2 million to two stockholders of BPN, the
company that provides insurance premium finance marketing and sales support for
the Company. The loans earn interest at a rate of 9.25% per annum, are secured
by BPN's common stock and provide for principal and interest payments over a
three year period.
F-12
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The activity in the allowance for loan losses consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
(Dollars in thousands) 1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 6,487 $ 5,356 $5,250
Provision for loan losses 5,853 507 194
Purchase discounts allocated to the allowance for loan losses, net 4,582 1,953 356
Charge-offs (8,329) (2,474) (718)
Recoveries 1,590 1,145 274
------- ------- ------
Net charge-offs (6,739) (1,329) (444)
------- ------- ------
Balance at end of year $10,183 $ 6,487 $5,356
======= ======= ======
</TABLE>
The discounts allocated to the allowance for loan losses in 1998 and 1997
are comprised primarily of acquisition discounts on the Company's purchase of
automobile installment contracts. The Company allocates the estimated amount of
discounts attributable to credit risk to the allowance for loan losses.
The following table sets forth information with respect to the Company's
non-performing assets:
(nonaccrual loans are shown net of specific allowances for loan losses)
<TABLE>
<CAPTION>
December 31,
----------------------------------------
(Dollars in thousands) 1998 1997
----------------- -----------------
<S> <C> <C>
Nonaccrual loans $18,632 $6,633
Real estate owned, net 1,877 562
----------------- -----------------
Totals $20,509 $7,195
----------------- -----------------
Percentage of non-performing assets to total assets 4.82% 2.31%
----------------- -----------------
</TABLE>
A loan is impaired when, based on current information and events,
management believes it will be unable to collect all amounts contractually due
under a loan agreement. Loans are evaluated for impairment as part of the
Company's normal internal asset review process. When a loan is determined to be
impaired, a valuation allowance is established based upon the difference between
the Company's investment in the loan and the fair value of the collateral
securing the loan.
At December 31, 1998, the aggregate investment in loans considered to be
impaired was $19.5 million and $6.5 million at December 31, 1997. Allowance for
loan losses was provided for all impaired loans at December 31, 1998 and 1997;
the related allowances were $1.8 million and $1.0 million, respectively. For
the years ended December 31, 1998 and 1997, the Company recognized interest
income on impaired loans of $470,000 and $239,000, respectively, all of which
was recorded using the cash received method. The average recorded investment in
impaired loans during the years ended December 31, 1998 and 1997 was
approximately $12.8 million and $6.8 million, respectively.
Under Federal regulations, the Company may not make real estate loans to
one borrower in an amount exceeding 15% of its unimpaired capital and surplus,
plus an additional 10% for loans secured by readily marketable collateral. At
December 31, 1998 and 1997, such limitation would have been approximately $4.4
million and $3.4 million, respectively, or $7.3 million and $5.7 million if
secured by readily marketable collateral. There are no loans in excess of these
limitations.
5. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System ("FHLB") and as
such is required to maintain an investment in capital stock of the FHLB of San
Francisco. At December 31, 1998 and 1997 the Bank owned 21,195 and 19,450
shares, respectively, of the FHLB's $100 par value capital stock. The amount of
stock required is adjusted annually based on a determination made by the FHLB.
The determination is based on the balance of the Bank's outstanding residential
loans and advances from the FHLB.
F-13
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INTEREST RECEIVABLE
Interest receivable is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
---------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Loans $1,985 $1,429
Investment securities 49 65
----------------- -----------------
Total $2,034 $1,494
----------------- -----------------
</TABLE>
7. PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
---------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Furniture and equipment $ 6,856 $3,650
Leasehold improvements 473 366
----------------- -----------------
7,329 4,016
Less accumulated depreciation and amortization (2,526) (931)
----------------- -----------------
$ 4,803 $3,085
----------------- -----------------
</TABLE>
Depreciation and amortization expense was $1.6 million, $715,000 and
$163,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
8. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1998 1997
------------------------------ --------------------------
Weighted Weighted
(Dollars in thousands) Amount Average Rate Amount Average Rate
------------ ------------ -------- ------------
<S> <C> <C> <C> <C>
Deposits with no stated maturity:
Regular and money market passbook $ 37,348 4.05% $ 26,095 3.76%
NOW accounts 9,967 1.15 6,558 .80
Money market checking 2,204 2.35 3,401 2.35
------------ ------------ -------- ------------
49,519 3.39 36,054 3.09
------------ ------------ -------- ------------
Time deposits less than $100,000 194,396 5.40 144,926 5.56
Time deposits $100,000 and over 77,753 5.32 52,214 5.89
------------ ------------ -------- ------------
272,149 5.38 197,140 5.65
------------ ------------ -------- ------------
Total deposits $321,668 5.07% $233,194 5.25%
============ ============ ======== ============
</TABLE>
A summary of certificate accounts by remaining maturity is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
(Dollars in thousands) 1998 1997
----------------- -----------------
<S> <C> <C>
Maturity within one year $242,447 $181,858
Maturity within two years 29,548 14,984
Maturity within three years 154 298
----------------- -----------------
Total $272,149 $197,140
================= =================
</TABLE>
Broker-originated deposits totaled $10.3 million and $17.5 million at
December 31, 1998 and 1997, respectively.
F-14
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. FEDERAL HOME LOAN BANK ADVANCES
The Company had no short term FHLB advances at December 31, 1998 and $28.0
million at December 31, 1997. The advances outstanding at December 31, 1997 had
a weighted average interest rate of 7.07%. FHLB advances were secured by the
Company's stock in the FHLB of San Francisco and by pledges of certain mortgages
with an aggregate balance of $55.3 million at December 31, 1997.
10. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
----------------------
1998 1997
---------- --------
<S> <C> <C>
RTC notes payable $10,930 $10,930
Notes payable to shareholders -- 2,000
---------- --------
$10,930 $12,930
========== ========
</TABLE>
The RTC notes payable were issued in connection with the Company's
acquisition of certain assets and liabilities from the RTC. See Note 15 for a
description of the terms and conditions of these notes.
The notes payable to shareholders are unsecured loans bearing interest at
8% per year with interest payable semi-annually and principal maturing on June
30, 1999. The proceeds from the notes payable were contributed to UPAM for
working capital purposes. The notes payable may be prepaid at any time, without
penalty and were paid off in April 1998.
The maturities of notes payable at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Due in 1 year or less $10,930
Due in 1 to 3 years --
-------
$10,930
=======
</TABLE>
11. WAREHOUSE LINES OF CREDIT
The Company has available $300 million in master repurchase credit
facilities bearing interest based on one month LIBOR. The credit facilities
provide for a committed amount of $125 million. At December 31, 1998, the
Company had no outstanding balances under its credit facilities and had $6.2
million outstanding at an interest rate of 6.70% at December 31, 1997. The
maximum amount outstanding at any month-end during 1998 and the average amount
outstanding during 1998 were $95.0 million and $40.5 million, respectively. The
credit facilities are secured by mortgage loans held for sale.
12. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31,
------------------------------
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Federal taxes:
Current $3,718 $ 4,622 $ 807
Deferred 35 (1,303) (302)
--------- --------- -------
3,753 3,319 505
--------- --------- -------
State taxes:
Current 1,143 1,547 304
Deferred 95 (375) (118)
--------- --------- -------
1,238 1,172 186
--------- --------- -------
Total $4,991 $ 4,491 $ 691
--------- --------- -------
</TABLE>
The tax effects of significant items comprising the Company's net deferred
taxes as of December 31 are as follows:
F-15
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31,
---------------------
(Dollars in thousands) 1998 1997
--------- -------
<S> <C> <C>
Deferred tax assets:
Franchise taxes $ 399 $ 452
Loans marked to market for tax purposes 2,300 2,797
Intangible assets 160 96
Accrued lease obligation closed offices 329 --
Compensation related reserve 302 49
Other 116 107
--------- -------
Total gross deferred tax assets 3,606 3,501
--------- -------
Deferred tax liabilities:
Loan loss allowances (508) (202)
FHLB stock dividends (145) (99)
Other -- (117)
-------- -------
Total gross deferred tax liabilities (653) (418)
--------- -------
Net deferred tax assets $2,953 $3,083
--------- -------
</TABLE>
The Company believes a valuation allowance is not needed to reduce the net
deferred tax assets as it is more likely than not that the deferred tax assets
will be realized through recovery of taxes previously paid or future taxable
income.
The Company's effective income tax rate differs from the federal statutory
rate due to the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- ----- ------
<S> <C> <C> <C>
Expected statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefits 7.0 7.2 7.5
Other, net 1.5 0.6 0.6
-------- ----- ------
Effective tax rate 42.5% 41.8% 42.1%
======== ===== ======
</TABLE>
For 1996, the Company filed its income tax return using a fiscal year end
of June 30, 1996. Accordingly, the amounts reflected in this Note for 1996 are
management's estimates of income tax expenses and deferred income taxes at that
date.
Amounts for the current year are based upon estimates and assumptions as of
the date of this report and could vary significantly from amounts shown on the
tax returns as filed. Accordingly, the variances from the amounts previously
reported for 1997 are primarily a result of adjustments to conform to the tax
returns as filed.
13. REGULATORY CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") established new capital standards for savings institutions, requiring
the Office of Thrift Supervision ("OTS") to promulgate regulations to prescribe
and maintain uniformly applicable capital standards for savings institutions.
Such regulations include three capital requirements: a tangible capital
requirement equal to 1.5% of adjusted total assets, a leverage limit or core
capital requirement equal to 3.0% of adjusted total assets, and a risk-based
capital requirement equal to 8.0% of risk-weighted assets.
F-16
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, the Bank had the following regulatory capital requirements
and capital position:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 December 31, 1997
-------------------------------------------------------------------------
(Dollars in thousands) ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $29,251 $ 6,321 $22,930 $22,379 $ 4,619 $17,760
Tangible capital ratio 6.94% 1.50% 5.44% 7.27% 1.50% 5.77%
Core capital $29,251 $12,642 $16,609 $22,379 $ 9,239 $13,140
Core capital (leverage) ratio 6.94% 3.00% 3.94% 7.27% 3.00% 4.27%
Risk-based capital $33,154 $24,625 $ 8,529 $24,938 $16,171 $ 8,767
Percent of risk-weighted assets 10.77% 8.00% 2.77% 12.34% 8.00% 4.34%
</TABLE>
The FDIC Improvement Act of 1991 ("FDICIA") required each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. In response to these requirements, the OTS adopted final rules,
effective December 19, 1992, based upon FDICIA's five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
The rules provide that a savings association is "well capitalized" if its
leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or
greater, its total risk-based capital ratio is 10% or greater, and the
institution is not subject to a capital directive.
As used herein, leverage ratio means the ratio of core capital to adjusted
total assets, Tier 1 risk-based capital ratio means the ratio of core capital to
risk-weighted assets, and total risk-based capital ratio means the ratio of
total capital to risk-weighted assets, in each case as calculated in accordance
with current OTS capital regulations. Under these regulations, the Bank is
deemed to be "well capitalized" as of December 31, 1998. Since that date, there
are no conditions or events that management believes would have changed its
"well-capitalized" designation.
The Bank had the following regulatory capital calculated in accordance with
FDICIA's capital standards for a "well capitalized" institution:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 December 31, 1997
---------------------------------- ----------------------------------
(Dollars in thousands) ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leverage $29,251 $21,070 $ 8,181 $22,379 $15,398 $ 6,981
Leverage ratio 6.94% 5.00% 1.94% 7.27% 5.00% 2.27%
Tier 1 risk-based $29,251 $18,469 $10,782 $22,379 $12,128 $10,251
Tier 1 risk-based ratio 9.50% 6.00% 3.50% 11.07% 6.00% 5.07%
Total risk-based $33,154 $30,781 $ 2,373 $24,938 $20,213 $ 4,725
Total risk-based ratio 10.77% 10.00% 0.77% 12.34% 10.00% 2.34%
</TABLE>
At periodic intervals, both the OTS and Federal Deposit Insurance
Corporation ("FDIC") routinely examine the Bank's financial statements as part
of their legally prescribed oversight of the savings and loan industry. Based
on these examinations, the regulators can direct that the Bank's financial
statements be adjusted in accordance with their findings.
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act ("Act") of 1996 was enacted. The Act included a Special
Assessment ("Special SAIF Assessment") related to the recapitalization of the
SAIF, which was levied based on a rate of 65.7 cents per $100 of SAIF-insured
domestic deposits held as of March 31, 1995. As a result of the Act, the
Company recorded a pre-tax charge of $820,000 in the year ended December 31,
1996.
14. COMMITMENTS AND CONTINGENCIES
Certain branch and office locations are leased by the Company under
operating leases expiring at various dates through the year 2006. Rent expense
was $3.0 million, $1.5 million and $475,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
F-17
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rental payments as of December 31, 1998 under existing
leases are set forth as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
YEAR ENDING DECEMBER 31:
<S> <C>
1999 $ 2,412
2000 2,681
2001 2,332
2002 1,944
2003 868
Thereafter 285
-------
Total $10,522
=======
</TABLE>
Under the RTC Minority Preference Resolution Program, the Company's Mission
Street branch is subject to a rent-free lease until April 30, 1999. The Company
executed a new five year lease with the landlord at current market rates,
commencing May 1, 1999.
In order to meet the borrowing needs of its customers, the Company is a
party to certain commitments to extend credit which have specified interest
rates and fixed expiration dates. These commitments, substantially all of which
are to fund mortgages on one-to-four family residences, are considered off-
balance sheet financial instruments. These instruments involve elements of
credit risk and interest rate risk in excess of amounts recognized in the
accompanying statements of financial condition. The Company's exposure to credit
loss from these commitments to extend credit, in the event of borrower
nonperformance, is represented by the contractual amount of these commitments.
Certain of the commitments are expected to expire without being drawn upon and,
accordingly, the total commitment amounts do not necessarily represent future
cash requirements.
At December 31, 1998 and 1997, the Company had outstanding commitments to
originate loans of approximately $23.3 million and $117.4 million, respectively.
Commitments outstanding included $17.8 million and $93.3 million of adjustable
rate loans at December 31, 1998 and 1997 and $5.5 million and $24.1 million of
fixed rate loans at December 31, 1998 and 1997, respectively. The fixed rate
loan commitments have interest rates ranging from 8.38% to 14.38% at December
31, 1998 and 7.75% to 16.00% at December 31, 1997. At December 31, 1998, the
Company had no outstanding commitments to sell loans on a nonrecourse basis and
$16.2 million at December 31, 1997.
The Company has entered into loan sale agreements with investors in the
normal course of business which include standard representations and warranties
customary to the mortgage banking industry. Violations of these representations
and warranties may require the Company to repurchase loans previously sold or to
reimburse investors for losses incurred. In addition, the Company may commit to
repurchase or substitute a loan if a payment default occurs within the first
month following the date the loan is funded, unless other arrangements are made
between the Company and the purchaser. In the opinion of management, the
potential exposure related to the Company's loan sale agreements will not have a
material effect on the financial position and operating results of the Company.
The Company is involved in various claims or legal actions arising in the
normal course of business. In the opinion of management, the ultimate
disposition of such matters will not have a material effect on the financial
position and operating results of the Company.
F-18
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. NOTES PAYABLE, RESTRICTION ON DIVIDEND PAYMENTS AND PLEDGE OF BANK STOCK.
In accordance with Federal Regulation 12 CFR 563.134, federal savings banks
which meet fully phased-in capital requirements may distribute dividends up to
100% of their net income to date plus the amount that would reduce by one-half
their surplus capital ratio at the beginning of the calendar year. The Bank
exceeds the fully phased-in capital requirements. In connection with the April
29, 1994 purchase of assets and assumption of certain liabilities from the RTC,
the Bank and the Company, entered into a five year Interim Capital Assistance
Loan Agreement ("ICA") with the RTC (the Bank is not a direct or indirect
obligor, or a guarantor of the loan) for $6.9 million at a fixed interest rate
of 3.69% for two years and 0.125% above the 13-week Treasury Bill auction rate
for the remaining three years, adjusted annually. On September 9, 1994, the Bank
acquired deposits from the RTC totaling approximately $65 million located in
Panorama City in Southern California. This branch is located in a "Predominately
Minority Neighborhood," as defined by the RTC. In connection with this
acquisition, the RTC provided PAFI, $4.0 million in the form of an additional
ICA loan for a term of five years with interest at 0.125% above the 13 week
Treasury Bill auction rate, adjusted quarterly. The entire amount was invested
in the Bank and qualifies as regulatory capital for the Bank. In addition, the
OTS required $750,000 of additional capital from the shareholders to be invested
in the Bank in connection with the Panorama City branch acquisition.
These Agreements, as amended, provide among other things, that the Bank may
not declare or pay any dividends until the loan is repaid by the Company.
Dividends may be paid to the Company if the funds are used exclusively for
payment of principal or interest on the obligation of PAFI to the RTC or the
Bank has provided the FDIC with 30 days prior written notice of its intent to
declare or pay such dividends and the Bank is in compliance with certain
conditions as required under the Agreements. The stock of the Bank was pledged
by PAFI to the RTC as collateral for the loan.
16. STOCK OPTIONS
In 1994, the Company adopted a stock option plan and, in November 1997,
amended and restated such plan as the United PanAm Financial Corp. 1997 Employee
Stock Incentive Plan (the "Plan"). The maximum number of shares that may be
issued to officers, directors, employees or consultants under the Plan is
2,287,500. Options issued pursuant to the Plan have been granted at an exercise
price of not less than fair market value on the date of grant. Options generally
vest over a three to five year period and have a maximum term of ten years.
Stock option activity is as follows:
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------
Weighted Weighted
Weighted Average Average
Shares Average Shares Exercise Shares Exercise
1998 Exercise Price 1997 Price 1996 Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 1,580,000 $ 4.55 1,143,750 $0.80 900,000 $0.80
Granted 350,000 9.82 717,500 9.06 243,750 .80
Canceled or expired (10,000) (10.50) -- -- -- --
Exercised (100,000) (0.80) (281,250) 0.80 -- --
----------- ---------- ----------
Balance at end of year 1,820,000 $ 5.74 1,580,000 $4.55 1,143,750 $0.80
=========== ========== ==========
Weighted average fair value per share
of options granted during the year $ 5.62 $ 2.61 $ 0.23
============ ========== ==========
</TABLE>
F-19
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares exercised in 1997 were executed by a shareholder and officer of the
Company. In connection with this transaction, the Company loaned this individual
$225,000 to finance the exercise of these options which loan is secured by the
shares purchased. The loan bears interest at an annual rate of 5.81% payable on
the earlier of October 15, 2000 or the termination of this individual's
employment with the Company.
During 1998, 147,500 shares of restricted stock were granted to certain key
employees. The weighted average market value per share of the restricted stock
at the grant date was $5.00. The restricted stock vests 20% in 1999, 20% in
2000, 30% in 2001, and 30% in 2002.
The Company applies APB Opinion No. 25 in accounting for the Plan.
Compensation expense related to this stock compensation plan was $60,000 in
1998. During 1997 and 1996, no compensation expense was recorded for the Plan.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro-forma amounts
indicated below for the years ended December 31:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
--------- ------- ------
<S> <C> <C> <C>
Net income to common shareholders:
As reported $6,763 $6,248 $ 950
Pro-forma $6,334 $6,031 $ 942
Earnings per share:
As reported basic $ 0.44 $ 0.58 $0.09
As reported diluted $ 0.41 $ 0.53 $0.09
Pro-forma basic $ 0.42 $ 0.56 $0.09
Pro-forma diluted $ 0.39 $ 0.51 $0.09
</TABLE>
The fair value of options and restricted stock granted under the Plan was
estimated on the date of grant using the Black-Sholes option-pricing model with
the following weighted average assumptions used: no dividend yield, 61%
volatility in 1998 and zero volatility in 1997 and 1996, risk-free interest rate
of 7% and expected lives of 5 years.
At December 31, 1998, options exercisable to purchase 1,124,000 shares of
the Company's common stock under the Plan were outstanding as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------------
Weighted Weighted
Average Average
Expiration Exercise Exercise
Range of Exercise Prices Shares Date Price Shares Price
- ------------------------ --------------- --------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.80 - $1.33 875,000 2006 $ 0.87 823,000 $ 0.87
$4.75 70,000 2008 4.75 -- --
$10.50-$12.10 875,000 2008 10.69 301,000 10.50
--------------- --------------- ----------------- -----------------
1,820,000 $ 5.74 1,124,000 $ 3.73
--------------- --------------- ----------------- -----------------
</TABLE>
The Company's auto finance subsidiary has granted options to certain of its
key employees to purchase up to 15.0% of that subsidiary. These options vest
over a five year period and are exercisable at a predetermined price which
increases each year.
F-20
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. 401(k) PLAN
The Company maintains the Pan American Bank, FSB 401(k) Profit Sharing Plan
(the "401(k) Plan") for the benefit of all eligible employees of the Company.
Under the 401(k) Plan, employees may contribute up to 15% of their pre-tax
salary or the annual dollar limit of $10,000 for 1998. The Company will match,
at its discretion, 50% of the amount contributed by the employee up to a maximum
of 6% of the employee's salary. The contributions made by the Company in 1998
were $402,000. There were no contributions made by the Company in 1997 and
1996.
18. OTHER EXPENSES
Other expenses are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Marketing $ 3,624 $1,740 $ 171
Forms, supplies, postage and delivery 2,226 1,301 384
Telephone 1,707 921 185
Professional fees 1,790 788 339
Travel and entertainment 1,644 885 170
Loan servicing expense 1,344 349 168
Data processing 978 529 364
Deposit insurance premiums 156 309 371
Insurance premiums 590 253 93
Loan expenses 963 476 168
Amortization of intangible assets 239 127 132
Office closure expense 800 -- --
Other 1,208 470 227
----------------- ----------------- -----------------
Total $17,269 $8,148 $2,772
================= ================= =================
</TABLE>
The expense for office facilities closed represents the net present value
of future lease obligations net of expected sublease income related to five real
estate lending branch offices that were closed during the fourth quarter of
1998.
19. EARNINGS PER SHARE
On December 31, 1997, the Company adopted SFAS 128 for calculating earnings
per share as shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1998 1997 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Earnings per share basic
Net income applicable to common stock $ 6,763 $ 6,248 $ 950
----------------- ----------------- ------------------
Average common shares outstanding 15,263 10,739 10,669
----------------- ----------------- ------------------
Per share $ 0.44 $ 0.58 $ 0.09
================= ================= ==================
Earnings per share diluted:
Net income $ 6,763 $ 6,248 $ 950
================= ================= ==================
Average common shares outstanding 15,263 10,739 10,669
Add: Stock options 880 1,136 --
----------------- ----------------- ------------------
Average common shares outstanding diluted 16,143 11,875 10,669
----------------- ----------------- ------------------
Per share $ 0.42 $ 0.53 $ 0.09
================= ================= ==================
</TABLE>
F-21
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments are as
follows at the dates indicated:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------------------ -----------------------
(Dollars in thousands) Carrying Fair Value Carrying Fair Value
Value Estimate Value Estimate
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 52,211 $ 52,211 $ 19,026 $ 19,026
Securities -- -- 1,002 1,002
Residual interests in securitizations -- -- 8,230 8,230
Loans, net 133,718 133,718 148,535 161,324
Loans held for sale 214,406 220,431 120,002 126,782
Federal Home Loan Bank Stock 2,120 2,120 1,945 1,945
Accrued interest 2,034 2,034 1,494 1,494
Liabilities:
Deposits 321,668 322,724 $233,194 $233,538
Notes payable 10,930 10,930 12,930 12,930
Federal Home Loan Bank advances -- -- 28,000 28,000
Warehouse lines of credit -- -- 6,237 6,237
</TABLE>
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Because no ready market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision. The
use of different assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statements of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
Securities: Securities are valued at quoted market prices where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Residual interests in securitizations: The fair value of residual
interests in securitizations is determined by discounting the estimated cash
flows received over the life of the asset using prepayment, default, and
interest rate assumptions that market participants would use for similar
financial instruments also subject to prepayment, credit and interest rate risk.
Loans, net: For real estate loans, fair values were estimated using quoted
prices for equivalent yielding loans as adjusted for interest rates, margin
differences and other factors. For non-mortgage loans, fair values, were
estimated at carrying amounts due to their short-term maturity and portfolio
interest rates that are equivalent to present market interest rates.
Loans held for sale: The fair value of loans held for sale is based on
current pricing of whole loan transactions that a purchaser unrelated to the
seller would demand for a similar loan.
Federal Home Loan Bank stock: Since no secondary market exists for FHLB
stock and the stock is bought and sold at par by the FHLB, fair value of these
financial instruments approximates the carrying value.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial
F-22
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
instruments. For fixed maturity deposits, the fair value was estimated by
discounting expected cash flows by the current offering rates of deposits with
similar terms and maturities.
Federal Home Loan Bank advances: The fair value of FHLB advances are
valued at their carrying amounts included in the consolidated statements of
financial condition, which are reasonable estimates of fair value due to the
relatively short period to maturity of the advances.
Notes payable: The fair value of notes payable is considered to
approximate carrying value as their note rates are consistent with present
market rates.
Warehouse lines of credit: The fair value of the warehouse lines of credit
is considered to approximate carrying value as the note rate is consistent with
present market rates.
Financial instruments with off-balance sheet risk: No fair value is
ascribed to the Company's outstanding commitments to fund loans since commitment
fees are not significant and predominantly all such commitments are variable-
rate loan commitments. There were no significant unrealized gains and losses on
commitments to sell loans.
21. OPERATING SEGMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS 131"), which establishes standards
for the way that public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. Effective January 1, 1998, the Company adopted
SFAS 131 and is reporting on its operating segments as follows:
The Company has four reportable segments: mortgage finance, auto finance,
insurance premium finance and banking. The mortgage finance segment originates
and sells or securitizes subprime mortgage loans collateralized primarily by
first mortgages on single family residences. The auto finance segment acquires,
holds for investment and services subprime retail automobile installment sales
contracts generated by franchised and independent dealers of used automobiles.
The insurance premium finance segment, through a joint venture, underwrites and
finances automobile and commercial insurance premiums in California. The
banking segment operates a five-branch federal savings bank and is the principal
funding source for the Company's mortgage, auto and insurance premium finance
segments.
The accounting policies of the segments are the same as those described in
the Company's summary of significant accounting policies except for (i) funds
provided by the banking segment to the other operating segments which are
accounted for at a predetermined transfer price (including certain overhead
costs) and (ii) an allocation between the mortgage finance and banking segments
representing a cost reimbursement for services provided by the banking segment
to the mortgage finance segment.
The Company's reportable segments are strategic business units that offer
different products and services. The are managed and reported upon separately
within the Company.
At or For Year Ended December 31, 1998
-------------------------------------------------------
F-23
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Insurance
Mortgage Auto Premium
Finance Finance Finance Banking Total
------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 5,009 $ 8,498 $ 3,035 $ 9,557 $ 26,099
Provision for loan losses 5,560 -- 293 -- 5,853
Non-interest income 49,154 104 410 3,198 52,866
Non-interest expense 46,957 6,276 386 7,739 61,358
------------- --------------- --------------- --------------- ---------------
Segment profit (pre-tax) $ 1,646 $ 2,326 $ 2,766 $ 5,016 $ 11,754
============= =============== =============== =============== ===============
Loans $208,850 $62,392 $44,360 $32,522 $348,124
Allowance for loan losses 4,838 4,138 349 858 10,183
At or For Year Ended December 31, 1997
-----------------------------------------------------------------------------------------------
Insurance
Mortgage Auto Premium
Finance Finance Finance Banking Total
------------- --------------- --------------- --------------- ---------------
Net interest income $ 1,814 $ 3,370 $ 2,978 $ 5,938 $ 14,100
Provision for loan losses -- 350 (85) 242 507
Non-interest income 26,526 27 190 1,085 27,828
Non-interest expense 20,578 3,487 275 6,342 30,682
------------- --------------- --------------- --------------- ---------------
Segment profit (loss) (pre-tax) $ 7,762 $ (440) $ 2,978 $ 439 $ 10,739
============= =============== =============== =============== ===============
Loans $124,144 $39,540 $28,501 $76,352 $268,537
Allowance for loan losses 1,823 1,791 450 2,423 6,487
At or For Year Ended December 31, 1996
-----------------------------------------------------------------------------------------------
Insurance
Mortgage Auto Premium
Finance Finance Finance Banking Total
------------- --------------- --------------- --------------- ---------------
Net interest income $ 411 $ 521 $ 1,700 $ 6,076 $ 8,708
Provision for loan losses -- -- 194 -- 194
Non-interest income 2,352 -- 271 153 2,776
Non-interest expense 2,620 1,135 265 5,629 9,649
------------- --------------- --------------- --------------- ---------------
Segment profit (pre-tax) $ 143 $ (614) $ 1,512 $ 600 $ 1,641
============= =============== =============== =============== ===============
Loans $ 20,766 $ 7,367 $31,683 $95,771 $155,587
Allowance for loan losses 100 192 375 4,689 5,356
</TABLE>
For the reportable segment information presented, there are no reconciling
items between the Company's consolidated results and segment net interest
income, segment assets and segment profit. Substantially all expenses are
recorded directly to each industry segment. Segment non-interest income and
non-interest expense differ from the consolidated results due to an inter-
segment cost reimbursement in 1998 and 1997 as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Non-interest income for reportable segments $52,866 $27,828
Inter-segment cost reimbursement (1,800) (600)
--------------- ---------------
Consolidated non-interest income $51,066 $27,228
=============== ===============
Non-interest expense for reportable segments $61,358 $30,682
Inter-segment cost reimbursement (1,800) (600)
--------------- ---------------
Consolidated non-interest expense $59,558 $30,082
=============== ===============
</TABLE>
22. HOLDING COMPANY FINANCIAL INFORMATION
Following are the financial statements of United PanAm Financial Corp.
(holding company only):
F-24
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
STATEMENTS OF FINANCIAL CONDITION
Cash $ 178 $ 290
Note receivable from affiliate 58,138 --
Other assets 1,965 297
Investment in subsidiaries 23,050 14,696
---------- -------
Total assets $83,331 $15,283
========== =======
Notes payable -- 2,000
Other liabilities 418 274
---------- -------
Total liabilities 418 2,274
Shareholders' equity 82,913 13,009
---------- -------
Total liabilities and shareholders' equity $83,331 $15,283
========== =======
</TABLE>
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------------
1998 1997 1996
-------- ------- -----
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Equity in income of subsidiaries $ 6,155 $ 6,294 $ 952
Interest income 1,779 11 1
-------- ------- -----
Total income 7,934 6,305 953
-------- ------- -----
Interest expense 47 74 --
Other expense 679 25 4
-------- ------- -----
Total expense 726 99 4
-------- ------- -----
Income before income taxes 7,208 6,206 949
Income taxes (benefit) 445 (42) (1)
-------- ------- -----
Net income $ 6,763 $ 6,248 $ 950
======== ======= =====
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 6,763 $ 6,248 $ 950
Equity in earnings of subsidiaries (6,155) (6,294) (952)
Increase in accrued interest receivable (1,767) -- --
(Increase) decrease in other assets 100 (268) 7
Increase in other liabilities 144 274 --
Other, net 140 -- --
-------- ------- -----
Net cash provided by (used in) operating activities (775) (40) 5
-------- ------- -----
Cash flows from financing activities:
Issuance of common stock 63,001 -- --
Issuance of note to subsidiary (58,138) -- --
Capital contributed to subsidiary (2,200) (1,702) --
Increase (decrease) in notes payable to shareholders (2,000) 2,000 --
-------- ------- -----
Net cash provided by financing activities 663 298 --
-------- ------- -----
Net increase (decrease) in cash and cash equivalents (112) 258 5
Cash and cash equivalents at beginning of period 290 32 27
-------- ------- -----
Cash and cash equivalents at end of period $ 178 $ 290 $ 32
======== ======= =====
</TABLE>
23. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
F-25
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED
--------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998: 1998 1998 1998 1998
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net interest income $ 5,249 $ 6,913 $ 6,996 $ 6,942
Provision for loan losses 38 1,085 661 4,069
Non-interest income 10,098 17,533 17,310 6,125
Non-interest expense 12,797 15,967 15,642 15,152
------------------ ------------------ ------------------ -----------------
Income (loss) before income taxes 2,512 7,394 8,003 (6,154)
Income taxes (benefit) 1,059 3,181 3,333 (2,581)
------------------ ------------------ ------------------ -----------------
Net income (loss) $ 1,453 $ 4,213 $ 4,670 $(3,573)
================== ================== ================== =================
Earnings (loss) per share - basic $ 0.13 $ 0.27 $ 0.27 $ (0.21)
================== ================== ================== =================
Earnings (loss) per share - diluted $ 0.12 $ 0.26 $ 0.26 $ (0.21)
================== ================== ================== =================
THREE MONTHS ENDED
--------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997: 1997 1997 1997 1997
------------------ ------------------ ------------------ -----------------
Net interest income $ 2,766 $ 3,511 $ 3,844 $ 3,979
Provision for loan losses 94 285 66 62
Non-interest income 2,523 4,876 8,384 11,445
Non-interest expense 4,800 6,496 7,989 10,797
------------------ ------------------ ------------------ -----------------
Income before income taxes 395 1,606 4,173 4,565
Income taxes 162 666 1,752 1,911
------------------ ------------------ ------------------ -----------------
Net income $ 233 $ 940 $ 2,421 $ 2,654
================== ================== ================== =================
Earnings per share - basic $ 0.02 $ 0.09 $ 0.23 $ 0.24
================== ================== ================== =================
Earnings per share - diluted $ 0.02 $ 0.08 $ 0.21 $ 0.22
================== ================== ================== =================
</TABLE>
F-26
<PAGE>
EXHIBIT 10.92
AGREEMENT
---------
This Agreement is made as of November 5,1999, by and between BPN
Corporation ("BPN") and Pan American Bank, FSB ("PAB").
RECITALS
--------
A. BPN is a party to that certain Consulting Agreement and related
License Agreement, dated March 3,1997, between BPN and Dulcian, Inc., a copy of
which is attached hereto as Schedule A (the "Dulcian Agreements").
B. Dulcian has developed for BPN certain software applications under the
Dulcian Agreements for use by BPN in connection with the management of the
insurance premium finance business of BPN and PAB.
C. The parties hereto wish to specify the terms on which PAB shall
acquire an interest in all rights and interests of BPN arising under the Dulcian
Agreements, and will reimburse BPN for a portion of the costs incurred by BPN in
connection with the development of the application software under the Dulcian
Agreement.
NOW, THEREFORE, the parties agree as follows:
1. BPN hereby assigns to PAB a 50% interest in and to all
application software and other property developed under the Dulcian Agreements
in which BPN has acquired an interest pursuant to the terms of the Dulcian
Agreements, including, without limitation, all proceeds of future licensing or
other exploitation of such interests (the "Property").
2. In consideration of the assignment of a 50% interest in the
Property from BPN hereunder, PAB agrees to pay to BPN 50% of the total funds
expended by BPN in performing its obligations to Dulcian under the Dulcian
Agreements, and related hardware, subject to a cap of $175,000.00 on the amount
of PAB's contribution. Upon execution of this Agreement, PAB shall advance to
BPN the sum of $175,000.00 representing the maximum reimbursement of expenses to
BPN hereunder. Not later than November 30, 1998, BPN shall provide PAB with a
final accounting of all expenses incurred or committed under the Dulcian
Agreements by BPN, with appropriate invoices and such other documentation as PAB
may reasonably require. In the event the total expenses incurred by BPN, as
evidenced by such accounting, are less than $350,000.00, BPN shall reimburse PAB
to the extent of 50% of the difference between $350,000.00 and the expenses
actually incurred.
3. BPN and PAB shall have equal rights to use and consent to the use
of the Property. All licenses, sublicenses or other use of the Property, other
than in connection
1
<PAGE>
with the management of the insurance premium financing business conducted by PAB
and BPN, shall be subject to the prior approval of BPN and PAB. PAB and BPN
shall each be entitled to one half of the net revenues derived from any
exploitation of the Property other than in connection with the insurance premium
financing business of PAB and BPN, which will continue to be governed by the
terms of the Insurance Premium Financing Management Agreement dated May 17, 1995
between BPN and PAB.
Executed as of November 5, 1998.
BPN Corporation
By: /s/ Peter A. Walski
_________________________
Peter A. Walski
Title: President
__________________
By: /s/ Cornelius J. O'Shea
_________________________
Cornelius J. O'Shea
Title: V.P.
__________________
Pan American Bank, FSB
By: /s/ Lawrence J. Grill
__________________________
Lawrence Grill, President
2
<PAGE>
EXHIBIT 10.93
LOAN AND STOCK PLEDGE AGREEMENT
-------------------------------
This Loan and Stock Pledge Agreement the ("Agreement") is made and
executed as of November 5, 1998 by and among Barbara R. Walski, Peter A. Walski
and The Walski Family Trust u/d/t/ dated August 30, 1989 (collectively,
"Pledgor"), BPN Corporation, a California corporation ("BPN") and Pan American
Bank, FSB ("Lender").
RECITALS
--------
A. The Walski Family Trust u/d/t dated August 30, 1989 (the "Trust") is
the owner of 650 shares of the common stock (the "Shares") of BPN. Barbara R.
Walski and Peter A. Walski are the sole trustees and lifetime beneficiaries of
the Trust.
B. BPN is a party to an agreement for Purchase of Assets dated November
5, 1998 (the "Asset Purchase Agreement") under which BPN and Lender are
purchasing certain assets ("Assets") from Norwest Financial Coast, Inc.
C. The parties hereto desire to specify their agreement respecting the
acquisition of the Assets under the Asset Purchase Agreement and of certain
financing to be provided to Pledgor in connection therewith.
NOW, therefore, the parties agree as follows:
1. Asset Purchase Agreement. BPN shall pay $1,200,000 and Lender
------------------------
shall pay $1,800,000 of the total $3,000,000 acquisition price for
the Assets. Lender shall have the exclusive right to finance insurance
premium finance receivables ("IPF Loans") generated through the
exploitation of the Assets under the terms of the Insurance Premium
Financing Management Agreement (the "IPF Agreement") dated May 17, 1995
between Lender and BPN, which right shall not be subject to termination
under such agreement. The IPF Agreement shall otherwise govern
exploitation of the Assets by BPN and Lender. In addition, Lender has
agreed to pay a total of $25,000 to BPN to defer expenses to be
incurred by BPN in connection with taking over the business included as
part of the Assets and handling the IPF Loans generated thereby (the
"Expense Reimbursement"), which shall be credited pro rata against the
initial principal repayment obligation of Pledgor hereunder and of
Cornelius J. O'Shea ("O'Shea") under a $420,000.00 promissory note of
O'Shea evidencing credit extended by Lender to O'Shea in connection
with the acquisition of the Assets (the "O'Shea Note"). Upon the
crediting of the Expense Reimbursement to the Note and O'Shea Note,
Lender shall have no obligation to fund the Expense Reimbursement. All
other such expenses shall be paid by BPN.
2. Loan; Initial Payment. Pledgor has agreed to borrow, and Lender
---------------------
has agreed to loan to Pledgor the sum of $780,000.00, to be used by Pledgor
solely for the purpose of funding the payment to be made by BPN to acquire the
Assets under the Asset Purchase Agreement (the "Loan"). The Loan is evidenced
by this Agreement and a Promissory Note (the "Note") of even date. This
Agreement, the Note and any and all documents and instruments now or hereafter
1
<PAGE>
executed and evidencing the Loan or any security therefore are referred to
herein as the "Loan Documents". Immediately following funding of the Loan,
Pledgor shall pay $130,000.00 to Lender as a payment of principal. There shall
be credited against such payment the sum of $16,250. 00, representing 65 % of
the amount of the Expense Reimbursement.
3. Security. Pledgor hereby assigns, grants, pledges and transfers
--------
to Lender, a security interest in and lien upon all Collateral (as defined in
paragraph 4) as security for the payment and performance of any and all of the
following obligations and liabilities ("Obligations") of Pledgor owing to
Lender: (i) payment of all of the indebtedness evidenced by the Note in the
face amount of $780,000.00, executed by Pledgor in favor of the Lender; (ii)
payment and performance of all existing and future indebtedness and obligations
of the Pledgor to the Lender under the Loan Documents; and (iii) any and all
amendments, modifications, renewals and/or extensions of any of the foregoing,
including, but not limited to amendments, modifications, renewals or extensions
which are evidenced by new or additional instruments, documents or agreements or
which change the rate of interest on any indebtedness or obligations secured
hereby. The term "Obligations" as used herein is intended to mean Obligations
in its most comprehensive sense and includes all present and future
indebtedness, liabilities, undertakings, covenants and other obligations of
Pledgor, whether voluntary or involuntary, absolute or contingent, liquidated or
unliquidated, determined or undetermined, earned or unearned, and due or not
due.
4. Collateral. Pledgor hereby assigns, grants, pledges and
----------
transfers to Lender, as security for the payment and performance of the
Obligations described in paragraph 2 above, a security interest in, and lien
upon all of Pledgor's right, title and interest in and to the following:
(a) the Shares;
(b) all options or warrants for the purchase of additional Shares
and all rights represented thereby held by Pledgor if any (the "Options");
(c) stock powers ("Powers") duly executed in blank, with such
signatures properly guaranteed covering all of the Shares; and
(d) the proceeds of each of the foregoing including, without
limitation any and all dividends, cash, instruments and other property from time
to time received, receivable, or otherwise distributed in respect of or in
exchange for any of the Shares or Options (the "Proceeds") (The Shares, the
Options, the Powers, and the Proceeds shall be collectively referred to as the
"Collateral").
5. Delivery. Concurrent with the execution hereof, Pledgor has
--------
delivered Certificate(s) No(s). 5 , representing all of the
-------------------
Shares to Lender together with related Powers or endorsements, to be held
pursuant to the terms hereof for the benefit of Lender.
6. Lender's Duties. Lender shall have no duty with respect to the
---------------
Collateral other than the duty to use reasonable care if it is in its
possession. Without limiting the generality
2
<PAGE>
of the foregoing, Lender shall be under no obligation to take any steps
necessary to preserve rights in the Collateral against any other parties, to
sell same if it threatens to decline in value, or to exercise any rights
represented thereby.
7. Voting Rights; Dividends; Etc. During the term of this Agreement
------------------------------
and as long as no Event of Default, as defined herein shall have occurred and be
continuing:
(a) Pledgor shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Shares or any part thereof for any
purpose not inconsistent with the terms of this Agreement or the other Loan
Documents.
(b) Pledgor shall be entitled to receive and retain any and all
dividends and distributions paid in respect of the Shares; provided, however,
that any and all
(i) dividends and distributions paid or payable other than in
cash in respect of, and instruments and other property received, receivable or
otherwise distributed in respect of, or in exchange for, any Shares,
(ii) dividends and distributions paid or payable in cash in
respect of any Shares in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in surplus, and
(iii) cash paid with respect to, payable or otherwise
distributed on redemption of, or in exchange for, or upon the sale of any
Shares, shall be forthwith delivered to Lender to hold as Collateral and shall,
if received by Pledgor, be received in trust for the benefit of Lender, be
segregated from the other property or funds of Pledgor, and be forthwith
delivered to Lender as Collateral in the same form as so received (with any
necessary endorsement).
(c) Lender shall execute and deliver (or cause to be executed and
delivered) to Pledgor all such proxies and other instruments as Pledgor may
reasonably request for the purpose of enabling Pledgor to exercise those voting
and other rights which it is entitled to exercise pursuant to paragraph 7(a)
above and to receive those dividends or distributions which it is authorized to
receive and retain pursuant to paragraph 7(b) above.
(d) If an Event of Default shall have occurred and be continuing and
any amounts shall be due and payable (whether by acceleration, maturity, or
otherwise) under any of the Obligations, all rights of Pledgor to exercise the
voting and other consensual rights which it would otherwise be entitled to
exercise pursuant to this paragraph 7 and to receive the dividends and
distributions which it would otherwise be authorized to receive and retain
pursuant to this paragraph shall, at Lender's option, cease, and all such rights
shall, at Lender's option, thereupon become vested in Lender so long as an Event
of Default shall continue, and Lender shall, at its option, thereupon have the
sole right to exercise such voting and other consensual rights and to receive
and hold as Collateral such dividends and interest payments.
3
<PAGE>
8. Representations. Pledgor warrants, represents and covenants, and
---------------
to the extent expressly mentioned below, BPN warrants, represents and covenants
that:
(a) There are no restrictions upon the transfer of any of the
Collateral and Pledgor has the right to pledge and grant a security interest in
or otherwise transfer such Collateral free of any encumbrances or rights of
third parties, except for the rights of United PanAm Financial Corp., f/k/a Pan
American Group, Inc. ("UPFC"), under that certain Stock Option Agreement dated
May 17, 1995, as amended, between UPFC, Pledgor, BPN and O'Shea. Pledgor and
BPN hereby waive any rights that Pledgor or BPN may have under the Stock
Redemption Agreement between BPN, Pledgor and O'Shea dated August 25, 1990 (the
"Stock Redemption Agreement") to the extent such rights would hinder or impede
Lender's right to dispose of the Collateral, and further agree that Lender may,
upon foreclosure and sale of its Collateral or acceptance thereof in lieu of
sale or foreclosure, dispose of the Shares free and clear of any restriction or
rights of any third party arising under the Stock Redemption Agreement.
(b) All of the Collateral is and shall remain free from all liens,
claims, encumbrances, and purchase money or other security interests. Pledgor
shall not, without Lender's prior written consent, sell, transfer or otherwise
dispose of any or all of the Collateral.
(c) This Agreement, and the delivery to Lender of the certificates
representing the Shares, creates a valid and perfected security interest in the
Collateral in favor of Lender, and all actions necessary or desirable to such
perfection have been duly taken.
(d) No authorization or other action by, and no notice to or filing
with, any governmental authority or regulatory body is required either (i) for
the grant by Pledgor of the security interest granted hereby or for the
execution, delivery or performance of this Agreement by Pledgor; (ii) for the
perfection of or exercise by Lender of its rights and remedies hereunder; or
(iii) for the exercise by Lender of the voting or other rights provided for in
this Agreement or the remedies in respect of the Shares pursuant to this
Agreement (except as may be required in connection with a disposition of the
Shares by laws affecting the offering and sale of securities generally).
(e) Pledgor has made its own arrangements for keeping informed of
changes or potential changes affecting the Collateral (including, but not
limited to, rights to convert, rights to subscribe, payment of dividends,
reorganization or other exchanges, tender offers and voting rights) and Pledgor
agrees that Lender shall have no responsibility or liability for informing
Pledgor of any such changes or potential changes or for taking any action or
omitting to take any action with respect thereto.
(f) The Shares and any shares owned by O'Shea and pledged to Lender
represent, and will at all times represent, all of the issued and outstanding
shares of capital stock of BPN. Pledgor and BPN agree that no additional Shares
shall be issued except to Lender without Lender's written prior approval.
4
<PAGE>
(g) Pledgor and BPN represent that there are and will be no options,
warrants or other rights to acquire capital stock of BPN outstanding other than
the option of UPFC under the Stock Option Agreement.
(h) Pledgor and BPN represent, warrant and covenant that all of the
outstanding Shares have been duly and validly issued by BPN and they are fully
paid and nonassessable.
(i) Pledgor represents that Barbara R. Walski and Peter A. Walski
constitute the sole trustees and lifetime beneficiaries of the Trust, that they
have the full power and authority to execute all Loan Documents on behalf of the
Trust, that the Trust is not restricted from entering into and performing its
obligations under the Loan Documents, and that Lender has been delivered a true
and correct copy of the Trust as amended to date.
(j) The financial statements of Pledgor and BPN provided and to be
provided to Lender in connection with the Loan fairly represent the financial
condition, operation and income of such persons as of the date covered thereby.
9. Additional Covenants. Pledgor and BPN covenant and agree that:
--------------------
(a) BPN will not incur any indebtedness other than for trade
payables incurred for goods and services acquired or utilized in the ordinary
course of business and paid within 90 days, or guaranty or pledge any assets to
secure any indebtedness of any other person, and any obligation to repay Pledgor
and O'Shea any funds advanced to BPN from the proceeds of the Note and the
O'Shea Note.
(b) Lender may collect all Loan payments, when due, by directly
debiting amounts otherwise due BPN from Lender under the IPF Agreement.
(c) BPN and each party comprising Pledgor shall provide Lender
annually with financial statements in form satisfactory to Lender and copies of
all federal and state income tax returns filed by them.
(d) BPN and Pledgor have materially benefitted from the proceeds of
the Loan, and Lender would not extend such credit without BPN's and Pledgor's
agreement to the terms of this Agreement, including specifically this paragraph
9.
10. Share Adjustment. In the event that during the term of this
----------------
Agreement, any reclassification, readjustment or other change is declared or
made in the capital structure of BPN, or any Option is exercised, all new
substituted and additional shares, options, or other securities, issued, or
issuable, to Pledgor by reason of any such change or exercise shall be delivered
to and held by Lender under the terms of this Agreement in the same manner as
the collateral originally pledged hereunder.
5
<PAGE>
11. Warrants. In the event that during the term of this Agreement,
--------
subscription warrants or any other rights or options shall be issued or
exercised in connection with the Collateral, such warrants, rights and options
acquired by Pledgor shall be immediately assigned by Pledgor to Lender and all
new stock or other securities so acquired by Pledgor shall also be immediately
assigned to Lender to be held under the terms of this Agreement in the same
manner as the Collateral originally pledged hereunder.
12. Consent. Pledgor hereby consents that, from time-to-time, before
-------
or after the occurrence or existence of any Event of Default, with or without
notice to or assent from Pledgor, any other security at any time held by or
available to Lender for any of the Obligations or any other security at any time
held by or available to Lender of any other person, firm or corporation
secondarily or otherwise liable for any of the Obligations, may be exchanged,
surrendered, or released and any of the Obligations may be changed, altered,
renewed, extended, continued, surrendered, compromised, waived or released, in
whole or in part, as Lender may see fit, and Pledgor shall remain bound under
this Agreement notwithstanding any such exchange, surrender, release,
alteration, renewal, extension, continuance, compromise, waiver or inaction, or
extension of further credit.
13. Events of Default. The Lender may exercise the remedies held by
-----------------
the Lender under this Agreement and other Loan Documents if any of the following
events (an "Event of Default") occur and are not remedied by the defaulting
party or waived in writing by the Lender.
(a) The nonpayment, within five (5) days of the date when due, of
any installment of interest or principal owing under the Note or of any other
amount payable to the Lender under the terms of the Loan Documents.
(b) The failure by the Pledgor or BPN to perform or observe any
representation, warranty or agreement contained in any of the Loan Documents,
which shall continue for a period of thirty (30) days after the Pledgor or BPN
become aware thereof, except that any obligations related to the payment of
money shall have no grace period except as otherwise expressly provided in
paragraph 13(a) hereof.
(c) The existence for a period of thirty (30) days of any lien other
than liens created by the Loan Documents or permitted hereunder covering all or
any portion of the Collateral, unless the validity thereof is being contested in
good faith by the Pledgor.
(d) Any representation, statement, certificate, schedule or report
made or furnished to the Lender by or on behalf of the Pledgor or BPN proves to
be false or erroneous in any material respect at the time of the making thereof
or any representation or warranty contained in the Loan Documents ceases to be
complied with in any material respect.
(e) The insolvency (meaning an inability to pay debts as the same
become due or the existence of liabilities in excess of assets) of any of the
parties comprising Pledgor or
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BPN, or the institution of bankruptcy, reorganization, liquidation, receivership
or conservatorship proceeding by or against any of the parties comprising
Pledgor or BPN.
(f) The default in payment or acceleration of the maturity of any
indebtedness any of the parties comprising Pledgor or BPN owing to any other
person.
(g) For any reason after execution and delivery thereof, any
document delivered pursuant hereto that creates, or was intended to create, a
security interest or to provide collateral security for indebtedness created
hereunder ceases to be in full force and effect, or the liens intended to be
created thereby cease to be or are not valid and perfected first liens, subject
to no other liens.
14. Remedies Upon Default. Upon the occurrence of an Event of
---------------------
Default, Lender shall have, in addition to any other rights given by law or the
rights hereunder, all of the rights and remedies with respect to the Collateral
of a secured party under the California Uniform Commercial Code.
In addition, with respect to the Collateral, or any part thereof,
Lender may sell or cause the same to be sold at any public or private sale, in
one or more sales or lots, at such price as Lender may deem best, and for cash
or on credit or for future delivery, without assumption of any credit risk, and
the purchaser of any or all of the Collateral so sold shall thereafter hold the
same absolutely, free from any claim, encumbrance or right of any kind
whatsoever.
Any sale of the Collateral conducted in conformity with reasonable
commercial practices of banks, insurance companies or other financial
institutions disposing of property similar to the Collateral shall be deemed to
be commercially reasonable. Any requirements of reasonable notice shall be met
if such notice is mailed to Pledgor, at the address set forth in this Agreement,
at least ten (10) calendar days before the time of the sale or disposition. Any
other retirement of notice, demand or advertisement for sale, is, to the extent
permitted by law, waived.
Lender may, in its own name, or in the name of a designee or nominee,
buy at any public sale of the Collateral. Lender shall have the right to
execute any document or form, in its name or in the name of the Pledgor, which
may be necessary or desirable in connection with such sale of Collateral.
In addition to specific rights provided herein with respect to sales
of the Shares, and subject to applicable law, sales of the Collateral may be
conducted with or without demand and with or without notice or advertisement,
for cash, credit or for future delivery, all as the Lender shall deem
appropriate. Without limiting the foregoing, the Lender may (i) approach and
negotiate with potential purchasers, and (ii) restrict the prospective bidders
or purchasers to persons who will represent and agree that they are purchasing
such Collateral for their own account for investment and not with a view to the
distribution or resale thereof. In the event any such Collateral is sold at
private sale, Pledgor agrees that such sale shall not, by reason merely that it
is a private sale subject to the potential restrictions described herein, or
that there is a possibility that a substantially higher
7
<PAGE>
price might have been realized at a public sale, be deemed to have not been made
in a commercially reasonable manner. Pledgor recognizes that no ready market may
exist for such Collateral and that a sale by Lender of any such Collateral for
an amount substantially less than the value of the Shares may be commercially
reasonable in view of the difficulties that may be encountered in attempting to
sell securities that are not publicly traded. Upon consummation of any such
sale, Lender shall have the right to assign, transfer and deliver to the
purchaser or purchasers thereof, the Collateral so sold. Each such purchaser at
any such sale shall hold the property sold absolutely free from any claim or
right on the part of the Pledgor. Pledgor hereby waives (to the extent permitted
by law) all rights of redemption, stay and/or appraisal which Pledgor now has or
may at any time in the future have under any rule of law or statute now existing
or hereafter enacted. If any consent, ruling or authorization of any state,
municipal or other governmental agency or authority shall be necessary to
effectuate any sale or disposition of the Collateral, Pledgor shall execute all
such applications and other instruments as may be required in connection with
securing any such consent, ruling or authorization and, will otherwise use its
best efforts to secure the same. Under no circumstances will Lender be obligated
to register any securities under the Securities Act of 1933 or any similar
qualification or registration law of any state, unless, in its sole discretion,
it shall elect to do so, in which case the cost of such registration and
qualification shall become part of the Obligations secured hereby.
15. Lender as Pledgor's Attorney-in-Fact. Pledgor hereby irrevocably
------------------------------------
appoints Lender as its attorney-in-fact to arrange for the transfer, at any time
after the existence or occurrence of an Event of Default, of the Collateral on
the books of BPN to the name of Lender or to the name of Lender's nominee.
16. Further Assurances. Pledgor agrees that it will cooperate with
------------------
Lender and will execute and deliver, or cause to be executed and delivered, all
such other stock powers, proxies, instruments, and documents and will take all
such other action, as Lender may reasonably request from time to time in order
to carry out the provisions and purposes hereof.
17. Attorneys' Fees and Costs. Pledgor hereby agrees to pay all
-------------------------
reasonable attorneys' fees and all other costs and expenses which may be
incurred by Lender in the enforcement of this Agreement, whether or not suit is
brought.
18. Notices. Any notice, demand or communication required or
-------
permitted to be given by any provision of the Loan Documents will be in writing
and will be deemed to have been given when delivered personally or be
telefacsimile, receipt confirmed, to the party designated to receive such notice
or on the business date following the day sent by overnight courier or on the
third (3rd) business day after the same is sent by certified mail, postage and
charges prepaid, directed to the following addresses or to such other or
additional addresses as any party might designate by written notice to the other
party:
8
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To Pledgor or BPN: BPN
13750 Pipeline Avenue
Chino, California 91710
Attention: Peter A. Walski
Barbara R. Walski
To Lender: PanAm Bank
1300 S. El Camino Real - Suite 320
San Mateo, CA 94402
Attention: President
19. Choice of Law and Venue. The validity of this Agreement, its
-----------------------
construction, interpretation, and enforcement and the rights of the parties
hereto shall be determined under the laws of the State of California. The
parties agree that all actions or proceedings arising in connection with this
Agreement shall be tried and litigated only in the state and federal courts
located in the County of Los Angeles, State of California. Each party waives
any right it may have to assert the doctrine of forum non conveniens or to
object to venue to extent any proceeding is brought in accordance with the terms
hereof.
20. General Provisions.
------------------
(a) This Agreement shall bind and inure to the benefit of the
respective successors and assigns of the parties; provided, however, that
Pledgor and BPN may not assign this Agreement or any rights hereunder without
Lender's prior written consent and any prohibited assignment shall be absolutely
void. No consent to an assignment by Lender shall release Pledgor or BPN from
its obligations to Lender hereunder. Lender may assign its rights and duties
hereunder. Lender reserves the right to sell, assign, transfer, negotiate, or
grant participations in all or any part of, or any interest in rights and
benefits hereunder. In connection therewith, Lender may disclose all documents
and information which Lender now or hereafter may have relating to Pledgor or
Pledgor's business.
(b) Paragraph headings and numbers have been set forth herein for
convenience only. Unless the contrary is compelled by the context, everything
contained in each Paragraph hereof applies equally to this entire Agreement.
(c) Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against any party hereto, whether under any rule
of construction or otherwise, by virtue of such party's having prepared the
same. On the contrary, this Agreement has been reviewed by each of the parties
and shall be construed and interpreted according to the ordinary meaning of the
words used so as to fairly accomplish the purposes and intentions of all parties
hereto.
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(d) Each provision of this Agreement shall be severable from every
other provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
(e) This Agreement cannot be changed or terminated orally. All prior
agreements, understandings, representations, warranties, and negotiations, if
any, are merged into this Agreement, the Loan Documents and the other documents
and agreements entered into in connection herewith and therewith.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first written.
BPN Corporation
By: /s/ Peter A. Walski /s/ Barbara R. Walski
--------------------------- ------------------------------
Peter A. Walski Barbara R. Walski
Title: Pres.
--------------------
By: /s/ Cornelius J. O'Shea /s/ Peter A. Walski
--------------------------- ------------------------------
Cornelius J. O'Shea Peter A. Walski
Title: V.P.
--------------------
Pan American Bank, FSB THE WALSKI FAMILY TRUST
By: /s/ Lawrence J. Grill By: /s/ Peter A. Walski
--------------------------- ---------------------------
Lawrence Grill, President Peter A. Walski, Trustee
By: /s/ Barbarra R. Walski
---------------------------
Barbarra R. Walski, Trustee
10
<PAGE>
EXHIBIT 10.94
LOAN AND PLEDGE AGREEMENT
-------------------------
This Loan and Stock Pledge Agreement the ("Agreement") is made and
executed as of November 5, 1998 by and among Cornelius J. O'Shea and the
Cornelius J. O'Shea Living Trust (collectively, "Pledgor"), BPN Corporation, a
California corporation ("BPN") and Pan American Bank, FSB ("Lender").
RECITALS
--------
A. The Cornelius J. O'Shea Living Trust ("Trust") is the owner of 350
shares of the common stock (the "Shares") of BPN.
B. BPN is a party to an agreement for Purchase of Assets dated November
5, 1998 (the "Asset Purchase Agreement") under which BPN and Lender are
purchasing certain assets ("Assets") from Norwest Financial Coast, Inc.
C. The parties hereto desire to specify their agreement respecting the
acquisition of the Assets under the Asset Purchase Agreement and of certain
financing to be provided to Pledgor in connection therewith.
NOW, therefore, the parties agree as follows:
1. Asset Purchase Agreement. BPN shall pay $1,200,000 and Lender
------------------------
shall pay $1,800,000 of the total $3,000,000 acquisition price for the Assets.
Lender shall have the exclusive right to finance insurance premium finance
receivables ("IPF Loans") generated through the exploitation of the Assets under
the terms of the Insurance Premium Financing Management Agreement (the "IPF
Agreement") dated May 17, 1995 between Lender and BPN, which right shall not be
subject to termination under such agreement. The IPF Agreement shall otherwise
govern exploitation of the Assets by BPN and Lender. In addition, Lender has
agreed to pay a total of $25,000 to BPN to defer expenses to be incurred by BPN
in connection with taking over the business included as part of the Assets and
handling the IPF Loans generated thereby (the "Expense Reimbursement"), which
shall be credited pro rata against the initial principal repayment obligation of
Pledgor hereunder and of Peter A. Walski, Barbara R. Walski and The Walski
Family Trust (collectively "Walski") under a $780,000.00 promissory note of
Walski evidencing credit extended by Lender to Walski in connection with the
acquisition of the Assets (the "Walski Note"). Upon the crediting of the
Expense Reimbursement to the Note and Walski Note, Lender shall have no
obligation to fund the Expense Reimbursement. All other such expenses shall be
paid by BPN.
2. Loan; Initial Payment. Pledgor has agreed to borrow, and Lender
---------------------
has agreed to loan to Pledgor the sum of $420,000.00, to be used by Pledgor
solely for the purpose of funding the payment to be made by BPN to acquire the
Assets under the Asset Purchase Agreement (the "Loan"). The Loan is evidenced
by this Agreement and a Promissory Note (the "Note") of even date. This
Agreement, the Note and any and all documents and instruments now or hereafter
executed and evidencing the Loan or any security therefore are referred to
herein as the "Loan
1
<PAGE>
Documents". Immediately following funding of the Loan, Pledgor shall pay
$70,000.00 to Lender as a payment of principal. There shall be credited against
such payment the sum of $8,750.00, representing 35% of the amount of the Expense
Reimbursement.
3. Security. Pledgor hereby assigns, grants, pledges and transfers
--------
to Lender, a security interest in and lien upon all Collateral (as defined in
paragraph 4) as security for the payment and performance of any and all of the
following obligations and liabilities ("Obligations") of Pledgor owing to
Lender: (i) payment of all of the indebtedness evidenced by the Note in the
face amount of $420,000.00, executed by Pledgor in favor of the Lender; (ii)
payment and performance of all existing and future indebtedness and obligations
of the Pledgor to the Lender under the Loan Documents; and (iii) any and all
amendments, modifications, renewals and/or extensions of any of the foregoing,
including, but not limited to amendments, modifications, renewals or extensions
which are evidenced by new or additional instruments, documents or agreements or
which change the rate of interest on any indebtedness or obligations secured
hereby. The term "Obligations" as used herein is intended to mean Obligations
in its most comprehensive sense and includes all present and future
indebtedness, liabilities, undertakings, covenants and other obligations of
Pledgor, whether voluntary or involuntary, absolute or contingent, liquidated or
unliquidated, determined or undetermined, earned or unearned, and due or not
due.
4. Collateral. Pledgor hereby assigns, grants, pledges and
----------
transfers to Lender, as security for the payment and performance of the
Obligations described in paragraph 3 above, a security interest in, and lien
upon all of Pledgor's right, title and interest in and to the following:
(a) the Shares;
(b) all options or warrants for the purchase of additional Shares
and all rights represented thereby held by Pledgor if any (the "Options");
(c) stock powers ("Powers") duly executed in blank, with such
signatures properly guaranteed covering all of the Shares; and
(d) the proceeds of each of the foregoing including, without
limitation any and all dividends, cash, instruments and other property from time
to time received, receivable, or otherwise distributed in respect of or in
exchange for any of the Shares or Options (the "Proceeds") (The Shares, the
Options, the Powers, and the Proceeds shall be collectively referred to as the
"Collateral").
5. Delivery. Concurrent with the execution hereof, Pledgor has
--------
delivered Certificate(s) No(s). ____________________, representing all of the
Shares to Lender together with related Powers or endorsements, to be held
pursuant to the terms hereof for the benefit of Lender.
6. Lender's Duties. Lender shall have no duty with respect to the
---------------
Collateral other than the duty to use reasonable care if it is in its
possession. Without limiting the generality of the foregoing, Lender shall be
under no obligation to take any steps necessary to preserve rights
2
<PAGE>
in the Collateral against any other parties, to sell same if it threatens to
decline in value, or to exercise any rights represented thereby.
7. Voting Rights; Dividends; Etc. During the term of this Agreement
------------------------------
and as long as no Event of Default, as defined herein shall have occurred and be
continuing:
(a) Pledgor shall be entitled to exercise any and all voting
and other consensual rights pertaining to the Shares or any part thereof for any
purpose not inconsistent with the terms of this Agreement or the other Loan
Documents.
(b) Pledgor shall be entitled to receive and retain any and all
dividends and distributions paid in respect of the Shares; provided, however,
that any and all
(i) dividends and distributions paid or payable other
than in cash in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange for, any
Shares,
(ii) dividends and distributions paid or payable in cash
in respect of any Shares in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in surplus, and
(iii) cash paid with respect to, payable or otherwise
distributed on redemption of, or in exchange for, or upon the sale of any
Shares, shall be forthwith delivered to Lender to hold as Collateral and shall,
if received by Pledgor, be received in trust for the benefit of Lender, be
segregated from the other property or funds of Pledgor, and be forthwith
delivered to Lender as Collateral in the same form as so received (with any
necessary endorsement).
(c) Lender shall execute and deliver (or cause to be executed
and delivered) to Pledgor all such proxies and other instruments as Pledgor may
reasonably request for the purpose of enabling Pledgor to exercise those voting
and other rights which it is entitled to exercise pursuant to paragraph 7(a)
above and to receive those dividends or distributions which it is authorized to
receive and retain pursuant to paragraph 7(b) above.
(d) If an Event of Default shall have occurred and be
continuing and any amounts shall be due and payable (whether by acceleration,
maturity, or otherwise) under any of the Obligations, all rights of Pledgor to
exercise the voting and other consensual rights which it would otherwise be
entitled to exercise pursuant to this paragraph 7 and to receive the dividends
and distributions which it would otherwise be authorized to receive and retain
pursuant to this paragraph shall, at Lender's option, cease, and all such rights
shall, at Lender's option, thereupon become vested in Lender so long as an Event
of Default shall continue, and Lender shall, at its option, thereupon have the
sole right to exercise such voting and other consensual rights and to receive
and hold as Collateral such dividends and interest payments.
3
<PAGE>
8. Representations. Pledgor warrants, represents and covenants, and
---------------
to the extent expressly mentioned below, BPN warrants, represents and covenants
that:
(a) There are no restrictions upon the transfer of any of the
Collateral and Pledgor has the right to pledge and grant a security interest in
or otherwise transfer such Collateral free of any encumbrances or rights of
third parties, except for the rights of United PanAm Financial Corp., f/k/a Pan
American Group, Inc. ("UPFC"), under that certain Stock Option Agreement dated
May 17, 1995, as amended, between UPFC, Pledgor, BPN and Walski. Pledgor and BPN
hereby waive any rights that Pledgor or BPN may have under the Stock Redemption
Agreement between BPN, Pledgor and Walski dated August 25, 1990 (the "Stock
Redemption Agreement") to the extent such rights would hinder or impede Lender's
right to dispose of the Collateral, and further agree that Lender may, upon
foreclosure and sale of its Collateral or acceptance thereof in lieu of sale or
foreclosure, dispose of the Shares free and clear of any restriction or rights
of any third party arising under the Stock Redemption Agreement.
(b) All of the Collateral is and shall remain free from all
liens, claims, encumbrances, and purchase money or other security interests.
Pledgor shall not, without Lender's prior written consent, sell, transfer or
otherwise dispose of any or all of the Collateral.
(c) This Agreement, and the delivery to Lender of the
certificates representing the Shares, creates a valid and perfected security
interest in the Collateral in favor of Lender, and all actions necessary or
desirable to such perfection have been duly taken.
(d) No authorization or other action by, and no notice to or
filing with, any governmental authority or regulatory body is required either
(i) for the grant by Pledgor of the security interest granted hereby or for the
execution, delivery or performance of this Agreement by Pledgor, (ii) for the
perfection of or exercise by Lender of its rights and remedies hereunder; or
(iii) for the exercise by Lender of the voting or other rights provided for in
this Agreement or the remedies in respect of the Shares pursuant to this
Agreement (except as may be required in connection with a disposition of the
Shares by laws affecting the offering and sale of securities generally).
(e) Pledgor has made its own arrangements for keeping informed
of changes or potential changes affecting the Collateral (including, but not
limited to, rights to convert, rights to subscribe, payment of dividends,
reorganization or other exchanges, tender offers and voting rights) and Pledgor
agrees that Lender shall have no responsibility or liability for informing
Pledger of any such changes or potential changes or for taking any action or
omitting to take any action with respect thereto.
(f) The Shares and any shares owned by Walski and pledged to
Lender represent, and will at all times represent, all of the issued and
outstanding shares of capital stock of BPN. Pledgor and BPN agree that no
additional Shares shall be issued except to Lender without Lender's written
prior approval.
4
<PAGE>
(g) Pledgor and BPN represent that there are and will be no
options, ants or other rights to acquire capital stock of BPN outstanding other
than the option of UPFC under the Stock Option Agreement.
(h) Pledgor and BPN represent, warrant and covenant that all of
the outstanding Shares have been duly and validly issued by BPN and they are
fully paid and nonassessable.
(i) The financial statements of Pledgor and BPN provided and to
be provided to Lender in connection with the Loan fairly represent the financial
condition, operation and income of such persons as of the date covered thereby.
(j) Pledgor represents that Cornelius J. O'Shea is a trustee of
the Trust, that he has the full power and authority to execute all Loan
Documents on behalf of the Trust, that the Trust is not restricted from entering
into and performing its obligations under the Loan Documents, and that Lender
has or will be delivered a true and correct copy of the Trust.
9. Additional Covenants. Pledgor and BPN covenant and agree that:
--------------------
(a) BPN will not incur any indebtedness other than for trade
payables incurred for goods and services acquired or utilized in the ordinary
course of business and paid within 90 days, or guaranty or pledge any assets to
secure any indebtedness of any other person, and any obligation to repay Pledgor
and Walski any funds advanced to BPN from the proceeds of the Note and the
Walski Note,
(b) Lender may collect all Loan payments, when due, by directly
debiting amounts otherwise due BPN from Lender under the IPF Agreement.
(c) BPN and each party comprising Pledgor shall provide Lender
annually with financial statements in form satisfactory to Lender and copies of
all federal and state income tax returns filed by them.
(d) BPN and Pledgor have materially benefitted from the
proceeds of the Loan, and Lender would not extend such credit without BPN's and
Pledgor's agreement to the terms of this Agreement, including specifically this
paragraph 9.
10. Share Adjustment. In the event that during the term of this
----------------
Agreement, any reclassification, readjustment or other change is declared or
made in the capital structure of BPN, or any Option is exercised, all new
substituted and additional shares, options, or other securities, issued, or
issuable, to Pledgor by reason of any such change or exercise shall be delivered
to and held by Lender under the terms of this Agreement in the same manner as
the Collateral originally pledged hereunder.
5
<PAGE>
11. Warrants. In the event that during the term of this Agreement,
--------
subscription warrants or any other rights or options shall be issued or
exercised in connection with the Collateral, such warrants, rights and options
acquired by Pledgor shall be immediately assigned by Pledgor to Lender and all
new stock or other securities so acquired by Pledgor shall also be immediately
assigned to Lender to be held under the terms of this Agreement in the same
manner as the Collateral originally pledged hereunder.
12. Consent. Pledgor hereby consents that, from time-to-time, before
-------
or after the occurrence or existence of any Event of Default, with or without
notice to or assent from Pledgor, any other security at any time held by or
available to Lender for any of the Obligations or any other security at any time
held by or available to Lender of any other person, firm or corporation
secondarily or otherwise liable for any of the Obligations, may be exchanged,
surrendered, or released and any of the Obligations may be changed, altered,
renewed, extended, continued, surrendered, compromised, waived or released, in
whole or in part, as Lender may see fit, and Pledgor shall remain bound under
this Agreement notwithstanding any such exchange, surrender, release,
alteration, renewal, extension, continuance, compromise, waiver or inaction, or
extension of further credit.
13. Events of Default. The Lender may exercise the remedies held by
-----------------
the Lender under this Agreement and other Loan Documents if any of the following
events (an "Event of Default") occur and are not remedied by the defaulting
party or waived in writing by the Lender.
(a) The nonpayment, within five (5) days of the date when due,
of any installment of interest or principal owing under the Note or of any other
amount payable to the Lender under the terms of the Loan Documents.
(b) The failure by the Pledgor or BPN to perform or observe any
representation, warranty or agreement contained in any of the Loan Documents,
which shall continue for a period of thirty (30) days after the Pledgor or BPN
become aware thereof, except that any obligations related to the payment of
money shall have no grace period except as otherwise expressly provided in
paragraph 13(a) hereof.
(c) The existence for a period of thirty (30) days of any lien
other than liens created by the Loan Documents or permitted hereunder covering
all or any portion of the Collateral, unless the validity thereof is being
contested in good faith by the Pledgor.
(d) Any representation, statement, certificate, schedule or
report made or furnished to the Lender by or on behalf of the Pledgor or BPN
proves to be false or erroneous in any material respect at the time of the
making thereof or any representation or warranty contained in the Loan Documents
ceases to be complied with in any material respect.
(e) The insolvency (meaning an inability to pay debts as the
same become due or the existence of liabilities in excess of assets) of any of
the parties comprising Pledgor or
6
<PAGE>
BPN, or the institution of bankruptcy, reorganization, liquidation, receivership
or conservatorship proceeding by or against any of the parties comprising
Pledgor or BPN.
(f) The default in payment or acceleration of the maturity of
any indebtedness any of the parties comprising Pledgor or BPN owing to any other
person.
(g) For any reason after execution and delivery thereof, any
document delivered pursuant hereto that creates, or was intended to create, a
security interest or to provide collateral security for indebtedness created
hereunder ceases to be in full force and effect, or the liens intended to be
created thereby cease to be or are not valid and perfected first liens, subject
to no other liens.
14. Remedies Upon Default. Upon the occurrence of an Event of
---------------------
Default, Lender shall have, in addition to any other rights given by law or the
rights hereunder, all of the rights and remedies with respect to the Collateral
of a secured party under the California Uniform Commercial Code.
In addition, with respect to the Collateral, or any part thereof,
Lender may sell or cause the same to be sold at any public or private sale, in
one or more sales or lots, at such price as Lender may deem best, and for cash
or on credit or for future delivery, without assumption of any credit risk, and
the purchaser of any or all of the Collateral so sold shall thereafter hold the
same absolutely, free from any claim, encumbrance or right of any kind
whatsoever.
Any sale of the Collateral conducted in conformity with reasonable
commercial practices of banks, insurance companies or other financial
institutions disposing of property similar to the Collateral shall be deemed to
be commercially reasonable. Any requirements of reasonable notice shall be met
if such notice is mailed to Pledgor, at the address set forth in this Agreement,
at least ten (10) calendar days before the time of the sale or disposition. Any
other retirement of notice, demand or advertisement for sale, is, to the extent
permitted by law, waived.
Lender may, in its own name, or in the name of a designee or nominee,
buy at any public sale of the Collateral. Lender shall have the right to
execute any document or form, in its name or in the name of the Pledgor, which
may be necessary or desirable in connection with such sale of Collateral.
In addition to specific rights provided herein with respect to sales
of the Shares, and subject to applicable law, sales of the Collateral may be
conducted with or without demand and with or without notice or advertisement,
for cash, credit or for future delivery, all as the Lender shall deem
appropriate. Without limiting the foregoing, the Lender may (i) approach and
negotiate with potential purchasers, and (ii) restrict the prospective bidders
or purchasers to persons who will represent and agree that they are purchasing
such Collateral for their own account for investment and not with a view to the
distribution or resale thereof. In the event any such Collateral is sold at
private sale, Pledgor agrees that such sale shall not, by reason merely that it
is a private sale subject to the potential restrictions described herein, or
that there is a possibility that a substantially higher
7
<PAGE>
price might have been realized at a public sale, be deemed to have not been made
in a commercially reasonable manner. Pledgor recognizes that no ready market may
exist for such Collateral and that a sale by Lender of any such Collateral for
an amount substantially less than the value of the Shares may be commercially
reasonable in view of the difficulties that may be encountered in attempting to
sell securities that are not publicly traded. Upon consummation of any such
sale, Lender shall have the right to assign, transfer and deliver to the
purchaser or purchasers thereof, the Collateral so sold. Each such purchaser at
any such sale shall hold the property sold absolutely free from any claim or
right on the part of the Pledgor. Pledgor hereby waives (to the extent permitted
by law) all rights of redemption, stay and/or appraisal which Pledgor now has or
may at any time in the future have under any rule of law or statute now existing
or hereafter enacted. If any consent, ruling or authorization of any state,
municipal or other governmental agency or authority shall be necessary to
effectuate any sale or disposition of the Collateral, Pledgor shall execute all
such applications and other instruments as may be required in connection with
securing any such consent, ruling or authorization and, will otherwise use its
best efforts to secure the same. Under no circumstances will Lender be obligated
to register any securities under the Securities Act of 1933 or any similar
qualification or registration law of any state, unless, in its sole discretion,
it shall elect to do so, in which case the cost of such registration and
qualification shall become part of the Obligations secured hereby.
15. Lender as Pledgor's Attorney-in-Fact. Pledgor hereby irrevocably
------------------------------------
appoints Lender as its attorney-in-fact to arrange for the transfer, at any time
after the existence or occurrence of an Event of Default, of the Collateral on
the books of BPN to the name of Lender or to the name of Lender's nominee.
16. Further Assurances. Pledgor agrees that it will cooperate with
------------------
Lender and will execute and deliver, or cause to be executed and delivered, all
such other stock powers, proxies, instruments, and documents and will take all
such other action, as Lender may reasonably request from time to time in order
to carry out the provisions and purposes hereof.
17. Attorneys' Fees and Costs. Pledgor hereby agrees to pay all
-------------------------
reasonable attorneys' fees and all other costs and expenses which may be
incurred by Lender in the enforcement of this Agreement, whether or not suit is
brought.
18. Notices. Any notice, demand or communication required or
-------
permitted to be given by any provision of the Loan Documents will be in writing
and will be deemed to have been given when delivered personally or be
telefacsimile, receipt confirmed, to the party designated to receive such notice
or on the business date following the day sent by overnight courier or on the
third (3rd) business day after the same is sent by certified mail, postage and
charges prepaid, directed to the following addresses or to such other or
additional addresses as any party might designate by written notice to the other
party:
To Pledgor or BPN: BPN
13750 Pipeline Avenue
Chino, California 91710
8
<PAGE>
Attention: Cornelius J. O'Shea
To Lender: PanAm Bank
1300 S. El Camino Real
Suite 320
San Mateo, CA 94402
Attention: President
19. Choice of Law and Venue. The validity of this Agreement, its
-----------------------
construction, interpretation, and enforcement and the rights of the parties
hereto shall be determined under the laws of the State of California. The
parties agree that all actions or proceedings arising in connection with this
Agreement shall be tried and litigated only in the state and federal courts
located in the County of Los Angeles, State of California. Each party waives
any right it may have to assert the doctrine of forum non conveniens or to
object to venue to extent any proceeding is brought in accordance with the terms
hereof.
20. General Provisions.
------------------
(a) This Agreement shall bind and inure to the benefit of the
respective successors and assigns of the parties; provided, however, that
Pledgor and BPN may not assign this Agreement or any rights hereunder without
Lender's prior written consent and any prohibited assignment shall be absolutely
void. No consent to an assignment by Lender shall release Pledgor or BPN from
its obligations to Lender hereunder. Lender may assign its rights and duties
hereunder. Lender reserves the right to sell, assign, transfer, negotiate, or
grant participations in all or any part of, or any interest in rights and
benefits hereunder. In connection therewith, Lender may disclose all documents
and information which Lender now or hereafter may have relating to Pledgor or
Pledgor's business.
(b) Paragraph headings and numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each Paragraph hereof applies equally to this entire
Agreement.
(c) Neither this Agreement nor any uncertainty or ambiguity
herein shall be construed or resolved against any party hereto, whether under
any rule of construction or otherwise, by virtue of such party's having prepared
the same. On the contrary, this Agreement has been reviewed by each of the
parties and shall be construed and interpreted according to the ordinary meaning
of the words used so as to fairly accomplish the purposes and intentions of all
parties hereto.
(d) Each provision of this Agreement shall be severable from
every other provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
9
<PAGE>
(e) This Agreement cannot be changed or terminated orally. All
prior agreements, understandings, representations, warranties, and negotiations,
if any, are merged into this Agreement, the Loan Documents and the other
documents and agreements entered into in connection herewith and therewith.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first written.
BPN Corporation
By: /s/ Peter A. Walski /s/ Cornelius J. O'Shea
_________________________ _________________________________
Peter A. Walski Cornelius J. O'Shea
Title: Pres.
_________________
By: /s/ Cornelius J. O'Shea
________________________
Cornelius J. O'Shea
Title: VP
_________________
Pan American Bank, FSB
By: /s/ Lawrence J. Grill
_________________________
Lawrence Grill, President
10
<PAGE>
EXHIBIT 10.95
PROMISSORY NOTE
(SECURED LOAN)
$780,000.00 San Mateo, California
November 5, 1998
FOR VALUE RECEIVED, Peter A. Walski, Barbara R. Walski and The Walski
Family Trust, u/d/t August 30, 1989 (collectively, "Borrower"), promise to pay
to the order of Pan American Bank, its successors and assigns (the "Lender") at
1300 S. El Camino Real, Suite 320, San Mateo, California 94402 or at such other
place as might be designated in writing by the Lender, the principal sum of
Seven Hundred Eighty Thousand Dollars ($780,000.00) or so much thereof as has
been disbursed by the Lender and remains unpaid, together with interest thereon
at nine and one quarter percent (9.25%) per annum.
This Note is issued by the Borrower and accepted by the Lender
pursuant to a Loan and Stock Pledge Agreement between the Borrower, BPN
Corporation and the Lender, dated as of November 5, 1998 (the "Loan Agreement")
and evidences the Loan ("Loan") described in the Loan Agreement.
Principal and interest on this Note will be payable as follows: A
principal payment of $130,000.00, payable as set forth in the Loan Agreement,
will be made immediately following funding of the Loan. An initial payment of
$20,745.54, plus the amount of any accrued interest on the outstanding principal
balance of the Note from the date of funding of the Loan through November 30,
1998 shall be due on December 31, 1998. Thereafter, principal and interest will
be due in equal installments of $20,745.54 due on the last day of each month and
with the last payment due on December 31, 2001, at which time any remaining
unpaid balance and accrued but unpaid interest shall be due.
The Borrower will have the right at any regular payment date to prepay
the unpaid principal balance of this Note, in whole or in part, without penalty.
In the event of such a prepayment, Lender shall recalculate the future payments
due hereunder to reflect the amortization of the remaining principal, and
accrued interest, in equal monthly installments over the remaining term of the
Note.
The Borrower agrees that if, and as often as, this Note is placed in
the hands of an attorney for collection or to defend or enforce any of the
Lender's rights under this Note, the Loan Documents (as defined in the Loan
Agreement) or otherwise relating to the indebtedness hereby evidenced, the
Borrower will pay the Lender's reasonable attorneys' fees, all court costs
1
<PAGE>
and all other expenses incurred by the Lender in connection therewith. The
Lender may collect a late charge equal to five percent (5.0%) of each monthly
payment which is not received by the Lender within five (5) days after the
maturity date of each installment. Such late charge represents the estimate of
reasonable compensation for the loss which will be sustained by the Lender
arising from the Borrower's failure to make timely payments and may be collected
without prejudice to the rights of the Lender to collect any other amounts
arising from the Borrower's default in payment or to accelerate the maturity of
the indebtedness hereby evidenced. In addition to the foregoing late charge, at
the option of the Lender, after the occurrence of any Event of Default (as
defined in the Loan Agreement), the unpaid balance of this Note will bear
interest at fourteen percent (14.0%) per annum and such interest which has
accrued will be paid at the time of and as a condition precedent to curing any
Event of Default. During the existence of any default, the Lender may apply
payments received on any amount due hereunder or under the terms of any
instrument now or hereafter evidencing or securing payment of this indebtedness
as the Lender determines from time to time.
Payment of the indebtedness hereby evidenced is secured by certain
security interests described in the Loan Documents. On the breach by the
Borrower of any provision of this Note, or the occurrence of any other Event of
Default under any one or more of the Loan Documents or any other instrument now
or hereafter evidencing or securing payment of the indebtedness hereby
evidenced, and the continuation of such Event of Default beyond any applicable
cure period, at the option of the Lender, the entire indebtedness evidenced by
this Note will become immediately due, payable and collectible then or
thereafter as the Lender might elect, regardless of the date of maturity of this
Note. Failure by the Lender to exercise such option will not constitute a
waiver of the right to exercise the same on the occurrence of any subsequent
Event of Default.
The makers, endorsers, sureties, guarantors and all other persons who
might become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of nonpayment. Such parties consent
to any extension of time (whether one or more) of payment hereof, release of all
or any part of the collateral securing payment hereof or release of any party
liable for the payment of this obligation. Any such extension or release may be
made without notice to any such party and without discharging such party's
liability hereunder. If more than one maker executes this Note, the liability of
each of the undersigned is and shall be joint and several.
The lending transaction contemplated by this Note and the Loan
Documents has been negotiated, consummated and is to be performed in the State
of California. This Note and the other Loan Documents described herein shall be
governed by, and construed and enforced in accordance with the substantive law
of the State of California. Any action or proceeding arising in connection with
this Note and the Loan Documents shall be brought in a federal or state court
within Los Angeles County, California, and the Borrower hereby consents to the
jurisdiction of any federal or state court within the State of California and
located in State of California and located in Los Angeles County, California.
The Borrower irrevocably and unconditionally
2
<PAGE>
submits to the jurisdiction (both subject matter and personal) of each such
court and irrevocably and unconditionally waives (1) any objection that the
Borrower might now or hereafter have to the venue in any such court; and (2) any
claim that any action or proceeding brought in any such court has been brought
in an inconvenient forum. Notwithstanding the foregoing, the Lender may, in its
sole and absolute discretion, initiate proceedings in the courts of any other
jurisdiction in which the Borrower may be found or in which its assets may be
located.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS NOTE, ANY OF THE
LOAN DOCUMENTS OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION HEREWITH, OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF BORROWERS AND LENDER OR ANY OF THEM WITH RESPECT
TO THIS NOTE, THE LOAN AGREEMENT, THE LOAN DOCUMENTS, OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE
TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND
THE BORROWER AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT LENDER MAY FILE
AN ORIGINAL COUNTERPART OR A COPY OF THIS NOTE WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE BORROWER TO THE WAIVER OF THE RIGHT TO TRIAL BY
JURY.
IN WITNESS WHEREOF, the Borrower has executed this instrument effective the
date first above written.
Borrower: /s/ Barbara R. Walski
-------------------------
Barbara R. Walski
/s/ Peter A. Walski
-------------------------
Peter A. Walski
THE WALSKI FAMILY TRUST
By: /s/ Peter A. Walski, Trustee
-------------------------------
Peter A. Walski, Trustee
By:
/s/ Barbara R. Walski, Trustee
-------------------------------
Barbara R. Walski, Trustee
3
<PAGE>
EXHIBIT 10.96
PROMISSORY NOTE
SECURED LOAN
$420,000.00 San Mateo, California
November 5, 1998
FOR VALUE RECEIVED, Cornelius J. O'Shea and the Cornelius J. O'Shea
Living Trust ("Borrower"), promise to pay to the order of Pan American Bank, its
successors and assigns (the "Lender") at 1300 S. El Camino Real, Suite 320, San
Mateo, California 94402 or at such other place as might be designated in writing
by the Lender, the principal sum of Four Hundred Twenty Thousand Dollars
($420,000.00) or so much thereof as has been disbursed by the Lender and remains
unpaid, together with interest thereon at nine and one quarter percent (9.25%)
per annum.
This Note is issued by the Borrower and accepted by the Lender
pursuant to a Loan and Stock Pledge Agreement between the Borrower, BPN
Corporation and the Lender, dated as of November 5, 1998 (the "Loan Agreement")
and evidences the Loan ("Loan") described in the Loan Agreement.
Principal and interest on this Note will be payable as follows: A
principal payment of $70,000.00, payable as set forth in the Loan Agreement,
will be made immediately following funding of the Loan. An initial payment of
$11,170.67, plus the amount of any accrued interest on the outstanding principal
balance of the Note from the date of funding of the Loan through November 30,
1998 shall be due on December 31, 1998. Thereafter, principal and interest will
be due in equal installments of $11,170.67 due on the last day of each month and
with the last payment due on December 31, 2001, at which time any remaining
unpaid balance and accrued but unpaid interest shall be due.
The Borrower will have the right at any regular payment date to prepay
the unpaid principal balance of this Note, in whole or in part, without penalty.
In the event of such a prepayment, Lender shall recalculate the future payments
due hereunder to reflect the amortization of the remaining principal, and
accrued interest, in equal monthly installments over the remaining term of the
Note.
The Borrower agrees that if, and as often as, this Note is placed in
the hands of an attorney for collection or to defend or enforce any of the
Lender's rights under this Note, the Loan Documents (as defined in the Loan
Agreement) or otherwise relating to the indebtedness hereby evidenced, the
Borrower will pay the Lender's reasonable attorneys' fees, all court costs and
all other expenses incurred by the Lender in connection therewith. The Lender
may collect a late charge equal
1
<PAGE>
to five percent (5.0%) of each monthly payment which is not received by the
Lender within five (5) days after the maturity date of each installment. Such
late charge represents the estimate of reasonable compensation for the loss
which will be sustained by the Lender arising from the Borrower's failure to
make timely payments and may be collected without prejudice to the rights of the
Lender to collect any other amounts arising from the Borrower's default in
payment or to accelerate the maturity of the indebtedness hereby evidenced. In
addition to the foregoing late charge, at the option of the Lender, after the
occurrence of any Event of Default (as defined in the Loan Agreement), the
unpaid balance of this Note will bear interest at fourteen percent (14.0%) per
annum and such interest which has accrued will be paid at the time of and as a
condition precedent to curing any Event of Default. During the existence of any
default, the Lender may apply payments received on any amount due hereunder or
under the terms of any instrument now or hereafter evidencing or securing
payment of this indebtedness as the Lender determines from time to time.
Payment of the indebtedness hereby evidenced is secured by certain
security interests described in the Loan Documents. On the breach by the
Borrower of any provision of this Note, or the occurrence of any other Event of
Default under any one or more of the Loan Documents or any other instrument now
or hereafter evidencing or securing payment of the indebtedness hereby
evidenced, and the continuation of such Event of Default beyond any applicable
cure period, at the option of the Lender, the entire indebtedness evidenced by
this Note will become immediately due, payable and collectible then or
thereafter as the Lender might elect, regardless of the date of maturity of this
Note. Failure by the Lender to exercise such option will not constitute a waiver
of the right to exercise the same on the occurrence of any subsequent Event of
Default.
The makers, endorsers, sureties, guarantors and all other persons who
might become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of nonpayment. Such parties consent
to any extension of time (whether one or more) of payment hereof, release of all
or any part of the collateral securing payment hereof or release of any party
liable for the payment of this obligation. Any such extension or release may be
made without notice to any such party and without discharging such party's
liability hereunder. If more than one maker executes this Note, the liability
of each of the undersigned is and shall be joint and several.
The lending transaction contemplated by this Note and the Loan
Documents has been negotiated, consummated and is to be performed in the State
of California. This Note and the other Loan Documents described herein shall be
governed by, and construed and enforced in accordance with the substantive law
of the State of California. Any action or proceeding arising in connection with
this Note and the Loan Documents shall be brought in a federal or state court
within Los Angeles County, California, and the Borrower hereby consents to the
jurisdiction of any federal or state court within the State of California and
located in State of California and located in Los Angeles County, California.
The Borrower irrevocably and unconditionally submits to the jurisdiction (both
subject matter and personal) of each such court and irrevocably and
unconditionally waives (1) any objection that the Borrower might now or
hereafter have to the venue in any such court; and (2) any claim that
2
<PAGE>
any action or proceeding brought in any such court has been brought in an
inconvenient forum. Notwithstanding the foregoing, the Lender may, in its sole
and absolute discretion, initiate proceedings in the courts of any other
jurisdiction in which the Borrower may be found or in which its assets may be
located.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS NOTE, ANY OF THE
LOAN DOCUMENTS OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION HEREWITH, OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF BORROWERS AND LENDER OR ANY OF THEM WITH RESPECT
TO THIS NOTE, THE LOAN AGREEMENT, THE LOAN DOCUMENTS, OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE
TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND
THE BORROWER AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT LENDER MAY FILE
AN ORIGINAL COUNTERPART OR A COPY OF THIS NOTE WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE BORROWER TO THE WAIVER OF THE RIGHT TO TRIAL BY
JURY.
IN WITNESS WHEREOF, the Borrower has executed this instrument
effective the date first above written.
Borrower: /s/ Cornelius J. O'Shea
________________________
Cornelius J. O'Shea
THE CORNELIUS J. O'SHEA LIVING TRUST
/s/ Cornelius J. O'Shea
By:____________________________
Cornelius J. O'Shea, Trustee
3
<PAGE>
EXHIBIT 10.97
COAST PURCHASE
AGREEMENT
---------
NOVEMBER 6, 1998
<PAGE>
AGREEMENT FOR PURCHASE OF ASSETS
THIS AGREEMENT FOR PURCHASE OF ASSETS (hereinafter called Agreement) made
this 5th day of November, 1998, by and between Norwest Financial Coast, Inc., a
California corporation (Seller), with an address of 206 8th Street, Des Moines,
Iowa 50309 and Pan American Bank, FSB (PanAm Bank), a federally chartered
savings bank, with an address of 1300 South El Camino Real, San Mateo,
California 94402, and BPN Corporation (BPN), a California corporation, with an
address of 13750 Pipeline Avenue, Chino, California 91710 (PanAm Bank together
with BPN hereinafter referred to as Buyer).
1. For a sum equal to Three Million and 00/100 Dollars ($3,000,000.00)
(the Purchase Price); (i) Buyer agrees to purchase and Seller agrees to sell to
Buyer, Seller's equipment, furniture, fixtures, personal computers (including
computer equipment located in insurance policy producers' offices), proprietary
premium finance software (including source code and all existing copies),
business forms, goodwill relating to the "premium finance business," the rights
to pursue the business provided by the network of producers (independent
insurance agents and brokers) who refer their customers to Seller for insurance
premium financing (and all files, contracts and records with respect to said
producers), all as described on Schedule A attached hereto and incorporated
herein (the Assets), (ii) Buyer and Seller agree to enter into the Non-
Competition Agreement set forth on Schedule B, and (iii) Buyer agrees to
purchase and Seller agrees to sell to Buyer the names "Coast" and "Coast
Program" and any federal, state or common law trademark and service mark rights
or copyrights that may be associated therewith, and all other trade names and
service marks used or usable by Seller in conjunction with the "premium finance
business." The closing date shall be November 6, 1998 (the Closing Date). On
the Closing Date, Buyer shall pay to Seller the Purchase Price by wire transfer
in immediately available funds. Seller and Buyer agree that (x) Schedule A is a
representative list of the physical assets of Seller at its office located at
2525 Cherry Avenue, Suites 110, 200 and 350, Signal Hill, California 90806, and
may or may not include all of such assets to be transferred to Buyer hereunder;
(y) Seller makes no representations or warranties regarding the condition of the
<PAGE>
-2-
Assets, and Buyer accepts them strictly in their "as is" condition; and (z)
Seller is not transferring to Buyer any of Seller's receivables (including,
without limitation any loans or contracts) generated in connection with its
premium finance business, or any other asset or assets not identified on
Schedule A or otherwise described herein. Seller shall deliver to Buyer on the
Closing Date a complete list of all independent insurance agents, brokers and
other producers, including addresses, phone and fax numbers (which are available
to Seller), included within the Assets, together with production levels for the
last quarter in an ASCII formatted computer disc.
2. Seller represents and warrants, as of the date of this Agreement and
as of the Closing Date, that:
(a) It owns outright and has full and perfect title to all of the Assets
and other property transferred hereunder, free and clear of all
claims, liens, pledges and other encumbrances of any kind whatsoever.
(b) It is a duly formed and validly existing corporation and has full
power and authority to sell, assign, transfer and convey the Assets
and other tangible and intangible property transferred hereunder to
the Buyer, and all necessary proceedings on the part of the Seller
have been or will be duly taken prior to the Closing Date to authorize
the sale.
3. Buyer represents and warrants:
(a) Each is a duly formed and validly existing corporation, with full
power, authority, and legal right, including but not limited to all
necessary licenses, to acquire the Assets and other property
transferred hereunder, enter into this Agreement, and perform all of
its obligations under this Agreement and to carry out the transactions
contemplated hereby.
<PAGE>
-3-
(b) All necessary corporate action on the part of the Buyer has been or
will be duly taken to authorize the purchase and this Agreement has
been executed by a duly authorized officer.
4. For and in consideration of the mutual agreements set forth herein,
the Buyer does hereby grant to Seller a license to use any or all of the Assets,
and the names and trademarks identified in paragraph 1, for a period of one (1)
year from the Closing Date at no cost to Seller for the sole purpose of
servicing insurance premium finance receivables funded by Seller prior to the
Closing Date or during the period set forth in Section 13. Provided, however,
if Seller shall require the use of the Assets for a period of time beyond one
(1) year, Seller shall notify Buyer at least sixty (60) days prior to the
expiration of said one (1) year term, and said license shall be extended at no
cost, for an additional period of six (6) months. If Seller shall require the
extension of the license beyond said additional six (6) months, it shall be on
terms and conditions mutually acceptable to the parties. At the end of the
license period, Seller shall deliver the Assets to Buyer free and clear of all
claims, liens, pledges and other encumbrances, and in the same condition as of
the date of hereof, ordinary wear and tear excepted. The Buyer shall be
responsible for any cost associated with moving the Assets from Seller's
location. After the end of the license period, Seller shall no longer be
authorized to utilize the Assets.
5. From the date hereof to the Closing Date, Seller covenants with Buyer
as set forth below:
(a) Seller shall conduct its business in the ordinary and normal course of
business and consistent with past practice, including, without
limitation, credit granting standards, marketing, and charge-off
policy and practice.
(b) Seller will use its best efforts to keep its business organization
intact and to maintain its assets.
<PAGE>
-4-
6. From the date hereof to the Closing Date, Buyer covenants with Seller
as follows: It will promptly use its best efforts to obtain all government and
regulatory consents, approvals, licenses or other notices or filings, if any,
which will be necessary for the full performance of Buyer under this Agreement.
7. Buyer's obligation to purchase and pay for the Assets and other
property transferred hereunder shall be subject, to the extent not waived with
respect to all or any portion of the assets, to the satisfaction of each of the
following conditions at the closing.
(a) The representations and warranties in favor of Buyer contained in this
Agreement shall be true and correct in all material respects as of the
date when made and on and as of the Closing Date as though such
representations and warranties had been made on and as of the Closing
Date.
(b) Seller shall have performed and complied in all material respects with
all covenants, conditions and agreements required by this Agreement to
be performed or complied with.
(c) Seller shall have executed and delivered to Buyer a certified copy of
the resolution of its Board of Directors authorizing the sale of
assets pursuant to this Agreement.
(d) No court or governmental authority of competent jurisdiction shall
have issued an order restraining, enjoining or otherwise prohibiting
the consummation of the transactions contemplated by this Agreement.
8. Seller's obligation to sell the Assets and other property transferred
hereunder shall be subject to the satisfaction of the following condition(s) at
closing:
<PAGE>
-5-
(a) Buyer shall have executed and delivered to Seller a certified copy of
the resolution of its Board of Directors authorizing the purchase of
assets pursuant to this Agreement.
(b) Buyer shall have performed and complied in all material respects with
all covenants, conditions and agreements required by this Agreement to
be performed or complied with by Buyer.
(c) The representation(s) and warranties of Buyer in this Agreement shall
be true and correct in all material respects as of the date when made
and on and as of the Closing Date as though such representations and
warranties had been made on and as of the Closing Date.
9. Except as specifically limited in this Agreement, all representations,
warranties, covenants, and obligations in this Agreement and any certificate or
document delivered pursuant to this Agreement will survive the Closing Date for
the longer of; (a) one (1) year, or (b) the period of the license granted to
Seller under Section 4 hereof.
10. Seller will indemnify and hold harmless Buyer and its affiliates
(collectively hereinafter called the Buyer Indemnified Persons) for, and will
pay to the Buyer Indemnified Persons the amount of, any loss, liability, claim,
damage, expense (including costs of investigation and defense and reasonable
attorneys' fees) or diminution of value, whether or not involving a third-party
claim (collectively hereinafter called Damages) arising, directly or indirectly,
from or in connection with any liability of Seller to any third-party, whenever
arising (including any liabilities related to Seller's activities under the
license granted under Section 4), and in connection with any breach of any
representation or warranty made by Seller in this Agreement or any other
certificate or document delivered by Sellers pursuant to this Agreement. Buyer
will indemnify and hold harmless Seller and its affiliates (collectively
hereinafter called the Seller Indemnified Persons) for,
<PAGE>
-6-
and will pay to the Seller Indemnified Persons the amount of, any Damages
arising, directly or indirectly, from or in connection with any breach of any
representation or warranty made by Buyer in this Agreement. The remedies
provided in this paragraph 10 are not exclusive and do not limit any other
remedies that may be available to Seller, Buyer or any other indemnified
persons.
11. Buyer and Seller agree to the transition procedures as outlined in
Schedule C and each party will use its best efforts to adhere to such
procedures.
12. Buyer and Seller shall consult with each other and obtain each other's
approval before issuing any press release or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
hereby; provided however, that nothing contained herein shall prohibit either
party from making a communication directed to its employees or the employees of
any of its affiliates as long as it is consistent with the transition procedures
in Schedule C, or from making such disclosure as required to its regulatory
authorities, or from making such disclosures as it deems necessary to its
financial rating agencies. Buyer shall not contact any of Seller's employees
without first obtaining Seller's written consent.
13. Buyer shall be permitted to interview those certain employees of
Seller who work at its office located at 2525 Cherry Avenue, Suites 110, 200 and
350, Signal Hill, California 90806, and all sales representatives, as specified
in writing by Seller. Buyer may, in its sole discretion, offer employment to
any of the foregoing employees. Such interviews shall take place at times and
at a place acceptable to Seller. Seller shall retain responsibility for all of
the employee related liabilities and benefits with respect to the Seller's
employees not hired by Buyer (whether incurred, or arising out of or relating to
acts, omissions, events, or occurrences taking place before, on or after the
Closing Date), and Seller agrees to pay any such liabilities or employee benefit
claims related to those employees when due (whether incurred, or arising out of
or relating to acts, omissions, events, or occurrences taking place before, on
or after the Closing
<PAGE>
-7-
Date) subject to Seller's right to contest its liability. Seller shall retain
responsibility for all of the employee related liabilities and benefits with
respect to any of Seller's employees hired by Buyer incurred, or arising out of
or relating to acts, omissions, events or occurrences taking place on or before
the Closing Date, or otherwise during their employment by Seller, and Seller
agrees to pay any such liabilities or employee benefit claims when due, subject
to Seller's right to contest its liability. Nothing in this paragraph shall be
construed to make any of Seller's employee a third party beneficiary under this
Agreement.
14. On November 10, 1998, or on such date as may be mutually agreed upon
(the Notice Date), Seller shall send written notice to all insurance agents and
brokers known or believed to be likely to submit "premium finance" loan
applications to Seller, stating that (a) Seller has sold and the Buyer has
purchased the "premium finance business," (b) all references to "Norwest
Financial Coast, Inc." and/or "Dial Bank" on loan applications and agreements
previously distributed to them by Seller should be deleted as soon as reasonably
practical, and in any event within sixty (60) days after the Closing Date, and
(c) all loan applications and agreements bearing the name "Norwest Financial
Coast, Inc." and/or "Dial Bank" should be destroyed within sixty (60) days of
the Closing Date. Buyer shall distribute new applications and agreements to the
agents and brokers as soon as possible, but in no event later than forty-five
(45) days after the Closing Date. Until thirty (30) days after the Notice Date,
Seller shall continue to process any and all loan applications and agreements
received by Seller, and any loans made by Seller pursuant to such an application
shall be the property of Seller. Thereafter, whether or not the agents and
brokers use the loan applications and agreements bearing the name "Norwest
Financial Coast, Inc" and/or "Dial Bank," any and all applications received by
Seller shall be submitted for approval and acceptance to the Buyer, and Seller
shall have no other responsibility thereunder, except as provided under the
Master Assignment Agreement. For all applications and agreements received by
Seller after the date which is thirty (30) days following the Notice Date,
Seller hereby assigns all of its right, title and interest in, to and under such
applications and agreements
<PAGE>
-8-
and the Buyer assumes all liabilities and obligations of Seller, if any,
thereunder, except as provided under Schedule C or the Master Assignment
Agreement.
15. The parties hereto agree that this Agreement constitutes a sale of
"assets" and not a sale of the corporate entities "Norwest Financial Coast,
Inc." or "Premium Service/Norwest Financial Coast, Inc." and Seller shall
continue to have the right to bring or defend actions in its corporate names.
Seller agrees that Buyer has not assumed any liabilities of Seller or any
affiliated entities and all such liabilities shall remain the responsibility of
and be discharged by Seller. Seller has not transferred to Buyer the right to
use the names "Norwest Financial Coast, Inc." or "Premium Service/Norwest
Financial Coast, Inc." and any of the state or common law trademark and service
mark rights or copyrights that may be associated therewith and not transferred
to Buyer under Section 1 of this Agreement. Seller agrees herein to use the
names "Norwest Financial Coast, Inc." and/or "Premium Service/Norwest Financial
Coast, Inc." for the sole purposes of running-off of its current receivables and
bringing and defending actions with respect to the premium finance business
previously originated by Seller and the business originated pursuant to the
terms hereof, and shall not market any products or services using the name
"Coast." Buyer agrees that if in connection with any such actions, Seller
requires access to any of the equipment, or copies of any of the records or
documents transferred hereunder, Buyer shall (at no cost to Buyer) provide
Seller access to such equipment or copies of such documents or records.
16. This Agreement, the Non-Competition Agreement set forth as Schedule B,
and the Master Assignment Agreement of even date hereof, (a) constitutes the
entire agreement and supersedes all other prior agreements and understandings,
both written and oral, between the parties or their affiliates, with respect to
the subject matter hereof, (b) shall not be assigned by Buyer (other than to
such affiliated companies as it may designate) or by Seller by operation of law
or otherwise, without the consent of the other, (c) shall be governed in all
respects, including validity, interpretation and effect by the laws of the State
of California (excepting those conflicts
<PAGE>
-9-
of laws provisions which would serve to defeat application of California law),
and (d) may be executed in two or more counterparts, each of which shall be
deemed an original but all of which shall constitute but one instrument.
17. With the prior written consent of Seller, Buyer may assign its rights
under this Agreement to an affiliate.
18. Each party will be responsible for its own legal and out-of-pocket
expenses related to this transaction.
[Signature Page Follows]
<PAGE>
-10-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
BUYER: SELLER:
Pan American Bank, FSB, a federally Norwest Financial Coast, Inc., a
chartered savings bank California corporation
By: /s/ William Bron By: /s/ [SIGNATURE ILLEGIBLE]
----------------------------- --------------------------------
Title: Chairman Title: President
-------------------------- -----------------------------
BPN Corporation, a California
corporation
By:
-----------------------------
Title:
--------------------------
<PAGE>
-11-
Schedule A
[See Attached]
<PAGE>
Schedule A
1. All equipment
2. All furniture
3. All fixtures
4. Personal computers (including computer equipment located in insurance policy
producers' offices)
5. Proprietary premium finance software (including source code and all existing
copies)
6. Business forms
7. Goodwill relating to the "premium finance business"
8. The rights to pursue the business provided by the network of producers
(independent insurance agents and brokers) who refer their customers to
Seller for insurance premium financing (including all files, contracts and
records with respect to said producers)
9. All assets not listed above but included in the documentation of Seller
assets previously provided to Buyer by Seller
<PAGE>
EXHIBIT 10.98
[ADVANTA MORTGAGE LETTERHEAD]
August 21, 1996
Mr. Blair Kinney
Pan American Bank, FSB
1300 So. El Camino Real, Suite 320
San Mateo, CA 94402
Re: Master Commitment for Conduit Participants, number191564.11 (the
"Master Commitment"), dated as of October 2, 1995, between Advanta
Mortgage Conduit Services, Inc. ("Buyer") and Pan American Bank, FSB
("Seller"), and Master Loan Purchase Agreement for Advanta Conduit
Loan Acquisitions referred to in the Master Commitment (the "Purchase
Agreement").
Dear Blair:
This letter shall confirm that we have agreed to extend the Commitment Term
(as such term is defined in the Master Commitment) until September 30, 1997 (the
"Extended Term"). In all other respects, the Master Commitment (including the
monthly Commitment Volume, as such term is defined in the Master Commitment) and
the Purchase Agreement shall remain in full force and effect with the same force
and effect as if the original Commitment Term had included in the Extended Term.
The Master Commitment and the Purchase Agreement, as modified by this letter,
are hereby confirmed, approved, and ratified in their entirety.
Please evidence your confirmation of, and agreement to, the terms set forth
above by executing this letter where indicated below.
Very truly yours,
Advanta Mortgage Conduit Services, Inc.
By: /s/ Maryann O'Hara
-------------------
Maryann O'Hara
Vice President
The undersigned does hereby confirm and agree to the terms of this letter.
Date: October 1, 1996 Pan American Bank, FSB
----------------
By: /s/ Robert Wilson
------------------
Name: Robert Wilson
----------------
Title: EVP
---------------
cc: Rick Holguin Advanta Conduit
Anna Martinez Advanta Conduit
<PAGE>
MASTER COMMITMENT FOR CONDUIT PARTICIPANTS
This Master Commitment, dated as of October 2, 1995 is between Advanta
Mortgage Conduit Services, Inc., a Delaware corporation (the "Buyer"), and Pan
American Savings Bank, a California corporation (hereinafter referred to as
"Seller").
Attached to this Master Commitment is the Mortgage Loan Purchase Agreement
for Advanta Conduit Loan Acquisitions" (the "Purchase Agreement"), the terms of
which are hereby incorporated by reference into this Master Commitment. This
Master Commitment is intended to be a "Commitment" within the meaning of the
Purchase Agreement. Also attached to this Master Commitment is a form of a
"Settlement Sheet"; each executed "Settlement Sheet" is intended to be a
"Confirmation" within the meaning of the Purchase Agreement.
The Seller has heretofore received from the Buyer its "Advanta Conduit
Seller's Guide," which, as it may be modified, supplemented or amended form time
to time by the Buyer, is hereinafter referred to a the "Seller's Guide." Set
forth in the Seller Guide are the Buyer's underwriting and origination practices
guidelines, together with related product description, and documentation
requirements. Mortgage loans (i) which conform to such product descriptions,
underwriting and origination practices and documentation requirements set forth
in the Seller Guides, and (ii) which conform to all Representations and
Warranties, as defined in the Purchase Agreement and applicable to the related
Mortgage Loans, are hereinafter referred to as "Qualifying Loans."
Section 1. Certain Definitions. For purposes of this Master Commitment
-------------------
refer to the Purchase Agreement for defined terms.
In addition, for purposes hereof and of the Purchase Agreement:
the "Applicable Guidelines" means the Buyer's required underwriting
guidelines, origination practices and product descriptions, as set forth in
the Seller's Guide;
the "Documentation Requirements" means the Buyer's documentation
requirements, as set forth in the Seller's Guide.
Section 2. Commitment to Buy and Sell; Volume and Term.
-------------------------------------------
(a) The Buyer hereby agrees to purchase from the Seller, either
directly or indirectly or through one or more affiliates, and the Seller hereby
agrees to use its best efforts to sell to the Buyer during the period commencing
on October 2, 1995 and ending on September 30, 1996 (such period, the
"Commitment Term"), $1 million per month of Qualifying Loans originated by the
Seller (such dollar amount per month, the "Commitment Volume").
(b) For the first three months of the Commitment Term, the Seller
shall follow the delivery procedures set forth in the Seller's Guide under
Section 3, "Correspondent Procedures," for the "Flow" delivery option ("Flow
Deliveries"); thereafter the Seller shall follow the delivery procedures for the
"Pool" delivery option ("Pool Deliveries").
(c) Each such sale will be closed on a servicing related basis,
without recourse, and subject to all the terms and conditions hereof, the
provisions of the other Related Conduit Agreements, together with any and all
additional terms and conditions imposed on such sale by the provisions of the
Seller Guide.
(d) Each Settlement Sheet executed and delivered by the Buyer and
the Seller pursuant hereto shall constitute a confirmation of the purchase of
the Qualifying Loans described in such
<PAGE>
Settlement Sheet. If prior to purchase of any mortgage loan offered by the
Seller, either the Seller or the Buyer becomes aware that such mortgage loan is
not a Qualifying Loan, the Buyer will be under no obligation to purchase such
Mortgage Loan. The determination by the Buyer as to whether any offered Mortgage
Loan is a Qualifying Loan shall be conclusive, absent manifest error.
(e) Nothing contained in this Master Commitment or the other
Related Conduit Agreements shall be deemed to waive any right of the Buyer to
require Seller to repurchase any Mortgage Loan (i) in the event it is determined
by the Seller or the Buyer or anyone acting on their respective behalf that any
Mortgage Loan breaches any of the Representations and Warranties (as defined in
the Purchase Agreement) applicable to such Mortgage Loan (including the
representation and warranty that such mortgage loan is a Qualifying Loan), or
(ii) in the event Seller fails, with respect to such Mortgage Loan, to comply
with the document delivery requirements set forth in the Seller Guide.
Section 3. Pricing of Qualifying Loans. The Qualifying Loans will be
---------------------------
purchased from the Seller by the Buyer at prices to be determined by reference
to the applicable Rate Sheet issued by Buyer to Seller; it being acknowledged
and agreed that pricing shall reflect the Commitment Term, the Commitment
Volume, and whether the Seller is then delivering such Qualifying Loans as Pool
Deliveries or as Flow Deliveries. Not later than the Business Day prior to any
pricing change, Buyer shall transmit to the Seller, by facsimile, the new Rate
Sheet for the related Mortgage Loans.
Section 4. Origination and Transfer for Mortgage Loans.
-------------------------------------------
(i) The origination and transfer of Mortgage Loans will comply
with the requirements of the Seller Guide.
(ii) In connection with each purchase Mortgage Loans, the Buyer
shall purchase, without recourse, all of the Seller's right, title and interest
to each Mortgage Loan, including all interest accruing thereon, and principal
received on or with respect to such Mortgage Loan on or after the related Cut-
Off Date, from the Mortgagors most recent paid-to date.
(iii) Buyer may purchase any particular Mortgage Loans either
directly, or may cause an affiliate of Buyer (which may include a trust
organized for such purpose) to purchase such Mortgage Loans.
Section 5. Termination of Commitment.
-------------------------
(a) Subject to the termination provisions set forth below in this
Section 5, the provisions of this Master Commitment and of the other Related
Conduit Agreements shall be in effect during the Commitment Term; provided, that
--------
the provisions hereof and of the other Related Conduit Agreements shall
nevertheless apply to any purchases of Mortgage Loans which occur after the
expiration of the Commitment Term, unless the parties affirmatively agree
otherwise.
(b) The Buyer has the right, at its election, to terminated its
purchase commitment on five (5) Business Days' notice in the event (i) of a
material adverse change in the business or financial condition of the Seller,
(ii) that the Seller is in default under any Related Conduit Agreement and
Seller fails to cure such default within the prescribed Cure Period therein.
Section 6. Additional Programs. Should the Buyer elect to offer
-------------------
additional mortgage loan programs to the Seller, it shall notify the Seller and
the parties agree to discuss in good faith arrangements pursuant to which the
Seller would originate such products in a manner that would be mutually
beneficial to the parties. The failure of the parties to reach a mutually
acceptable agreement with respect to such product shall not alter the
2
<PAGE>
rights and responsibilities of the parties under the Related Conduit Agreements.
If an agreement with respect to an additional product is reached, the parties
hereto shall amend the provisions of the Related Conduit Agreement to reflect
such agreement.
Section 7. Amendments to the Seller Guide and Documentation
------------------------------------------------
Requirements. The Buyer shall notify the Seller in writing of all changes to the
- ------------
Seller Guides; provided, that no such change shall apply to any loans in the
Seller's pipeline to the extent that the related Mortgagor's application has
been approved in accordance with the Seller Guide.
Section 8. Counterparts. For the purpose of facilitating the execution
------------
of this Master Commitment and for other purposes, this Master Commitment may be
executed simultaneously in any number of counterparts, each of which shall be
deemed to be an original, and together shall constitute one and the same
instrument.
Section 9. Confidentiality. The Seller and its attorneys and
---------------
accountants will not disclose to third parties, without the Buyer's prior
consent, the terms of this Master Commitment, or the other Related Conduit
Agreements, except as required by law. The Seller shall indemnify the Buyer with
respect to any losses suffered by the Buyer as a result of the breach of this
covenant.
IN WITNESS WHEREOF, the parties hereto have caused this Master
Commitment to be duly executed by their respective officers on the day and year
first above written.
SELLER
PAN AMERICAN SAVINGS BANK
By: /s/ Robert Wilson
------------------
Name:
Title:
BUYER
ADVANTA MORTGAGE CONDUIT SERVICES, INC.
By: /s/ Anna M. Martinez
---------------------
Name: Anna M. Martinez
Title: Vice President
3
<PAGE>
EXHIBIT 10.99
ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT
This Assignment, Assumption and Recognition Agreement (the "Agreement") is
made and entered into on September 30, 1998, by Countrywide Home Loans, Inc., a
New York corporation, having an address at 4500 Park Granada Boulevard,
Calabasas, California 91302 (the "Seller"), First Federal Savings and Loan
Association of San Gabriel Valley, having an address at 225 North Barranca
Street, West Covina, California 91791-1605 (the "Purchaser") and Pan American
Bank, FSB, having an address at 625 The City Drive, Orange, California 91302
(the "Company").
In consideration of the mutual promises and agreements contained herein, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Assignment and Assumption. Except as expressly provided for herein, the
-------------------------
Seller hereby grants, transfers and assigns to the Purchaser on September 30,
1998 (the "Closing Date") (a) all of its right, title and interest as
"Purchaser" in, to and under that certain Mortgage Loan Purchase and Interim
Servicing Agreement dated as of September 30, 1998, and duly executed by the
Company and the Seller (attached hereto as Exhibit A, the "Purchase
---------
Agreement"), (b) all of its right, title and interest in and to the each of
the mortgage loans identified in Exhibit B hereto (the "Mortgage Loans"), and
---------
(c) all servicing rights relating to the Mortgage Loans (the "Servicing
Rights"). Except for the provisions pertaining to the payment of the
purchase price, the Purchaser hereby assumes all of the Seller's obligations
as "Purchaser" under the Purchase Agreement from and after the date hereof,
and the Seller shall be relieved and released by the Company of all of its
obligations under the Purchase Agreement from and after the date hereof.
Except as is otherwise expressly provided herein, the Seller makes no
representations, warranties or covenants to the Purchaser and the Purchaser
acknowledges that the Seller has no obligations to the Purchaser under the
terms of the Purchase Agreement or otherwise relating to the transaction
contemplated herein (including but not limited to any obligation to
repurchase any of the Mortgage Loans or to indemnify the Purchaser).
2. Consideration. In consideration for the transfers and assignments set forth
-------------
in paragraph 1 of this Agreement, upon receipt by the Purchaser of a
certification, issued by that custodian designated by the Purchaser, in form
and substance reasonably acceptable to the Purchaser and stating that all
Mortgage Loan Documents (as defined in the Purchase Agreement) have been
received by such custodian, the Purchaser shall pay to the Seller the amounts
referenced in that certain funding schedule dated as of September 30, 1998
and duly executed by the Seller and the Purchaser (the "Purchase Price").
The Purchaser agrees to wire the agreed upon Purchase Price to the Seller to
the account designated below:
Bank of New York
ABA - 021000018
Countrywide Home Loans
ACCT - 8900038632
REF - Stuart Levitt - First Federal (San Gabriel)
<PAGE>
Notwithstanding the foregoing, in the event the Purchaser does not receive
such certification and wire the funds on or before three (3) Business Days
following the Closing Date, the Purchaser shall sell, convey, transfer and
assign to the Seller on the fourth (4th) Business Day following the Closing
Date all right, title and interest in and to the Mortgage Loans, the Servicing
Rights, the Mortgage Loan Documents and the Escrow Accounts relating to the
Mortgage Loans. In such event, the Seller shall be entitled to all
collections and recoveries and interest received or applied to any Mortgagor's
account after the Cut-off Date (as defined in the Purchase Agreement).
3. Recognition of the Purchaser by the Company. From and after the date hereof,
-------------------------------------------
the Company shall recognize the Purchaser as the owner of the Mortgage Loans
and the "Purchaser" under the Purchase Agreement.
4. Servicing of the Mortgage Loans. From and after the date hereof, the Company
-------------------------------
shall interim service the Mortgage Loans for the Purchaser in accordance with
the terms and conditions of the Purchase Agreement, as if the Purchaser and
Company had entered into the Purchase Agreement. In consideration therefor,
the Purchaser shall pay the Company the interim servicing fee set forth in
Section 4.1 of the Purchase Agreement; provided, however, that the Seller
shall pay to the Purchaser the interim servicing fee for the second thirty
(30) day period following the Closing Date. The address of the Purchaser set
forth in Section 6.1 of the Purchase Agreement shall be changed to read as
follows:
First Federal Savings and Loan Association of San Gabriel Valley
225 North Barranca Street
West Covina, California 91791-1605
Attn: Dale Schiering
5. Status of Purchase Agreement. The Company and the Seller represent and
----------------------------
warrant that (a) the Purchase Agreement is in full force and effect as of the
date hereof, (b) the Purchase Agreement has not been amended or modified in
any respect, and (c) there has been no waiver or any agreement to waive any
provision, nor has any notice of termination been given, under the Purchase
Agreement.
6. No Claims. The Company represents and warrants that it has no offsets,
---------
counterclaims or other defenses available to it with respect to the Purchase
Agreement.
7. Covenants, Representations and Warranties of the Seller. The Seller
-------------------------------------------------------
represents and warrants to, and covenants with, the Purchaser that:
a. The Seller is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, and has
all requisite corporate power and authority to acquire, own and sell the
Mortgage Loans;
b. The Seller has full corporate power and authority to execute, deliver and
perform under this Agreement, and to consummate the transactions set forth
herein. The execution, delivery and performance of the Seller of this
Agreement, and the consummation by it of the transactions contemplated
hereby, have been duly
2
<PAGE>
authorized by all necessary corporate action of the Seller. This Agreement
has been fully executed and delivered by the Seller and constitutes the
valid and legally binding obligation of the Seller enforceable against the
Seller in accordance with its respective terms;
c. No material consent, approval, order or authorization of, or declaration,
filing or registration with, any governmental entity is required to be
obtained or made by the Seller in connection with the execution, delivery
or performance by the Seller of this Agreement, or the consummation by it
of the transaction contemplated hereby;
d. There is no action, suit, proceeding, investigation or litigation pending
or, to the Seller's knowledge, threatened, which either in any instance or
in the aggregate, if determined adversely to the Seller, would adversely
affect the sale of the Mortgage Loans to the Purchaser, the execution,
delivery or enforceability of this Agreement, or the Seller's ability to
perform its obligations under this Agreement; and
e. Immediately prior to payment of the purchase price for the Mortgage Loans,
the Seller is the lawful owner of the Mortgage Loans with the full right
to transfer the Mortgage Loans free from any and all claims and
encumbrances whatsoever.
8. Covenants, Representations and Warranties of Purchaser. The Purchaser
------------------------------------------------------
represents and warrants to, and covenants with, the Seller and the Company
that except for the provisions pertaining to the payment of the purchase
price thereunder, the Purchaser agrees to be bound as "Purchaser" by all of
the terms, covenants and conditions of the Purchase Agreement, and from and
after the date hereof, the Purchaser assumes for the benefit of the Seller
and the Company all of the Seller's obligations as "Purchaser" thereunder.
9. Governing Law. This Agreement shall be construed in accordance with the laws
-------------
of the State of California and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with the laws of the
State of California, except to the extent preempted by federal law.
10. 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.
11. Conflict with Purchase Agreement. To the extent there is any conflict
--------------------------------
between the terms of the Purchase Agreement and this Agreement, the latter
shall be controlling, notwithstanding anything to the contrary contained in
the Purchase Agreement.
12. Capitalized Terms. All capitalized terms used herein and not otherwise
-----------------
defined herein shall have the meanings assigned to such terms in the
Purchase Agreement.
3
<PAGE>
13. Counterparts. This Agreement may be executed 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.
[Next Page]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
COUNTRYWIDE HOME LOANS, INC.,
the Seller
By /s/ Michael W. Schloessmann
-----------------------------------
Michael W. Schloessmann
Vice President
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF SAN GABRIEL VALLEY,
the Purchaser
By
----------------------------------
Name:
Title:
PAN AMERICAN BANK, FSB,
the Company
By /s Blair F. Kenny
----------------------------------
Name: Blair F. Kenny
Title: Senior Vice President
5
<PAGE>
EXHIBIT A
MORTGAGE LOAN
PURCHASE AND INTERIM SERVICING
AGREEMENT
(attached)
6
<PAGE>
EXHIBIT B
MORTGAGE LOANS
(attached)
7
<PAGE>
EXHIBIT 10.100
WHOLE LOAN SALE AGREEMENT
This Whole Loan Sale Agreement: (The "Agreement") is made and entered into as of
this 23rd day of December, 1998 by and between Fremont Investment & Loan, a
California corporation ("Buyer") and UNITED PANAM MORTGAGE ("Seller"), with
reference to the following facts:
A. Seller engages into the business of originating and selling real estate
secured Loans.
B. Seller desires from time to time to sell Loans to Buyer, on the terms
and subject to the conditions set forth in this Agreement.
C. Buyer desires from time to time to purchase the Loans from Seller on the
terms and subject to the terms and conditions set forth in this Agreement.
D. Buyer and Seller desire to establish in this Agreement the terms and
conditions on which Buyer may from time to time purchase Loans from Seller.
Buyer and Seller hereby agree as follows:
Section 1. Definitions. The following terms shall have the meaning set
-----------
forth in this Section 1 for purposes of this Agreement and each Purchase
Agreement (as hereinafter defined).
(a) "Agreement" means this Agreement.
(b) "Business Day" means any calendar day of the week other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions and/or thrift and
loan institutions located in Los Angeles, California are authorized or obliged
by law or executive order to be closed.
(c) "Buyer" means Fremont Investment & Loan, a California corporation.
(d) "Purchase Amount" means the amount of the maximum aggregate unpaid
principal balance of Loans (as hereinafter defined) which Buyer shall be
obligated to purchase from Seller under the terms of a Purchase Agreement (as
hereinafter defined). The amount of the unpaid principal balance of each Loan so
purchased shall be determined as of the time of the Delivery (as hereinafter
defined) of each Loan.
(e) "Purchase Confirmation" means a written confirmation of a Purchase
issued by Buyer to Seller.
(f) "Delivery" means delivery of a Loan to Buyer for purchase by Buyer
pursuant to a Purchase Agreement and this Agreement.
1
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(g) "Purchase Date" means the earliest date on which Loans may be
delivered (as hereinafter defined) by Seller to Buyer under a Purchase, as set
forth in the Purchase Confirmation.
(h) "Last Delivery Date" means the latest date on which a Loan may be
delivered by Seller to Buyer under a Purchase Agreement.
(i) "Loan" means a real estate secured loan sold by Seller to Buyer
pursuant to a Purchase.
(j) "Net Yield" means, for each Loan, the yield to Buyer on its
purchase price for the Loan calculated on the basis set forth in this Agreement
or any Purchase Agreement.
(k) "Note" means the promissory note that evidences a Loan, together
with any riders, schedules or amendments modifying the same.
(l) "Permitted State" means any state or commonwealth of the United
States of America or the District of Columbia which is designated in a Purchase
Agreement as an acceptable jurisdiction in which a Loan may be originated and
where the Property for the Loan may be situated.
(m) "Property" or "Secured Property" means the real Property that is
encumbered by the Security Instrument for a Loan.
(n) "Purchase Agreement" means a letter agreement executed by Buyer
and Seller subsequent to the execution of this Agreement specifying the
aggregate total unpaid principal balance and number of Loans which Buyer agrees
to purchase pursuant to the terms of this Agreement.
(o) "Purchase" means the Sale of Loans pursuant to a Purchase
Agreement.
(p) "Required Net Yield" means the minimum net yield which a Loan
shall bear to Buyer, as set forth in the Purchase Agreement.
(q) "Security Instrument" means the mortgage, deed of trust or deed to
secure debt that secures repayment of a Loan together with any rider, schedules
or amendments modifying the same.
(r) "Seller" means the party to this Agreement identified in the first
paragraph of this Agreement as Seller.
(s) "Title Document" is a policy of Title Insurance in a form and
amount acceptable to Buyer.
2
<PAGE>
Section 2. The Purchase. Buyer may, at its election, from time to time,
------------
by the execution of a Purchase Agreement, purchase Loans from time to time
offered by Seller for sale to Buyer, as to each Purchase on the terms and
subject to the conditions set forth in this Agreement and in the Purchase
Agreement. The Agreement of Buyer to Seller set forth in each Purchase Agreement
for the purchase of Loans by Buyer from Seller shall cover and include only such
as Loan as: (a) is in strict compliance with the terms and conditions set forth
in the Purchase Agreement and this Agreement; (b) is approved by Buyer pursuant
to the terms of Section 5 of this Agreement; and (c) is delivered to Buyer or
Seller on or after the Purchase Agreement date and on or before the Last
Delivery Date.
Section 3. Description of Loan. All Loans sold to Buyer pursuant to this
-------------------
Agreement shall conform to the following terms and conditions as to the Borrower
on the Loan, the document evidencing and securing the Loan and the Property for
the Loan:
(a) Loan Type. The Loan must qualify as a Real Estate Secured Loan
---------
acceptable in form and type to Buyer.
(b) Location of Property. The Property for the Loan shall be located
--------------------
in a Permitted State as set forth in the Purchase Agreement.
(c) Loan Documents. The Loan shall be evidenced by a Note in the form
--------------
included as Exhibit "A"; shall be secured by a Security Instrument in the form
included as Exhibit "B". Buyer shall have the right, at its election, on thirty
days advance written notice to Seller, to substitute such forms of Note and/or
Security Instruments and/or Information Disclosure Statements for Exhibit "A".
Exhibit "B", as shall from time to time be required by state or federal law
applicable to Buyer.
(d) Loan Yield. The payments for which initial provision is made in
----------
the Note, if any, for which provision is made therein, shall be sufficient in
amount to bear a net yield to Buyer of not less than the required net yield as
set forth in the Purchase Agreement.
(e) Loan Terms. As of the date of the delivery (as hereinafter
----------
defined) of the Loan, the Loan proceeds shall have been fully disbursed to the
Borrower on the Loan and there shall have been no "repair holds" or similar
withholdings of Loan proceeds to the Borrower on the Loan. The terms of the Loan
shall provide for monthly payment to be made by the Borrower, all as more
particularly set forth in the Note (Exhibit A). Each monthly payment shall be
applied first to interest accrued to the date the payment is due and then to
principal. Interest at the rate or rates provided for in the Note shall accrue
on the entire unpaid principal balance of the Loan.
(f) Hazard Insurance. The Secured Property shall be covered by a
----------------
policy of fire and extended coverage hazard insurance written by an insurer
reasonably acceptable to Buyer and in an amount equal to the lesser of the
original principal amount of the Loan or the replacement
3
<PAGE>
value of the structural improvements situated on the Property. The policy shall
have a Lender's loss payable endorsement in a form acceptable to Buyer.
(g) Compliance With Applicable Law. The Loan shall have been
------------------------------
originated in full accordance with all applicable federal, state and local laws,
rules, regulations and ordinances, including, without limitation, the Federal
Consumer Credit Protection Act, as amended, and Regulation Z thereunder, the
Federal Equal Credit Opportunity Act, as amended, and Regulation B thereunder,
the National Flood Disaster Protection Act, as amended, the Federal Fair Credit
Reporting Act, as amended, all applicable Permitted State statutes and
regulations affecting Seller, and all applicable usury and interest rate
limitation laws.
Section 4. Delivery and Payment.
--------------------
(a) Delivery. For each Purchase Agreement, Seller shall deliver
--------
("Deliver") Loans to Buyer (the "Delivery") without cost or expense to
Buyer except as spec ifically provided to the contrary in this Agreement,
at the main office of Buyer, or at such other place as Buyer may from time
to time designate. Delivery of the Loans shall occur only upon delivery to
Buyer of each of the following for each Loan:
(i) An approved credit report with respect to the Borrower on
the Loan, dated not earlier than 90 days prior to the date of
closing of the Loan, unless accompanied by an updated report, dated
not earlier than 90 days prior to the date of delivery of the Loan;
and a history of payments on the Loan, if the Loan was closed more
than 60 days prior to the date of its delivery.
(ii) The original of the Note evidencing the Loan, endorsed by
Seller, in form satisfactory to Buyer, to the order of Buyer.
(iii) The Borrower's original application for the Loan, a copy
of the settlement statement or Loan closing statements issued in
connection with the closing of the Loan, and all of the original
documents, certifications and disclosures executed by the Borrower
in connection with origination of the Loan.
(iv) The original of any and all Agreements affecting the terms
of the Note evidencing the Loan, or affecting the Security
Instrument securing the Loan, or affecting any of the liabilities
or obligations of the Borrower or any successor-in-interest to the
Property for the Loan.
(v) Verifications of employment of the Borrower and
verifications of deposits of the Borrower, each dated not earlier
than 90 days prior to the date of closing of the Loan, if
applicable.
4
<PAGE>
(vi) A statement, rating or other acceptable form to determine
the payment status and history of the previous mortgage owned by
the Borrower, including the property dated within 90 days of the
closing date of the loan.
(vii) A policy of fire and extended coverage hazard insurance,
written as set forth in Section 3(f) of this Agreement, with the
premium prepaid thereon, in the sum satisfactory to Buyer with a
Lender's loss payable endorsement in a form acceptable to Buyer.
(viii) A copy of the Truth-in-Lending disclosures issued in
connection with the Loan, together with a copy of each Truth-in-
Lending notice of right of rescission issued in connection with the
Loan.
(ix) If any Borrower on the Loan executes the Note, Security
Instrument or any other documents in connection with the Loan
through the Borrower's attorney-in-fact, a certified copy of a
recorded special power of attorney granted to such attorney-in-
fact, in form and content acceptable to Buyer.
(x) Copies of all state-required fair lending, consumer
protection or other notices and disclosures, as completed and
delivered to the Borrower for the Loan.
(xi) The original policy of Title Insurance, or title
commitment in an amount and form acceptable to Buyer.
(xii) Any and all such other documents as may reasonably be
required of Seller by Buyer, in such form as may reasonably be
required by Buyer with reasonable notice prior to the last delivery
date.
(xiii) A statement of the amount of the purchase price for the
Loan, calculated as set forth in the Purchase Agreement.
(xiv) The confirmation of recording of the Security Instrument
securing the Loan, evidencing recordation in the county in which
the Property for the Loan is situated.
(xv) The original of the assignment of the Security Instrument
securing the Loan, duly executed by Seller, as assignor, in favor
of Buyer, as assignee.
(xvi) A certificate of flood insurance, if required.
(xvii) A copy of Seller's letter to the Borrower for the Loan,
advising the Borrower of the sale of the Loan to Buyer, in form and
content acceptable to Buyer, and dated within five days prior to
the delivery of the Loan to Buyer.
5
<PAGE>
Notwithstanding standard trailing documents, the timely Delivery of all of the
foregoing items for a Loan on or before the Last Delivery Date, whether with or
subsequent to Delivery of the Loan shall be a condition subsequent of Delivery,
and upon failure of such timely deliver, Seller agrees to repurchase the Loan
from Buyer, without recourse and promptly upon demand of the Buyer, on the terms
set forth in Section 11 of this Agreement.
(b) Approval and Rejection of Delivered Loans. Buyer, in its sole
-----------------------------------------
discretion, shall approve or reject each Loan delivered by the last delivery
date, on the basis of: (i) compliance by Seller with all requirements for
delivery set forth in Section 4(a) of this Agreement; (ii) conformity of the
Loan with the requirements of Section 3 of this Agreement; (iii) legally
enforceable Security Instrument for the Loan; and (iv) conformity of the Loan
with the normal underwriting requirements of Buyer. Buyer shall have the right
to inspect the Property for any Loan, or to cause such an inspection to be made
and to determine if the Property is in conformity with the reasonable
requirements of Buyer.
(c) Submission for Approval. Intentionally Deleted.
-----------------------
(d) Payment of Purchase Price. Buyer shall pay to Seller the purchase
-------------------------
price for each Loan delivered pursuant hereto upon the Last Delivery Date, in
immediately available funds as indicated on the Purchase Agreement, provided
that for any Loan that has been approved by Buyer in accordance with Section
4(C) of this Agreement prior to Delivery.
The purchase price of the Loan shall be the sum of the unpaid
principal balance of the Loan, multiplied by the purchase price factor (as set
forth in the Purchase Agreement), plus all unpaid interest accrued on the unpaid
principal balance of the Loan, calculated daily through the date of payment of
the purchase price, reduced by the amount of the unearned portion of any prepaid
interest of the Loan, and subject to such further computations and adjustments
as are set forth in the Purchase Agreement.
Section 5. Servicing. Seller shall release all servicing rights, and all
---------
rights to receive servicing fees and other servicing and servicing-related
income and benefits, with respect to each Loan delivered under this Agreement to
and for the benefit of Buyer. Seller acknowledges and agrees that Buyer shall,
from and after the Last Delivery Date, enjoy all servicing rights and all rights
to receive servicing fees and other no residual, contingent or other claims
thereon whatsoever remaining in Seller, except only at such time, if any, as
Seller repurchases the Loan from Buyer pursuant to the terms of this Agreement.
Seller hereby agrees to give written notice to the Borrower of the assignment of
the Loan, acknowledgement of the release of such servicing rights and rights to
receive servicing fees and other service and servicing-related income and
benefits to Buyer, in form satisfactory to Buyer.
Section 6. General Covenants, Warranties and Representations of Seller.
-----------------------------------------------------------
Seller hereby makes the following covenants, warranties and representations each
of which Seller acknowledges
6
<PAGE>
is a material inducement to Buyer to enter into this Agreement and to make
commitments. In connection therewith, Seller acknowledges that Buyer intends to
rely upon each such covenant, warranty and representation.
(a) Authorized Act of Seller, Etc. The execution of this Agreement by
-----------------------------
Seller and the performance of the obligations of Seller under this Agreement
have been duly authorized by the Board of Directors of Seller, or are within the
scope and coverage of a general authorization adopted by the Board of Directors
of Seller which is in full force and effect and the application of which
includes the officers of Seller signatory hereto: upon execution and delivery of
this Agreement by Seller, the obligations of Seller under this Agreement will be
the legal, valid and binding obligations of Seller, enforceable in accordance
with the terms of this Agreement; Seller is not subject to any charter, by-law,
indenture, mortgage, lien, lease agreement, instrument, order, judgment or
decree, or any other restriction of any kind or character, which would prevent
the consummation of the transactions contemplated by this Agreement; and the
execution of this Agreement and the consummation of the transactions
contemplated by this Agreement will not constitute a default under the
provisions of any of the foregoing or result in a violation of any law, rule,
regulation, order, judgement or decree to which Seller or its Property are
subject. There is no litigation pending or, to Seller's knowledge, threatened,
which, if determined adversely to Seller, would adversely affect, the execution
delivery or enforceability of this Agreement, or the ability of Seller to
perform all of its obligations under this Agreement or which would have a
material adverse effect on the financial condition of Seller. In general, Seller
carries a general loss reserve allocation on loans held in its portfolio. Seller
holds all federal, state and other licenses, authorizations, approvals, orders
and contracts, as are reasonably necessary to Seller's performance of its
obligations under this Agreement in compliance with applicable law and secondary
market requirements and is duly organized, validly existing, and in good
standing under the laws of the United States, and any applicable Permitted
State.
(b) Sale in the Ordinary Course of Business, Etc. The consummation of
--------------------------------------------
the transactions contemplated by this Agreement are in the ordinary course of
business of Seller and are not subject to the bulk transfer or other similar
statutory provision's in effect in any applicable jurisdiction.
(c) Delivery of Annual Financial Statements of Seller and Buyer.
-----------------------------------------------------------
Concurrently with the delivery of this Agreement, Seller is delivering to Buyer
and Buyer to Seller its statements of financial condition as of the last day of
each of the fiscal years of Seller first and second prior to the date of this
Agreement, and its statements of operations for the 12-month period then ended.
Each of the foregoing financial statements are correct and complete, have been
audited by independent certified public accountants, have been prepared in
accordance with generally accepted principles consistently applied throughout
the period involved, and present fairly the financial condition and results of
operations of Seller as of the dates, and for the periods, covered thereby.
(d) No Broker or Finder. Seller has not employed or otherwise engaged
-------------------
any broker or finder in connection with the negotiation or execution of this
Agreement; nor has Seller
7
<PAGE>
conducted the negotiations with respect to this Agreement nor with respect to
the transactions contemplated by this Agreement in such manner as to give rise
to any claims against Buyer for any brokerage commission, finder's fees or
similar payment.
(e) General Covenants, Warranties and Representation of Seller.
----------------------------------------------------------
(i) The Note, the Security Instrument, the Assignment of Security
Instrument and any other documents required to be delivered under this
Agreement for each Loan have been delivered to Buyer and any documents
required to be delivered to Buyer after the Closing Date of this
Agreement shall be delivered to the Buyer.
(ii) Subject to the effect of this Agreement and the documents
executed pursuant hereto, as of the date of delivery Seller is the
owner of record of each Loan and the indebtedness evidenced by each
Note.
(iii) The origination and collection practices used by the Seller
with respect to each Loan have been in all respects legal and prudent
and in compliance with all federal, and applicable Permitted State
laws, including without limitation, the federal Equal Credit
Opportunity Act, Regulation B, the federal Fair Debt Collection
Practices Act, and where applicable, the Robbins-Rosenthal Fair Debt
Collection Practices Act.
(iv) The Loans were selected without prejudice from among the
outstanding Loans in the Seller's portfolio as to which the covenants,
representations and warranties set forth in this Section 6 and Section
7 are applicable.
Section 7. Covenants, Warranties and Representations of Seller with
--------------------------------------------------------
Respect to Loans. With respect to each Loan delivered or to be delivered
- ----------------
by Seller to Buyer hereunder, Seller hereby makes the following covenants,
warranties and representations, each of which (i) shall be deemed to be made
anew by Seller, both at the time of offering the Loan for purchase to Buyer and
at the time of Delivery of the Loan to Buyer, and (ii) Seller acknowledges that
Buyer intends to rely upon each such covenant, warranty and representation.
(a) Terms of Loan, Etc. The Loan conforms in every material respect to
------------------
the requirements of Section 3 of this Agreement. The terms of the Note and/or
Security Instrument pertaining to the Loan have not been impaired, waived,
altered or modified in any respect and no instrument of waiver, alteration or
modification has been executed with respect to the Note or Security Instrument
pertaining to the Loan except as otherwise approved by Buyer in writing. The
Note and Security Instrument pertaining to the Loan are not subject to any right
of rescission, setoff, counter-claim or defense, nor will the operation of any
of the terms of the Note or Security Instrument, or the exercise of any right
thereunder, render the Note or Security Instrument unenforceable, in whole or in
part, or subject to any right or rescission, setoff, counter-claim or
8
<PAGE>
defense. The Security Instrument pertaining to the Loan has not been satisfied,
cancelled or subordinated, in whole or in part, or rescinded, and the Property
for the Loan has not been released from the lien of the Security Instrument, in
whole or in part, nor has any instrument been executed that would effect any
such release, cancellation, subordination or rescission. The Note for the Loan
is not and has not been secured by any collateral except the lien of the
corresponding Security Instrument. In the event the Security Instrument
constitutes a deed of trust, a trustee, duly qualified under applicable law to
serve as such, has been properly designated and so serves under the deed of
trust, and no fees or expenses are or will become payable by Buyer to such
trustee, except in connection with an occurrence following the date of Delivery
of the Loan.
(b) No Defaults, Etc. To the best of Seller's knowledge, there are no
----------------
defaults of any kind existing on the part of the Borrower under the Loan or the
Note and/or Security Instrument pertaining to the Loan. There has been no
delinquency of more than thirty (30) days in any payment by the Borrower on the
Loan during the twelve (12) month period immediately preceding delivery of the
Loan.
(c) Compliance with Applicable Law. The Loan, the Note, the Security
------------------------------
Instrument and all documents ancillary thereto are the legal, valid and binding
obligations of the Borrower under the Loan, and are enforceable in accordance
with their respective term and in full force and effect in accordance with all
applicable federal, state and local laws, rules, regulations and ordinances,
including, without limitation, the Federal Consumer Credit Protection Act, as
amended, the Federal Truth-in-Lending Act, as amended, and Regulation Z
thereunder, the Federal Equal Credit Opportunity Act, as amended, and Regulation
B thereunder, the National Flood Insurance Act, as amended, the Federal Flood
Disaster Protection Act, as amended, the Federal Fair Credit Reporting Act, as
amended, all applicable federal and state laws and regulations including,
without limitation all applicable usury and interest rate limitation laws.
(d) Condition of Property. No facts have come to the attention of
---------------------
Seller which would or should lead Seller to believe that there has been any
physical damage or deterioration to the Property for the Loan, or that the
Property is unoccupied, or is not occupied by the Borrower (if the commitment
requires that the Loan be an owner-occupied Loan), or that the Property has not
been constructed or is not being maintained in full accordance with applicable
zoning and building codes, regulations and ordinances.
(e) No Advances. Seller has not, and to the best of Seller's knowledge
-----------
no other person has, advanced any funds for and on behalf of the Borrower on the
Loan for the purpose of enabling the Borrower to make any required payments of
principal or interest on the Loan, or any tax, insurance, special assessment,
sewer, utility or similar payments with respect to the Property.
(f) No Litigation. There is no pending litigation and, to the best of
-------------
Seller's knowledge, no threatened litigation which may affect in any way, by
attachment or otherwise, the title or interest of Seller in and to the Note, the
Security Instrument or the Property for the Loan.
9
<PAGE>
(g) No Encroachments or Impairments. There are no encroachments or
-------------------------------
material impairment of the value or marketability of the Loan, the Note, the
Security Instrument or the Property for the Loan.
(h) Insurance in Effect. All policies of title insurance, hazard
-------------------
insurance, and flood insurance, if applicable, respecting the Loan or the
Property for the Loan are in full force and effect, have been issued by sound
and financially responsible insurance companies duly licensed and qualified to
transact business in accordance with the specific requirements of Section 3 of
this Agreement for hazard insurance, all such insurance coverage or insurers
insure Seller, among others, as the owner of the Loan as loss payee thereunder
and there are, to the best of Sellers knowledge, no facts or circumstances which
could provide a basis for revocation of any of the polices or defense to any
claim or claims made thereon.
(i) No Condemnation. Seller does not have any knowledge of any
---------------
existing, proposed or intended condemnation or taking of all or any portion of
the Property for the Loan, pursuant to the power of eminent domain, or any
proposed transfer in avoidance of the exercise of such power, or of any other
facts or circumstances which might tend to affect the value or marketability of
the Loan or of the Property for the Loan or the Borrower's ability punctually to
perform all of his duties and obligations under the Loan, including timely
payment of all installments of principal and/or interest thereunder, as
applicable.
(j) Knowledge of Other Circumstances, Etc. Seller has no knowledge of
-------------------------------------
any circumstances or conditions with respect to the Loan or the Note or Security
Instrument pertaining to the Loan, the Borrower under the Loan or such
Borrower's credit standing that can reasonably be expected to cause private
institutional investors to regard the Loan as an unacceptable investment, cause
the Loan to become delinquent or adversely affect the value or marketability of
the Loan.
(k) Covenants True and Not Misleading. No covenant, representation or
---------------------------------
warranty by Seller in this Agreement or in any written statement, exhibit or
certificate furnished to Buyer pursuant to this Agreement or in connection with
any sale of any Loan to Buyer by Seller contains or will contain any untrue
statement of any material fact, or omits or will omit to state any material fact
necessary to make the statements contained therein not misleading. Each and all
of the foregoing covenants, warranties and representations by Seller shall
continue and survive the Purchase by Buyer and the delivery to Buyer of each and
all of the Loans to which they pertain, with respect to each Loan, until the
Loan has been paid in full.
(l) Unless otherwise specifically stated hereunder, as of the Delivery
and with respect to each Loan:
(i) All payments required to be made up to the date 30 days prior
to the Date specified in the Purchase Agreement on such Loans have
been made, the Seller has not advanced funds, or induced, solicited or
knowingly received any advance of
10
<PAGE>
funds from a party other than the owner of the Property subject to the
Loan, directly or indirectly, for the payment of any amount required
by the Loan.
(ii) The terms of the Note and the Security Instrument have not
been impaired, waived, altered or modified in any respect. No
instrument of waiver, alteration or modification has been executed,
and no Borrower has been released, in whole or in part, except in
connection with an assumption agreement, which assumption agreement is
part of the Loan file and the terms of which are reflected in the
Purchase Agreement agreed to by Buyer.
(iii) The Note and the Security Instrument are not subject to any
set-off, counterclaim or defense including the defense of usury, nor
will the operation of any of the terms of the Loan and the Security
Instrument, or the exercise of any right thereunder, render the Note
and the Security Instrument unenforceable, in whole or in part, or
subject to any right of rescission, set-off, counterclaim or defense,
including the defense of usury and no such right of rescission, set-
off, counterclaim or defense has been asserted with respect thereto.
(iv) Any and all requirements of any federal, state or local law
applicable to the Loan have been complied with.
(v) The Security Instrument has not been satisfied, cancelled or
subordinated, in whole, or rescinded, and the Property has not been
released from the lien or the Security Instrument, in whole or in
part, nor has an instrument been executed that would effect any such
release, cancellation, subordination or rescission.
(vi) The Seller has a valid, subsisting and enforceable lien on
the Property, including the land and all buildings on the Property.
(vii) The Note and the related Security Instrument are genuine
and each is the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, reorganization or other similar
laws affecting creditors' rights in general and by general principles
of equity.
(viii) All parties to the Note and the Security Instrument had
legal capacity at the time to enter into the Loan and to execute and
deliver the Note and the Security Instrument, and the Note and the
Security Instrument have been duly and properly executed by such
parties.
(ix) The proceeds of the Loan have been fully disbursed and there
are no requirements for future advances thereunder, any and all
requirements set forth in the Loan documents have been complied with.
11
<PAGE>
(x) The Note and the Security Instrument have not been assigned
or pledged, and as of the Last Delivery Date, Seller has good and
marketable title thereto, as sole owner, except for normal warehousing
purposes.
(xi) To the best of the Seller's knowledge, there is no default,
breach, violation or event of acceleration existing under the Security
Instrument or the related Note and there is 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.
(xii) To the best of the Seller's knowledge, there is no
proceeding pending for the total or partial condemnation of the
Property.
(xiii) The related Security Instrument contains customary and
enforceable provisions such as to render the rights and remedies of
the holder thereof adequate for the realization against the Property
of the benefits of the security provided thereby, including, (i) in
the case of a Security Instrument designated as a deed of trust, by
trustee's sale, and (ii) otherwise by judicial foreclosure.
(xiv) The related Note is not and has not been secured by any
collateral except the lien of the corresponding Security Instrument.
(xv) If the Security Instrument 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
Security Instrument, or a valid substitution of trustee has been
recorded or may be recorded and no extraordinary fees or expenses are
or will become payable to the trustee under the deed of trust, except
in connection with default proceedings and a trustee's sale after
default by the Borrower.
(xvi) The Seller has no knowledge of any circumstances or
conditions not reflected in the representations set forth herein, or
in the Loan File with respect to the Loan, the Property or the
Borrower which in the Seller's opinion could reasonably be expected to
materially and adversely affect the value of the Property, or the
marketability of the Loan or cause the Loan to become delinquent or
otherwise in default.
(xvii) The Property is located in a Permitted State as designated
in the Purchase Agreement.
(xviii) The Loan is sub-serviced for the Seller by Ocwen.
12
<PAGE>
Section 8. Warranties and Representations of Buyer. Buyer hereby makes the
---------------------------------------
following warranties and representations, each of which shall be deemed to be
made anew by Buyer at the date of purchase by Buyer of each Loan purchased
pursuant to the commitment.
(a) Authorized Act of Buyer. The execution and Delivery of this
-----------------------
Agreement by Buyer, and the performance by Buyer of its obligations under this
Agreement, have been duly authorized by the Board of Directors of Buyer, or are
within the scope and coverage of a general authorization adopted by the Board of
Directors of Buyer which is in full force and effect and the application of
which includes the officers of Buyer signature hereto. Upon execution and
Delivery of this Agreement by Buyer, and acceptance pursuant to the terms set
forth in this Agreement by Seller, the obligations of Buyer of this Agreement
will be the legal, valid and binding obligations of Buyer, enforceable against
Buyer in accordance with the terms of this Agreement.
(b) No Broker or Finder. Buyer has not employed or otherwise engaged
-------------------
any broker or finder in connection with the negotiation or execution of this
Agreement; nor has Buyer conducted the negotiations with respect to this
Agreement or with respect to the transactions contemplated by this Agreement in
such manner as to give rise to any claims against Seller brokerage commission,
finder's fee or similar payment.
(c) Regulatory Authority. Performance by Buyer under the commitment is
--------------------
consistent with federal and state laws, rules and regulations applicable to
Buyer.
Section 9. Purchase Fee. Seller shall pay Buyer, in consideration of each
------------
Purchase, a nonrefundable fee in an amount set forth in the Purchase Agreement
payable concurrently with the execution of the Purchase Agreement. Payment of
such nonrefundable fee shall not affect the calculation of the purchase price
under Section 4(d) of this Agreement.
Section 10. Certain Repurchase Obligations of Seller. As a material
----------------------------------------
inducement to Buyer to purchase the Loans, Seller hereby unconditionally agrees,
in the event of any breach of any covenant, warranty or representation arising
under Section 6 or Section 7 of this Agreement, to repurchase the affected Loans
from Buyer, without recourse and promptly upon demand of Buyer, at a price
equal, for each Loan, to the sum of the unpaid principal balance thereof,
multiplied by the Purchase Price Factor (as set forth in the Purchase
Agreement), plus all accrued and unpaid interest accruing thereon to the date of
repurchase, reduced by the amount of the unearned portion of any unpaid interest
on the Loan. Upon repurchase, Buyer shall deliver to Seller the Notes evidencing
the Loans repurchased, the Security Instruments securing the Loans repurchased
and related documents and materials covering the Loans repurchased. Seller shall
fully reimburse Buyer immediately upon the demand of Buyer for all out-of-pocket
costs and expenses incurred by Buyer in connection with any actions taken by
Buyer with respect to the repurchase of any Loans under this Section 10,
including, without limitation, Buyer's reasonable attorneys' fees.
Section 11. Opinion of Counsel. Intentionally Deleted.
------------------
13
<PAGE>
Section 12. Scope of Agreement. This Agreement shall govern the purchase by
------------------
Buyer and the sale by Seller of all Loans so purchased and sold pursuant to the
Purchase Agreement, subject as to each Purchase, only to such additional,
alternative or mandatory terms and provisions of this Agreement as are set forth
in the Purchase Agreement.
Section 13. Board of Directors Resolutions of Seller. Concurrently with the
----------------------------------------
delivery of this Agreement by Seller to Buyer, Seller shall deliver to Buyer, or
not later than the first delivery or submission for approval of any Loan
hereunder and within 45 days from the execution of this Agreement, Seller will
deliver to Buyer, a copy of resolution of the Board of Directors of Seller,
certified by the secretary of Seller, to the effect that the execution of this
Agreement by Seller and the performance of the obligations of Seller under this
Agreement have been duly authorized by the Board of Directors of Seller, or are
within the scope and coverage of a general authorization adopted by the Board of
Directors of Seller which is in full force and effect and the application of
which includes the officers of Seller signatory hereto.
Section 14. Miscellaneous Provisions.
------------------------
(a) Expenses. Except as specifically provided to the contrary in this
--------
Agreement, Buyer and Seller shall each bear his own costs and expenses in
connection with the negotiation and preparation of this Agreement and the
performance by each of Buyer and Seller of its respective obligations arising
under this Agreement.
(b) No Waiver. Buyer may, at its sole option, waive any of its rights,
---------
powers or remedies under this Agreement only by an instrument executed in
writing by a duly authorized officer. No waiver of any default or breach by
Seller hereunder shall be implied from any omission by Buyer to take any action
on account of such breach or default if the breach of default continues or is
repeated. No express waiver under this Section 14(b) shall affect any default or
breach other than the default specified in the waiver, and the waiver shall be
operable only for the time and to the extent therein expressly stated. Any
forbearance or delay by Buyer in exercising any right, power or remedy under
this Agreement shall not be deemed a waiver thereof, and any single or partial
exercise of any right, power or remedy shall not preclude the further exercise
thereof.
(c) No Limitation of Remedies. Buyer and Seller each expressly
-------------------------
declines to limit its remedies under this Agreement to recourse under the terms
of this Agreement, including, without limitation, as to Buyer, the terms of
Section 10 of this Agreement, and in connection therewith Buyer and Seller
acknowledge and agree that in the event of a breach of this Agreement by either
party, the other shall be entitled to pursue any and every remedy available to
it at law or in equity, as well as any and every remedy available to it under
this Agreement, and to that end all of such remedies shall be deemed cumulative
and not exclusive. Without limitation upon the generality of the foregoing,
Buyer and Seller acknowledge and agree that, if Seller breaches Seller's
obligation under Section 4 of this Agreement to deliver Loans pursuant to the
terms of the Purchase Agreement, Buyer shall be entitled to pursue any and every
of the foregoing remedies.
14
<PAGE>
(d) Integration, Etc. The making, execution and delivery of this
----------------
Agreement by each of Buyer and Seller have not been induced by any covenants,
warranties, representations or agreements other than those set forth in this
Agreement. The entire understanding of the parties with respect to the subject
of this Agreement is embodied in this Agreement, and there are no further or
other agreements or understandings, written or oral, in effect between the
parties relating to the subject matter of this Agreement, unless expressly
referred to by reference in this Agreement. This Agreement may be amended or
modified only by a writing executed by the duly authorized officers of Buyer and
Seller.
(e) Severability and Applicable Law. Whenever possible, each provision
-------------------------------
of this Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement shall be
prohibited or invalid under applicable law, the provision shall be ineffective
to the extent of the prohibition or invalidity without invalidating the
remainder of the provisions or the remaining provisions of this Agreement. This
Agreement shall be governed by and construed under the laws, rules and
regulations relating to thrift and loan associations; provided however, that, to
the extent that this Agreement shall be deemed to be governed by or construed
under state law, this Agreement shall be governed by and construed under the
laws of the State of California.
(f) Attorney's Fees. In the event of the bringing of any action or
---------------
suit by either Buyer or Seller against the other, by reason of any breach of any
provision of this Agreement, on the part of the other, then and in that event
the party in whose favor final judgment shall be entered by a court of competent
jurisdiction shall be entitled to have and recover of and from the other party
to this Agreement all costs and expenses of suit, including court costs and
actual attorneys' fees incurred.
(g) Notices. Any notices, requests, demands, payment or other
-------
communication under this Agreement shall be in writing and shall be deemed to
have been duly given if delivered in person or by United States Mail, certified
or registered, with return receipt requested, or otherwise actually delivered:
(i) If to Buyer, to:
Fremont Investment & Loan
175 North Riverview Drive
Anaheim, California 92808
Attention: Kyle Walker
Senior Vice President
15
<PAGE>
(ii) If to Seller, to:
-------------------------------------
-------------------------------------
-------------------------------------
Attention:___________________________
---------------------------
or to such other address or addresses as may be furnished in writing by either
party, and such notice or communication shall be deemed to have been given as of
the date so mailed or actually delivered.
(h) Assignments. All of the terms and conditions of this Agreement
-----------
shall be binding upon and inure to the benefit of Buyer and Seller and their
respective successors and assigns; provided, however, that Seller shall neither
assign nor delegate any of its rights, privileges or duties arising under this
Agreement without the prior written consent of Buyer, and any attempted or
purported assignment or delegation without prior written consent shall be null
and void abinitio and constitute a material breach and default by Seller
--------
of its obligations under this Agreement.
(i) Termination. This Agreement shall be terminated only by thirty
-----------
(30) calendar days' written notice of such termination given by either party to
the other. Such notice shall not require any cause. This Agreement shall
continue in full force until such notice is given and thirty (30) calendar days
then elapse, after which time this Agreement shall be terminated for all
purposes except unsatisfied Purchase then outstanding as well as all Loans
thereafter delivered, substituted, repurchases, etc., thereunder and except with
regard to Loans heretofore sold to Buyer with respect to which the covenants,
warranties and representations of Seller set forth in Sections 6 & 7, inter
alia, shall survive termination.
(j) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, each of Buyer and Seller has executed this Agreement as
of the date first above written.
FREMONT INVESTMENT & LOAN
("Buyer")
By: /s/ [SIGNATURE ILLEGIBLE]
--------------------------
Title:
-----------------------
16
<PAGE>
UNITED PANAM MORTGAGE
("Seller")
By: /s/ Blair F. Kenny
--------------------------
Title: Senior Vice President
-----------------------
By: /s/ [SIGNATURE ILLEGIBLE]
--------------------------
Title: President
-----------------------
17
<PAGE>
EXHIBIT 10.101
PAN
AMERICAN
- --------
BANK, FSB
December 8, 1998
Mr. Ray C. Thousand
30 Bridge Port Road
Newport Beach, CA 92657
Re: Employment Agreement
Dear Mr. Thousand:
This letter agreement and attachments hereto, (collectively the "Agreement") set
forth the terms and conditions of your employment with Pan American Bank, FSB
(the "Bank") and its subsidiary, United Auto Credit Corporation ("UACC"), both
of which may be referred to interchangeably hereinafter as "Employer." By
signing this Agreement, you will be agreeing to these terms. It is important
that you understand clearly both what your benefits are and what is expected of
you by Employer. The effective date of this Agreement (the "Effective Date")
shall be as of December 8, 1998.
1. Term. This Agreement shall have a term of three (3) years, commencing as
of the Effective Date (the "Term"). Where used herein, "Term" shall refer
to the entire period of your employment by Employer from and after the
Effective Date, whether for the period provided above or as extended or
terminated earlier as hereinafter provided.
2. Duties. You shall hold the office of President of the Bank's automobile
finance subsidiary UACC. You shall perform the duties customarily
performed by individuals holding a similar title with other financial
institutions or as otherwise may be agreed upon by the Bank and you from
time to time. During the Term hereof, you shall perform the services
herein contemplated faithfully, diligently and to the best of your ability,
in compliance with instructions and policies of the Bank's senior
management, the Bank's Board of Directors, the Bank's Federal Charter and
Bylaws and with all applicable laws and regulations.
3. Compensation.
a) Base Salary. For your service rendered to the Bank or any subsidiary
corporation hereunder, during the Term hereof, the Bank shall pay or
cause to be paid a base salary to you at the rate of $170,000 per
annum from December 8, 1998 to December 7, 1999, $175,000 per annum
from December 8, 1999 to December 7, 2000 and $180,000 per annum from
December 8, 2000 to December 7, 2001, payable in conformity with the
Bank's normal payroll periods and procedures.
<PAGE>
Mr. Ray C. Thousand
December 8
Page 2
b) Bonus. In addition to the base salary provided for under Section
3(a) above, you shall be entitled to annual bonus compensation in
accordance with the incentive compensation formula set forth in
Exhibit A to this Agreement. Among other things, the incentive
compensation formula establishes certain performance criteria and
sales objectives by which the amount of your bonus compensation, if
any, is to be determined.
c) Automobile Allowance. The Bank shall provide you during the Term of
this Agreement with an automobile allowance of Two Hundred Dollars
($200) per month.
d) Options. Options will vest according to the separate INCENTIVE
OPTION AGREEMENT dated March 25, 1998.
4. Other Benefits. During the Term hereof and unless otherwise agreed to by
the Bank and you:
a) Vacation. You shall be entitled to a total of three (3) weeks paid
vacation, the amount and term of which shall be determined in
accordance with the policies of Employer as in effect from time to
time.
b) Group Medical, Life Insurance and Other Benefits. You will be
eligible for the medical, dental, vision, life insurance and long-
term disability plans that are generally applicable to your
employment classification.
5. Business Expenses. You shall be entitled to reimbursement by Employer for
any and all ordinary and necessary business expenses reasonably incurred by
you in the performance of your duties and in acting for Employer during the
Term of this Agreement, provided that you furnish to Employer adequate
records and other documentation as may be required for the substantiation
of such expenditures as a business expense of the Bank.
6. Termination.
a) Termination for Cause. The Bank's Board may for cause terminate your
employment at any time during the Term of this Agreement. In such
event, all of your rights under this Agreement shall terminate and
you shall have no right to receive compensation, and other benefits
shall cease for any period after the effective date of such
termination for cause. Bonus compensation unpaid shall be forfeited.
Termination for cause shall be defined as your personal dishonesty,
willful misconduct, breach of fiduciary or duty of loyalty,
continuing intentional or habitual failure to perform stated duties,
violation of any law (other than minor traffic violations or similar
misdemeanor offenses), rule or regulation adopted by the Office of
Thrift Supervision, Federal Deposit Insurance Corporation or
<PAGE>
Mr. Ray C. Thousand
December 8
Page 3
other regulatory agency with jurisdiction over the Bank, any
judgment, ruling or decree by any court of competent jurisdiction or
administrative body that precludes or impairs your ability to perform
the services contemplated by this Agreement or any material breach by
you of any provision of this Agreement.
b) Termination Without Cause. Employer may terminate your employment
without cause at any time during the Term of this Agreement. In the
event that the Bank terminates your employment without cause, you
shall be entitled to receive as severance compensation an amount as
provided in Exhibit B. The severance payment under this Section 6(b)
shall be provided in a lump sum or, at your election, in equal
monthly installments for a period not to exceed six (6) months from
the date of termination. This payment shall be in lieu of any and all
other compensation due under the agreement unless previously vested
or earned, except the amount of any bonus compensation payable to you
under Section 3(b) hereof, shall be prorated through the date of
termination.
c) Compliance with Law and Regulation. You and Employer, expressly
acknowledge and agree that any payments made to you pursuant to this
Agreement or otherwise are subject to and conditioned upon compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
d) Suspension and Removal 0rders. If you are suspended and/or
temporarily prohibited from participating in the conduct of
Employer's affairs by notice served under Section 8(e)(3) or 8(g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. Section 1818 (e)(3)
and (g)(1)), the Bank's obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate
proceeding. If the charges in the notice are dismissed, the Bank may
in its discretion: (I) pay you all or part of the compensation
withheld while its obligations under this Agreement were suspended;
and (ii) reinstate (in whole or in part) any of its obligations which
were suspended. If you are removed and/or permanently prohibited from
participating in the conduct of Employer's affairs by an order issued
under Section 8(e)(4) or 8(g)(l) of the Federal Deposit Insurance Act
(12 U.S.C. Section 1818(e)(4) or (g)(1)), all obligations of the Bank
under this Agreement shall terminate as of the effective date of the
order, but vested rights of the parties shall not be affected.
e) Termination by Default. If Employer is in default (as defined in
Section 3(x)(1) of the Federal Deposit Insurance Action (12 U.S.C.
Section 18133(x)(l)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the parties
shall not be affected.
<PAGE>
Mr. Ray C. Thousand
December 8
Page 4
f) Supervisory Assistance or Merger. All obligations under this
Agreement shall be terminated, except to the extent that it is
determined that continuation of the Agreement is necessary for the
continued operation of Employer: (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee, at the
time that the Federal Deposit Insurance Corporation enters into an
agreement to provide assistance to or on behalf of Employer under the
authority contained in Section 13(c) of the Federal Deposit Insurance
Act (12 U.S.C. Section 1823(c)); or (ii) by the Director or his or
her designee, at the time that the Director or his or her designee
approves a supervisory merger to resolve problems related to the
operation of Employer or when Employer is in an unsafe or unsound
condition. All rights of the parties that have already vested,
however, shall not be affected by such action.
g) Disability. In the event that you shall fail, because of illness,
incapacity or injury, to render the services contemplated by this
Agreement for three (3) consecutive calendar months, or for shorter
periods aggregating four (4) months in any twelve (12) month period,
your employment hereunder may be terminated by written notice from
Employer to you. In the event that your employment is terminated
under this Section 6(g), you shall receive the difference between any
disability payments provided through insurance plans offered by
Employer, if any, provided you have enrolled in such plans and paid
the cost thereof, and your base salary asset forth in Section 3(a)
hereof, for six months after notice from Employer, plus the amount of
any bonus compensation payable to you under Section 3(b) hereof,
prorated through the date of termination. Such termination shall not
affect any rights which you may have pursuant to any insurance or
other death benefit, or any stock option plans or options thereunder,
which rights shall continue to be governed by the provisions of such
plans and arrangements.
h) Death. If your employment is terminated by reason of your death,
this Agreernent shall terminate without further obligations of
Employer to you (or your heirs or legal representatives) under this
Agreement, other than for payment of: (i) your base salary (as set
forth in Section 3(a) hereof) through the date of termination; (ii)
the amount of any bonus compensation payable to you under Section
3(b) above, prorated through the date of termination; (iii) any
compensation previously deferred by you; (iv) any accrued vacation
and/.or sick leave pay; and (v) any amounts due pursuant to the terms
of any applicable welfare benefit plan. All of the foregoing amounts
shall be paid to your estate or beneficiary, as applicable, in a lump
sum in cash within thirty (30) days after the date of termination or
earlier as required by applicable law.
<PAGE>
Mr. Ray C. Thousand
December 8
Page 5
7. Disclosure or Use of Employer's Trade Secrets. During the Term
hereof, you will have access to and become acquainted with what you
and Employer acknowledge are trade secrets or confidential or
proprietary information of Employer (including but not limited to
products, employees, practices, policies or process). You shall not
use or disclose any trade secrets, confidential or proprietary
information, directly or indirectly, or cause them to be used or
disclosed in any manner, except as may be required or requested by
Employer, by court order or under applicable law or regulation. This
paragraph shall survive the termination of this agreement.
8. Return of Documents. You expressly agree that all manuals,
documents, files, reports, studies or other materials used and/or
developed by you for Employer during the Term of this Agreement or
prior thereto while you were employed by Employer are solely the
property of Employer, and that you have no right, title or interest
therein. Upon termination of this Agreement, you or your
representative shall promptly deliver possession of all such
materials (including any copies thereof) to Employer.
9. Notices. All notices, demands or other communications hereunder
shall be in writing and shall be deemed to have been duly given if
delivered in person, or sent by United States mail, certified or
registered, with return receipt requested, if to you, addressed to
you at your last address residence as shown in the records of
Employer, and if to Employer, addressed to the President of Employer
at Employer's principal office.
10. Governing Law and Jurisdiction. This Agreement, the legal
relations between the parties and any action instituted by any
party arising under or in connection with this Agreement, shall
be governed by and interpreted in accordance with the laws of
the State of California.
11. Arbitration. Any dispute, controversy or claim arising out of
or in respect of this Agreement (or its validity,
interpretation or enforcement), the employment relationship or
the subject matter hereof shall at the request of either party
be submitted to and settled by arbitration conducted at a
mutually convenient office of the Judicial Arbitration &
Mediation Services, Inc. ("JAMS"). Employer and Employee may
agree on a retired judge from the JAMS panel. If they are
unable to agree upon a retired judge, JAMS will provide a list
of three available judges and each party may strike one. If two
of the three judges are stricken, the remaining judge will
serve as arbitrator. If two arbitrators remain, the first judge
listed shall serve as arbitrator. Employer and Employee agree
that arbitration must be initiated within two years after the
claim breach occurred and that the failure to initiate
arbitration within the two-year period constitutes an absolute
bar to the institution of any new proceedings related to such
alleged breach. The aggrieved party can initiate arbitration by
sending written notice of any intention to arbitrate by
registered or certified mail to all parties and to JAMS. The
notice must contain a description of the dispute, the amount
involved and the remedy sought. The prevailing party in such
proceeding will be entitled to the reasonable attorneys'
<PAGE>
Mr. Ray C. Thousand
December 8
Page 6
fees and expenses of counsel and costs incurred by reason of
such arbitration..
12. Benefit of Agreement. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that you
may not assign any interest in this Agreement without the prior
written consent of Employer.
13. Captions. Captions and paragraph heading used in this
Agreement are for convenience only and shall not be used in
interpreting this Agreement.
14. Entire Agreement. This Agreement contains the entire agreement
of the parties with respect to your employment by Employer, and
it expressly supersedes any and all other agreements, either
oral or written, relating thereto.
15. Severability. Should any provision of this Agreement for any
reason be declared invalid, void or unenforceable by a court of
competent jurisdiction, the validity and binding effect of any
remaining portions of this Agreement shall remain in full force
and effect as if this Agreement had been executed with such
invalid, void or unenforceable provisions eliminated; provided,
however, that the remaining provisions still reflect the intent
of the parties to this Agreement.
16. Amendments. This Agreement may not be amended or modified
except by a written agreement signed by you and the President
of the Bank. This Agreement and any amendment thereof may be
executed in counterparts.
17. Non-Solicitation. Employee agrees that for a period of one
year after the termination of employment, except in the case of
a termination pursuant to Section 6(b) hereof, Employee will
not, on behalf of the Employee or on behalf of any other
individual, association or entity, call on any of the customers
of Employer for the purpose of soliciting or inducing any of
such customers to acquire (or providing to any of such
customers) any product or service provided by Employer, nor
will Employee in any way, directly or indirectly, as agent or
otherwise, in any other manner solicit, influence or encourage
such customers to take away or to divert or direct their
business to Employee or any other period or entity by or with
which Employee is employed, associated, affiliated or otherwise
related.
18. Employees. Employee agrees that for a period of two years
after the termination of Employee's employment, except in the
case of termination pursuant to Section 6(b) hereof, Employee
will not, directly or indirectly, disrupt, damage, impair, or
interfere with Employer's business by soliciting, influencing,
encouraging or recruiting any employee of Employer to work for
Employee or any Employee Related Entity.
<PAGE>
Mr. Ray C. Thousand
December 8
Page 7
We look forward to your continued successful association with the Bank. In
order to confirm your agreement with and acceptance of the terms and conditions
set forth above, please sign and date one copy of this Agreement where indicated
below and return it to the Bank's Human Resources Department. The other copy is
for your records.
Very truly yours,
/s/ Lawrence J. Grill
Lawrence J. Grill
President and CEO
I agree to the terms of employment set forth in this Agreement subject to
approval of the Pan American Bank Board of Directors.
/s/ Ray C. Thousand 1/28/99
____________________ ______________________________
Employee Date
<PAGE>
EXHIBIT A
Bonus Calculations
GOALS
- -----
December 31,
1999
------------------
Volume for at least one month $10,000,000
Pre-tax profit $ 4,600,000
Average delinquency (30+ contractual) of less than 2.25%
Average net charge-off (charge-offs vs. average O/S for the
period) less than 5.25%
BONUS
- -----
Bonus will be calculated as follows:
Year 1
- ------
25% of base salary if pre-tax profit of $3,450,000 is achieved and all other
goals are essentially met.
50% of base salary if pre-tax profit of $3,680,000 is achieved and all other
goals are essentially met.
75% of base salary if pre-tax profit of $4,140,000 is achieved and all other
goals are essentially met.
100% of base salary if pre-tax profit of $4,600,000 is achieved and all other
goals are essentially met.
The bonus calculation, including the amounts to be used for the goals as set
forth above, shall be mutually agreed upon in years 2 and 3 based on the
approved budget for UACC.
"Pre-tax profit" shall be used upon the amount reflected in the Bank's internal
financial statements for UACC without any allocation for Bank Corporate
overhead, but including Cost of Funds charged by the Bank at 7% and assuming 6
to 1 leverage.
Attainment of goals/bonus assumes that there are no material changes in policy
by the Bank that might materially affect or limit the Auto Finance Division
Business Plan. If any material changes in policy are made by the Bank, and not
concurred in by you, then goals and bonus calculation will be adjusted
accordingly upon mutual agreement of the parties.
Employee must be on the payroll at the end of the calendar year to be eligible
for payment of a bonus regardless of length of service or reason for termination
or resignation unless provided for specifically in the Employment Agreement. If
the Employee is discharged by the Company for "Willful Misconduct" or any other
reasons set forth in paragraph 6(a) of the
<PAGE>
Mr. Ray C. Thousand
December 8
Page 9
Employment Agreement, any right of the Employee to a bonus shall be forfeited
even if the employee is on the payroll at the end of the calendar year.
Bonus payments will be made within 60 days after the end of the calendar year
allowing for the review of the results of operations.
<PAGE>
EXHIBIT B
Severance Compensation
Upon Termination Without Cause
Pursuant to 6(b)
If termination occurs during the first two years of the term of this contract,
the payment shall be equal to twelve (12) months salary at the then current base
salary and prorated bonus.
If termination occurs in the third year, the amount paid shall be the actual
amount of total months base salary remaining to be paid to the end of the term
of the contract and prorated bonus.
<PAGE>
EXHIBIT 10.102
Pan American
Bank, FSB
San Mateo, California
Service Agreement Between FPS GOLD/(R)/
And Pan American Bank, FSB
June 5, 1998
<PAGE>
FPS GOLD/(R)/
ON-LINE COMPUTER SERVICE AGREEMENT
This Agreement dated June 19, 1998, is made and entered into between DHI
Computing Service, Inc., a Utah corporation, doing business through a division
known as FPS GOLD (hereinafter referred to as "FPS"), and the following user
(hereinafter referred to as "User") of the computer services described herein:
<TABLE>
<S> <C>
User's Name: Pan American Bank, FSB.
Address: 1300 South El Camino Real Suite 320
City, State, Zip Code: San Mateo, CA 94402-2962
Telephone: 650-345-1800
</TABLE>
This agreement sets forth the terms and conditions under which FPS shall process
data for the User and provide related services as herein set forth. In
consideration of the mutual promises set forth herein, the parties agree as
follows:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1. SERVICES
1.1 Connection of Remote Units to CPU. FPS has central processing computer
equipment ("CPU") capable of communicating with FPS-approved in-house electronic
computer equipment ("remote units") in an on-line mode. The equipment presently
constituting the CPU and the related computer equipment of FPS which is integral
to FPS' utilization of the CPU for the benefit of User is described in Exhibit
"A." Pursuant to this Agreement, FPS will permit the User to connect its remote
units to the CPU and receive the services and the reports described in this
Agreement. The remote units which the User presently has available to it or
which the User will promptly acquire are also set forth in Exhibit "A." Such
remote units are approved by FPS as being of the type capable of transmitting
data to and receiving reports from FPS and functioning as remote units under
this Agreement.
1.2 Reports and Services; Data Transmission. FPS agrees to process data
transmitted to it by the User and with the data base thereby produced to provide
the User with reports and services described in Exhibit "B." Standard reports
and services described in Exhibit "B" shall be provided automatically and
optional reports and services described in Exhibit "B" shall be provided upon
the User's written request. The User agrees to transmit and deliver to FPS'
processing center the data required for FPS to process such data and produce
said reports. The data shall be transmitted and delivered in the format
reasonably designated and approved by FPS. The User assumes full responsibility
for the timely and accurate transmission and delivery of the data. If the data
transmitted and delivered to FPS is incorrect, incomplete, or in a format
unapproved by FPS, then the User agrees to pay reasonable charges to FPS for any
services which it may render at its option, but without obligation to do so, in
preparing or correcting the data or the format of the data.
1.3 On-Line Transmission. The on-line transmission hours shall be from 8:30
a.m. to 7:30 p.m., Monday through Friday, except on those state and federal
holidays when the User is permitted to be closed for business under applicable
laws. On-line transmission shall also be available from 9:00 a.m. to 4:00 p.m.
on Saturdays, except those holidays as described above, at the additional charge
set forth in Exhibit "C." All times set forth herein are Mountain Time
(Standard or Daylight, as may then be in effect).
1.4 Printed Forms. FPS shall provide standard paper stock for reports printed
by FPS at its processing center or its other printing facilities. If the User
wants its reports printed on social preprinted forms, or on custom FPS laser-
printed forms, such forms shall be supplied and paid for by the User. All such
special forms shall be subject to FPS' approval as to format. FPS agrees, at
the User's request, to store a reasonable supply of such User forms at the FPS
printing facility, and the User or its designated agent shall have the sole
responsibility for the replenishment of said supply. The User shall provide all
standard paper stock, as well as special forms, for reports printed by remote
units at the premises of the User.
1.5 Availability of Reports. The daily reports described in Exhibit "B" will
normally be available to the User by 8:00 a.m., Mountain Time, on the first day
on which the User is open for business after the day on which the data reflected
on the reports was transmitted to FPS. If the User has on-line remote printing
capability, FPS will, at the Users' request, transmit the daily reports to the
User on-line. If the User does not have or elects not to use remote printing
capability, the User shall have full responsibility for the pickup of reports
from FPS' processing center in Provo, Utah, or at any remote printing facility
of FPS which the User considers more convenient to it, whether using a common
carrier or other courier. As a convenience to the User, FPS may from time
totime, at its option and at the request of the User, deliver reports to the
User at locations and for a fee to be agreed upon. If FPS delivers the reports
and if agents of the User who are to receive the reports are not present at the
time of delivery, the reports may nevertheless be left at the agreed locations
and the User assumes all risk of loss with respect thereto, unless the User and
FPS have agreed in writing in advance on some other procedure to be followed in
the event of absence of the User's agents. The User may use the on-line mode to
generate reports in addition to those described in Exhibit "B."
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1.6 Examination of Reports by the User; Notification of Errors. The User
agrees to follow the procedures outlined in FPS instruction manuals, bulletins,
and orientation classes to monitor the accuracy and completeness of the reports
received from FPS pursuant to this Agreement. Additionally, the User agrees to
establish its own internal accounting and other control procedures necessary to
properly balance the reports on a daily basis. The User shall promptly, and in
no event later than 96 hours after FPS has made a report available to the User,
notify FPS of any errors or omissions in the report.
1.7 Obligation of FPS to Modify Reports and Services. FPS agrees to use prompt
and commercially reasonable efforts to provide raw reports and services or
modify existing reports and services as are required by any governmental
regulatory agency having jurisdiction over the User. FPS agrees to notify the
User of new reports and services and of modifications to reports and services.
The User shall pay its pro rata share (determined by the number of User customer
accounts serviced by FPS in relation to the total number of customer accounts
serviced by FPS for all of its financial institution users subject to such
regulatory agency) of reasonable charges (as that term is defined in Section 9.2
herein) for the development of such new or modified reports or services. The
User shall also pay reasonable charges for the use of such new or modified
reports or services. All software programs for such new or modified reports and
services shall be the sole and exclusive property of FPS, as provided in Section
5.10 herein, except as otherwise agreed in writing by the parties.
1.8 Right of FPS to Modify Reports and Services. In addition to modifications
made under the circumstances described in Section 1.7, FPS reserves the right to
modify its reports and services under this Agreement from time to time as long
as no such modification will materially diminish the quality of reports and
services provided hereunder. FPS will notify the User of any modifications made
by it.
1.9 Additional Reports and Services Requested by User. Upon written request
from the User from time to time, but subject to agreement by FPS after receipt
of any such request, FPS shall use its best efforts to provide and perform
additional data processing reports and services which the User may reasonably
need. The User agrees to pay reasonable charges for the development and use of
such additional reports and services.
2. EQUIPMENT
2.1 Remote Units. The User shall obtain a sufficient number of FPS-approved
remote units and appropriate telephone data communications equipment so that the
User can transmit on-line to FPS the data to be processed by FPS under this
Agreement and receive from FPS the on-line data at the remote units. FPS has no
obligations whatever with respect to the remote units or the telephone
communications equipment.
2.2 Transmission Lines. Except as set forth in Section 7.6, FPS shall arrange
with the appropriate telephone companies for the necessary
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transmission lines for the transmission of data between the User and FPS, but
FPS has no other obligations whatever with respect to such transmission lines.
2.3 Telephone Company Charges. The User shall pay all telephone company
charges for lines and equipment used in connection with the on-line services
provided by FPS. If any part of such lines or equipment is used jointly by the
User and any other party, FPS shall allocate the portion of the charges related
thereto which shall be paid by the User, and any such allocation reasonably made
by FPS shall be binding on the User. The User shall promptly reimburse FPS for
any telephone company charges to be paid by the User which are initially paid by
FPS, together with a reasonable charge for FPS overhead.
3. TRAINING
3.1 Conversion Training. FPS shall provide to the User eight (8) person weeks
of training (or the equivalent of 320 hours of training by one individual) for
key personnel of the User who will be responsible for training other employees
of the User. Except as the parties otherwise agree in writing, five (5) of the
person weeks of conversion training will be at FPS' facilities in Provo, Utah,
and the remaining three (3) person weeks of conversion training will be at the
User's facilities. The charge which the User agrees to pay FPS for such
training is $ 0 . All training shall be at times reasonably
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convenient to both parties. Each party shall pay its own travel and related
living expenses. FPS estimates that the amount of training set forth above will
be needed to train each qualified key employee in the use of the FPS systems.
However, additional training may be needed depending upon such employee's
qualifications and the amount of time and effort exerted by such employee in
learning the systems outside of the training sessions. The User agrees to
require its employees being trained to follow FPS' reasonable training
recommendations, including recommendations for outside study and other training
activities.
3.2 Systems Manuals. FPS shall provide to the User, without additional charge,
three sets of detailed systems manuals for the reports and services described in
Exhibit "B." Prior to the execution of this Agreement, the User has received
and has had opportunity to carefully review FPS' current systems manuals. FPS
shall periodically send to the User updates for the manuals as new or modified
reports and services are provided by FPS.
4. CHARGES FOR SERVICES
4.1 Charge for Conversion of Records. For conversion of the User's records
from its existing processor to FPS' on-line system, the User agrees to pay FPS a
one-time charge of $ 0 . This amount is payable at the time of execution
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of this Agreement and is in addition to other charges payable hereunder. The
User agrees to assist with the conversion procedure in whatever ways FPS
reasonably requests. The User shall be responsible for verifying the accuracy
of the data base after its conversion and for notifying FPS of any errors
therein. FPS shall be responsible for the correction of errors within a
reasonable time after receipt of such notification to the extent the errors are
the result of FPS programming. The User shall be responsible for the correction
of errors which are not the result of FPS programming.
4.2 Amount of Charges. The charges to be paid to FPS by the User for the
reports and services described in Exhibit "B" are set forth in Exhibit "C." All
of the charges shall be subject to increase by FPS from time to time upon at
least 90 days advance written notice; provided, however, in no event may any
increase be effective prior to one year from the date of this Agreement, and in
no event may the increased charges exceed the charges set forth in Exhibit "C"
by a percentage which exceeds the percentage increase in the Consumer Price
Index ("CPI-U") between the month in which this Agreement is executed and the
most recent month preceding the notification of such increased charges for which
the CPI-U is available. The CPI-U means the "Consumer Price Index -Seasonally
adjusted U.S. City Average For All Items For All Urban Consumers (1982-84=100)"
published by the Bureau of Labor Statistics of the United States Department of
Labor or, if such index is unavailable, any other consumer price index
reasonably selected by FPS.
4.3 Statements for Services. Statements for services described in Exhibit "B"
will be submitted to the User monthly for the preceding calendar month, and the
User agrees to pay such statements, without any offset or deduction, within 10
working days after the date of receipt thereof. Statements for telephone
company charges pursuant to Section 2.3 and statements for other amounts to be
paid by the User pursuant to this Agreement will also be submitted to the User
monthly and shall be paid to FPS within 10 working days after the date of
receipt thereof.
4.4 Late Charges. The User agrees that, at the option of FPS, the amount of
any late payment shall bear interest at the rate of 1 1/2 percent per month (or
fraction thereof) from the due date until paid; provided, however, in no event
shall the amount of interest exceed the maximum permitted by applicable law.
4.5 Taxes. The User agrees to pay when due all sales, use, or other taxes
(except a tax on FPS' net income) in connection with the transactions
contemplated by this Agreement. Failure of FPS to collect any such tax in
connection with any statement for services to which it relates shall in no way
release the User of its obligation under this Section 4.5.
5. TERM OF AGREEMENT AND DEFAULT
5.1 Initial Term. The initial term of this Agreement shall commence on the
date of this Agreement and continue until three years after the User goes on-
line with the CPU in connection with its regular business.
5.2 Extended Terms. The initial term of this Agreement shall automatically be
extended for additional successive terms of three years each unless either party
gives written notice of its election not to extend at least 180 days prior to
the end of the initial term or any extended term. For purposes of this
Agreement, the "term" includes the initial term and each extended term.
5.3 Federal and State Agencies. If at any time any provision of this Agreement
would put the User in violation of a mandatory requirement of any federal or
state governmental agency and if FPS is unwilling, within 30 days after written
notice thereof from the User, to amend this Agreement to eliminate such
violation, then the User shall have the right on 30 days additional written
notice to FPS lo terminate this Agreement.
5.4 Material Default by User. If at any time the User materially defaults in
the performance of its obligations hereunder and FPS gives written notice to the
User specifying the default, FPS may terminate this Agreement unless such
specified default is cured by the User within 30 days following such notice.
Termination of this Agreement shall not relieve the User of its obligation to
pay for services rendered prior to termination and to pay for all other amounts
owing hereunder. If there is a bona fide dispute as to whether the User is in
material default, FPS agrees, notwithstanding anything in this Agreement to the
contrary, to continue providing services to User as long as the User pays, in
accordance with this Agreement, the charges owed for such services.
5.5 Liquidated Damages. In the event of termination of this Agreement by FPS
pursuant to the provisions of Section 5.4 herein, or in the event of any
termination of this Agreement by the User other than as permitted in accordance
with the provisions of Section 5.6 or Section 5.7 herein, the User shall pay to
FPS, as liquidated damages and not as a penalty, in addition to all other
amounts then owing hereunder, 65 percent of the projected charges which would
become payable by the User between the date of termination and the end of the
then current term of this Agreement. If the User fails to use, or discontinues
the use of, or substantially reduces its use of (in addition to any reduction in
use resulting from a reduction in the User's business), the services of FPS,
such failure, discontinuance, or substantial reduction shall be deemed a
termination of this Agreement by the User. For purposes of this Section 5.5:
(a) projected monthly charges for each month after the date of termination shall
be deemed equal to the average of the monthly charges billed to the User by FPS
for the six calendar months (or lesser number if charges have only been billed
for a shorter time) preceding the month in which the date of termination occurs
or, (b) if charges have not yet been billed to the User, projected monthly
charges for each month after the date of termination shall be deemed equal to
the average monthly charges which would have been payable by the User for the
three calendar months preceding the month in which termination occurs, such
average monthly charges to be calculated by FPS in a reasonable manner assuming
the User had been on-line with the CPU with all of its business during such
three-month period. This provision for liquidated damages has been agreed to
because of the difficulty which the parties acknowledge exists in determining
actual damages because of their indefiniteness. The amount of the liquidated
damages is a reasonable estimate by the parties of actual damages.
5.6 Material Default by FPS. If, at any time during the term hereof, FPS
materially defaults in the performance of its obligations hereunder, the User
shall give written notice to FPS specifying the default. If such specified
default is not cured by FPS within 30 days following such notice to FPS, then
the User May terminate this Agreement by written notice to FPS.
5.7 Other Rights of Termination by User. In addition to any termination of
this Agreement by User pursuant to Section 5.6, the User shall have the right to
terminate this Agreement upon the occurrence of any of the following events:
(a) any failure by FPS, after using prompt and commercially reasonable efforts
required pursuant to Section 1.7, to provide new reports or services or
modify existing reports or services as required by regulatory agencies; or
(b) any failure by FPS, after using prompt and commercially reasonable efforts
to cure any breach of warranty under Section 6.1, or to correct any defect
constituting a breach of warranty under Section 6.2; or
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(c) any exercise by the User of a right to terminate pursuant to Section 5.3
herein in the event FPS is unwilling to amend this Agreement under the
circumstances set forth in said section.
5.8 Cooperation on Termination. Upon the termination or expiration of this
Agreement, and upon full payment to FPS of all charges for services and other
amounts owing hereunder (except to the extent such amounts are the subject of a
bona fide dispute between the parties), FPS will cooperate with the User to
effect an orderly transition to the User or its new processor of all data stored
by FPS relating to the User's records and accounts. As part of such transition,
FPS, at the request of the User, will deliver such data to the User or its new
processor either on tape or on printout, or both, and the User agrees prior to
such delivery to pay FPS the reasonable cost thereof, including the cost of any
required computer and programmer time used in preparing the tape or the
printout.
5.9 Notification. In the event either party gives written notice of its
election pursuant to Section 5.2 not to extend the term of this Agreement, or in
the event either party gives written notice of default pursuant to Sections 5.4
or 5.6 which might lead to a termination of this Agreement, or in the event of
any other action to terminate this Agreement by either party, or in the event of
any material change in reports or services to be provided by FPS pursuant to
this Agreement, the User agrees promptly to notify each federal and state agency
having jurisdiction over the User to the extent the policies of such agency
require notification. The User agrees to notify FPS in writing of the name and
address of each federal and state agency to which notification is to be sent by
FPS pursuant to this Section 5.9.
5.10 Ownership of Programs. All data processing programs developed by FPS or at
any time used by FPS in connection with this Agreement, and all systems manuals
and other documentation prepared by FPS, are and shall remain the sole and
exclusive property of FPS, and the User acknowledges that it has and will have
no right, title, or interest therein.
6. WARRANTIES; CORRECTION OF ERRORS
6.1 Year 2000 Warranty; Limited Remedy.
(a) Modification of FPS Programs. Most of the FPS data processing programs
which will be utilized by FPS to provide reports and other services pursuant
to this Agreement were developed, or have already been modified, to
accommodate the transition to the year 2000. FPS is currently modifying and
testing its remaining data processing programs and expects to complete this
effort on or before December 31, 1998.
(b) Progress Reports. Between the date hereof and January 1, 2000, FPS shall
provide User with monthly reports with respect to its modification and
testing efforts and other year 2000 issues.
(c) Date for Compliance; Warranty. FPS warrants that commencing on or before
January 1, 1999, FPS will be Year 2000 Compliant. The term "Year 2000
Compliant " means that reports and other services provided by FPS pursuant
to this Agreement will be capable of accounting for: (i) data which
represents or references different centuries or more than one century either
by utilizing four digit years or by interpreting two digit years from 50 to
99 as twentieth century dates and two digit years from 00 to 49 as twenty-
first century dates, and (ii) the fact that the year 2000 is a leap year.
(d) Testing. FPS will provide a mainframe computer on which the User and other
users will be able to conduct extensive on-line tests in a test environment
(which will be separate from the production environment) in which to verity
that the FPS data processing programs are Year 2000 Compliant. Such testing
will be available no later than the date on which FPS deems itself to be
Year 2000 Compliant. The User agrees to participate in such testing and to
promptly notify FPS of any errors.
(e) Remedies. In the event of any material breach of the warranty in part (c)
above, the User agrees lo promptly provide evidence thereof to FPS. FPS
agrees to use prompt and commercially reasonable efforts to cure such
breach, and, if FPS does so, the User shall have no other remedy. However,
if FPS is unable to cure any such breach within a reasonable period of time,
then the User shall have the right to terminate this Agreement without any
obligation for liquidated damages. With respect to any such breach which is
communicated to FPS on or before March 31, 1999, a reasonable time to cure
shall not extend beyond June 30, 1999.
(f) Ancillary Services. FPS is a facilitator through which certain other
entities provide services (the "Ancillary Services") for the benefit of the
User or its customers. Ancillary Services may include, without limitation,
services relating to ATMs, check inclearing, statement rendering, the
Federal Reserve System, credit bureaus, and major investor servicers. FPS
makes no representation or warranty as to whether the AncillaryServices, to
the extent dependent on such other entities, will be Year 2000 Compliant as
of any date. If any such entity fails to become Year 2000 Compliant prior
to June 30, 1999, FPS intends to identify alternative providers for such
services.
6.2 Other Warranties; Limited Remedy. FPS warrants that it has and will
have the right to use the computer data processing programs which will be
utilized to provide the reports and services described in Exhibit "B". FPS also
warrants that the computer data processing programs currently utilized by FPS to
provide the reports and services described in Exhibit "B" function substantially
in accordance with FPS' current systems manuals and that the computer data
processing programs as changed or modified by FPS from time to time to provide
new or modified reports and services in accordance with Sections 1.7 and 1.8
herein will function substantially in accordance with the systems manuals as
updated by FPS from time to time to reflect such changes and modifications.
If the data processing programs utilized from time to time to provide the
reports and services described in Exhibit "B" do not function substantially in
accordance with FPS' then current systems manuals, the User agrees promptly to
provide evidence thereof to FPS. FPS agrees to use prompt and commercially
reasonable efforts to correct the defect in the programs, and, if FPS uses
prompt and commercially reasonable efforts to correct the defect, the User shall
have no other remedy. However, if FPS is unable within a reasonable time to
correct any such defect representing a breach of the warranty, then the User
shall have the right to terminate this Agreement.
6.3 Disclaimer of Other Warranties. EXCEPT AS STATED IN SECTIONS 6.1 and
6.2, THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO
THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
6.4 Correction of Errors. FPS agrees to utilize commercially reasonable
care in providing the reports and performing its services under this Agreement,
but FPS gives no assurance that the reports or services will be free from
errors. The User acknowledges that data processing entails the likelihood of
some human and machine errors. If any errors in reports or services are caused
by FPS, FPS will exercise prompt and commercially reasonable efforts to correct
such errors at no additional expense to the User, and, unless such errors are
caused by the gross negligence or willful misconduct of FPS, FPS shall have no
other liability with respect thereto. To the extent FPS is precluded from
access to the means to correct such errors because such means are under the
User's control, then the responsibility of FPS to correct errors shall be
limited to notifying the User of the method by which the errors may be
corrected. The obligation of FPS in this Section 6.4 is subject to the User's
obligation to notify FPS in accordance with Section 1.6.
7. CONFIDENTIAL INFORMATION; STORAGE; DISCLOSURE AND AUDIT
7.1 Confidential Information - Duty of User; Return to FPS. The User shall
use commercially reasonable efforts to preserve the confidentiality of all
information which it receives relating to the business methods, systems, data
processing programs, systems manuals, training aids, other documentation, and
procedures of FPS, or relating to other customers of FPS, and the User will in
all events use the same standard of care with respect thereto which it uses with
its own materials which are of a confidential nature. Upon termination of this
Agreement for any reason, the User agrees promptly to return to FPS all systems
manuals, training aids, and other documentation and materials containing
proprietary information of FPS, and all copies thereof.
7.2 Confidential Information - Duty of FPS. FPS shall use commercially
reasonable efforts to preserve the confidentiality of all financial, personal,
and other information it receives relating to the User, and the accounts which
third parties have with the User, and FPS will in all events use the same
standard of care with respect thereto which it uses with the confidential
materials of other users. Disclosures by FPS to federal and state agencies
having jurisdiction over the User, in accordance with other provisions of this
Agreement and applicable law, shall not constitute a violation by FPS of its
obligations under this Section.
7.3 Security. The User shall be solely responsible for monitoring the
individuals who have access to reports received from FPS and who have access to
the remote units which are connected in an on-line mode to the CPU. The computer
processing programs utilized by FPS to provide the services under this Agreement
will have certain control features for on-line interrogation which will be
described in the systems manuals, but the User will be responsible to determine
the adequacy of and to implement those controls.
7.4 Storage. The User agrees to maintain source data, original entry
microfilm, and the tapes or printouts to enable the User to reconstruct records
in any situation in which reconstruction is necessary. FPS agrees during the
term of this Agreement to preserve each day's daily backup file for seven
days,
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month-end records for 90 days, and year-end records for three years. One set of
daily records and another set of month-end records will be stored at the FPS
processing center, and another set of each will, for security purposes, be
stored at a different location. All storage shall be consistent with general
industry standards for preservation of data processing records.
7.5 Cooperation In Audits. The parties agree that all data in the possession
of FPS relating to the User shall be subject to examination and audit by
examiners of any federal or state agency having jurisdiction over the User, and
the User's internal auditor or their designees. Any such federal or state
agency or internal auditor shall also have the right to observe the processing
of the User's data at FPS' processing center and to ask for and receive from FPS
any reports, summaries, or information contained in or derived from such data.
FPS will provide verifications and trial balances and will permit programming
examination (after normal on-line operation hours) as necessary to meet the
User's audit requirements. The User shall pay reasonable charges made for all
special programming and all computer usage, in excess of that described in
Exhibit "B", which is required in connection with such audits and examinations.
7.6 Disaster Protection. FPS shall identify emergency procedures and an
alternate location for the processing by FPS of the data supplied by the User in
case of a disaster at FPS' processing center. All such emergency procedures and
such alternate location shall be determined by FPS in its discretion and shall
be addressed annually in the third party review provided pursuant to Section 7.7
herein. However, communication in an on-line mode between the User's remote
units and any such alternate location will require transmission lines and
equipment which shall be the responsibility of the User and not FPS and which
cannot be expected to be readily available in case of a disaster unless the User
makes adequate prior arrangements for such lines and equipment. Upon request,
the results of periodic disaster tests shall be made available to the User. FPS
agrees to release the information necessary to allow the User to develop a
disaster contingency plan which will work in concert with FPS's plan.
7.7 Third Party Review. Upon request, FPS shall provide the User and any
federal or state agency having jurisdiction over the User (to the extent the
policies of such federal or state agency require a copy) with a copy of its
annual third party review, together with a statement from the reviewing auditor
indicating the review was performed in accordance with Bulletin PA-7-1A and
"Audits of Service Center Produced Records" published by the American Institute
of Certified Public Accountants or any other generally recognized standards for
third party services. In addition, FPS shall provide the User and any such
federal or state agency with a copy of its management memorandum detailing its
response to the issues raised in such annual review. The User and any such
federal or state agency shall have the right to review the internal security
controls at FPS' processing center.
7.8 Financial Statements. Upon request, FPS agrees annually lo provide the
User and any federal or state agency having jurisdiction over the User with a
copy of FPS' current audited financial statement to the extent required by such
agency.
7.9 Powers of Regulatory Authorities. The parties acknowledge that any federal
or state agency having jurisdiction over the User may, to the extent provided by
applicable law, have rights and powers relating to the services performed by FPS
under this Agreement in addition to those set forth herein.
8. LIMITATIONS
8.1 Events Beyond Reasonable Control of FPS. FPS shall have no liability to
the User or to any other person for damages, delays, or loss of data which may
be caused by acts or omissions of any governmental authority, or by fire, heat,
storm, water, flood, lightning, wind, earthquake, other acts of God, accident,
acts of the public enemy, wars, rebellion, insurrection, riot, sabotage, strike,
telephone line or equipment failure, CPU or other equipment failure or
malfunction, power failure, or any other events beyond the reasonable control of
FPS. Notwithstanding the foregoing, FPS shall not be relieved of liability
under this Section 8.1 for failures or malfunctions of the CPU or other
equipment under FPS' control unless such equipment is maintained in accordance
with commercially reasonable standards.
8.2 Limitation of Damages. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE
CONTRARY, IN NO EVENT SHALL FPS BE LIABLE TO USER OR ANY THIRD PARTY FOR ANY
LOSS OF PROFITS OR OTHER CONSEQUENTIAL, INCIDENTAL, OR SPECIAL DAMAGES ARISING
FROM THIS AGREEMENT OR ITS PERFORMANCE OR FAILURE OF PERFORMANCE, EVEN IF FPS
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. Without limiting the
foregoing, the total liability of FPS for any and all claims in any way related
to this Agreement, and any performance or nonperformance by FPS hereunder,
regardless of the form of action, whether in contract or in tort, including
negligence, shall in no eventexceed the greater of (a) $50,000, or (b) four
times the average monthly charges paid by the User to FPS pursuant to this
Agreement during the 12 months immediately preceding the date on which the User
first gives FPS written notice of any such claim.
8.3 Allocation of Risk. The limitations and disclaimers with respect to
warranties, remedies, and damages set forth in this Agreement are protective of
FPS but nevertheless reflect an acceptable allocation of risk to the User.
8.4 Third Party Claims. The User agrees to indemnify and hold FPS harmless
from any and all claims asserted against FPS by any customer, employee, or agent
of the User or any other person who may be affected by the reports and services
of FPS, except for claims in which it is alleged that the data processing
programs or other documentation or materials utilized by FPS to provide the
reports and services infringe a U.S. patent, copyright, or other proprietary
right belonging to any third party.
9. MISCELLANEOUS
9.1 Notice. All notices given under this Agreement shall be in writing and
shall be sent by registered or certified mail, return receipt requested, or by
overnight courier, to FPS GOLD, Attention: President, at 1525 West 820 North,
Provo, Utah, 84601, and to the User at the address set forth at the beginning of
this Agreement. Notice shall be considered received on the second day after
posting, when mailed as described above, or upon receipt when by overnight
courier. Notice may also be given to a party by personal service upon an
officer thereof. Either party, upon notice to the other, may change any name or
address to which future notices may be sent.
9.2 Reasonable Charges. The term "reasonable charges" in this Agreement means
charges reasonably determined by FPS for the reports or services to which they
relate, which shall include a charge for programming, clerical and other
personnel and for CPU or other equipment usage involved in providing reports or
performing services, all at the then standard hourly rates charged by FPS for
such personnel and such equipment usage, plus all travel expenses, telephone,
postage, supply costs and other costs reasonably incurred in connection with
such services.
9.3 Governing Law and Limitation on Actions. This Agreement is entered into in
the State of Utah and in all respects shall be construed, interpreted, and
governed by the laws of the State of Utah. No claim arising out of or relating
in any manner to transactions under this Agreement may be asserted by either
party more than 18 months after the cause of action has arisen.
9.4 Entire Agreement; Modification. This Agreement and its exhibits set forth
the entire agreement and understanding of the parties, and supersedes all prior
agreements, written or oral, between the parties. No renewal or modification or
waiver of any of the provisions herein contained, or any future representation,
promise, or condition in connection with the subject matter hereof, shall be
binding upon the parties unless made in writing and signed by the parties to
this Agreement. A mere acknowledgment of any action inconsistent with the terms
of this Agreement shall not be deemed an acceptance or approval of such
inconsistent action.
9.5 Effect of Invalid or Unenforceable Provision. This Agreement, to the
extent possible, shall be construed so as to give validity to all the provisions
hereof. Any provision of this Agreement found to be invalid or unenforceable
shall not affect the validity or enforceability of any other provision of this
Agreement, and each provision of this Agreement shall be enforced to the fullest
extent permitted by applicable law.
9.6 Arbitration. Any claim arising out of or relating to this Agreement shall
be settled by arbitration at Salt Lake City, Utah, in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment on the award rendered by the arbitrator(s) may be entered in any court
having jurisdiction thereof. Each arbitrator shall have a knowledge of
financial institution electronic data processing practices.
9.7 Binding Effect. This Agreement may not be assigned by either party without
the prior written approval of the other party except to a successor in interest
to the business (or, in the case of FPS, the financial institution data
processing business) of the assigning party. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties, their
successors and assigns.
9.8 Authorization. Each party represents and warrants that execution and
delivery by it of this Agreement and performance of its obligations hereunder
has been duly authorized and will not constitute a breach of any other contract
by which it is bound.
9.9 Waiver. Waiver of any default hereunder by either party shall not
constitute a waiver of any subsequent default.
4
<PAGE>
9.10 Section Headings. The section headings in this Agreement are included only
for purposes of convenient reference, and they shall not affect the
interpretation of this Agreement.
9.11 Miscellaneous. In interpreting words used herein, unless the context shall
otherwise indicate, the singular shall include the plural, the plural shall
include the singular, and the use of any one gender shall include all genders.
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the
date written at the beginning hereof.
DHI Computing Service, Inc., dba FPS Gold
By: /s/ B. Lynn Crandall
-----------------------------------------------------
B. Lynn Crandall/Chief Executive Officer
User: Pan American Bank, FSB.
By /s/ Carol M. Bucci
-----------------------------------------------------
Authorized Signature
Name Carol M. Bucci
-----------------------------------------------------
(Type or Print)
Title Senior Vice President
-----------------------------------------------------
5
<PAGE>
FPS GOLD/(R)/
ON-LINE COMPUTER SERVICE AGREEMENT
AMENDMENT
This Amendment dated this amends that certain On-line Computer
--------,
Service Agreement (the "Agreement") dated between DHI Computing
---------------,
Service, Inc., dba FPS GOLD and PAN AMERICAN BANK, FSB. (the "User"). Any
provisions of the original Agreement which are in conflict or are inconsistent
with the provisions of this Amendment shall be superseded by this Amendment and
all provisions not hereby amended shall remain in full force and effect.
For good and valuable consideration, receipt and sufficiency whereof and hereby
acknowledged, the parties agree as follows:
Section 1.3 On-line Transmission. This section is changed in its entirety to
read as follows: The on-line transmission hours shall be from 7:30 a.m. to 6:30
p.m., Monday through Friday, except on those state and federal holidays when the
User is permitted to be closed for business under applicable laws. On-line
transmission shall also be available from 8:00 a.m. to 3:00 p.m. on Saturdays,
except those holidays as described above, at the additional charge set forth in
Exhibit "C." All times set forth herein are Pacific Standard Time (Standard or
Daylight, as may then be in effect).
Section 1.6 Examination of Reports by the User; Notification of Errors. The
last sentence in this section shall be changed to read as follows: The User
shall promptly, and in no event later than 96 hours after FPS has made a report
available to the User, (120 hours if a holiday weekend applies), notify FPS of
any errors or omissions in the report.
Section 1.7 Obligation of FPS to Modify Report and Services. A sentence is
added to the end of this section to read as follows: In the event FPS is unable
to provide required regulatory changes, the User shall give FPS written notice
of FPS' inability to provide such reports and services, and if such specified
default is not cured by FPS within 30 days following such notice to FPS, then
the User may terminate this Agreement by written notice to FPS as provided in
Section 5.6 of this Agreement.
Section 1.8 Right of FPS to Modify Reports and Services. The last sentence in
this section shall be changed to read as follows: FPS will notify the User of
any modifications made by it through the FPS update procedures.
Section 1.9 Additional Reports and Services Requested by User. The last
sentence in this section shall be changed to read as follows: FPS will notify
the User of the time frame and charges to complete such services, at which time
the User agrees to notify FPS of its intent to have such modifications made to
the system, and to pay reasonable charges for the development and use of such
additional reports and services.
Section 2.3 Telephone Company Charges. The last sentence in this section shall
be changed to read as follows: The User shall promptly reimburse FPS for any
telephone company charges to be paid by the User which are initially paid by
FPS, together with a reasonable charge for FPS overhead not to exceed 10
percent.
Section 4.1 Charge for Conversion of Records. The fifth sentence in this
section shall be changed to read as follows: FPS shall be responsible for the
correction of errors within a commercially reasonable time not to exceed 2 weeks
after receipt of such notification to the extent the errors are the result of
FPS programming.
Section 4.2 Amount of Charges. The second sentence in this section shall be
changed to read as follows: All of the charges shall be subject to increase by
FPS, from time to time, but not more than once per year, upon at least 90 days
written notice; provided, however, in no event may any increase be effective
prior to one year from the date of this Agreement, and in no event may the
increased charges
6
<PAGE>
exceed the charges set forth in Exhibit "C" by a percentage which exceeds the
percentage increase in the Consumer Price Index ("CPI-U") between the month in
which this Agreement is executed and the most recent month preceding the
notification of such increased charges for which the CPI-U is available.
Section 4.3.1 Disputed Amounts. This section to be added to the end of Section
4.3 Statements for Services. (a) If the User in good faith disputes any amounts
invoiced hereunder, User will provide written notification of such dispute to
FPS, setting forth the reason for the dispute. Such notice will be given prior
to the date that the disputed payment is due to FPS. The User may elect to
withhold payment of any validly disputed amount until the dispute is resolved by
the parties, or unless the User is otherwise required to pay the disputed amount
to an escrow agent or to FPS in accordance with the dispute resolution process
set forth in this Agreement. If the dispute involves only a portion of such
invoice, the User agrees to withhold only the disputed amount and to timely pay
the undisputed portion of the amount invoiced. The parties agree to immediately
negotiate in good faith to resolve the dispute. If the dispute cannot be
resolved prior to the date when the amounts would be otherwise due hereunder,
then FPS may, at its option, require that the amount withheld in dispute be paid
over to an escrow agent mutually agreed upon by FPS and the User, pending the
resolution of such dispute. If the parties are unsuccessful in resolving such
dispute within thirty (30) days after the date of the written notice of dispute
from the User to FPS, then either party may initiate the dispute resolution
processes provided for in this Agreement. Any moneys held by the escrow agent in
the escrow fund will be invested by the escrow agent in interest bearing
federally insured instruments. The party receiving funds from such escrow will
also receive the interest earned on that portion of the escrowed funds so
received, and will pay a portion of the fees of the escrow agent based upon the
pro rata portion of the funds not received. (b) If the User in good faith
disputes any amounts previously paid by the User to FPS hereunder, the User will
provide written notice of such dispute to FPS within (3) months of the date the
disputed amount was paid to FPS, setting forth the reason for the dispute. FPS
agrees to respond within ten (10) days after receipt of such notice, setting
forth FPS' position with respect to the disputed matter. The parties agree to
immediately negotiate in good faith to resolve the dispute. If the dispute is
not resolved within thirty (30) days following the initial notice by the User to
FPS, then the User may, at its option, require that the amount withheld in
dispute be paid over to an escrow agent mutually agreed upon by FPS and the
User, pending the resolution of such dispute. If the parties are unsuccessful
in resolving such dispute within thirty (30) days after the date of the written
notice of dispute from the User to FPS, then either party may initiate the
dispute resolution processes provided for in this Agreement. Any moneys held by
the escrow agent in the escrow fund will be invested by the escrow agent in
interest bearing federally insured instruments. The party receiving funds from
such escrow will also receive the interest earned on that portion of the
escrowed funds so received, and will pay a portion of the fees of the escrow
agent based upon the pro rata portion of the funds not received.
Section 5.2 Extended Terms. The first sentence in this section shall be changed
to read as follows: The initial term of this Agreement shall automatically be
extended for additional successive terms of two years each unless either party
gives written notice of its election not to extend at least 180 days prior to
the end of the initial term or any extended term. For purposes of this
Agreement, the "term" includes the initial term and each extended term.
Section 5.5 Liquidated Damages. The first sentence of this section shall be
amended to read as follows: In the event of termination of this Agreement by
FPS pursuant to the provisions of Section 5.4 herein, or in the event of any
termination of this Agreement by the User other than as permitted in accordance
with the provisions of Section 5.6 or Section 5.7 herein, the User shall pay to
FPS, as liquidated damages and not as a penalty, in addition to all other
amounts then owing hereunder, a percent, as set forth in Exhibit "D" attached
hereto, of the projected charges which would become payable by the User between
the date of termination and the end of the then current term of this Agreement.
Section 5.6 Material Default by FPS. Two additional sentences are added to this
section to read as follows: In the event that there is no contributory fault on
the part of the User, no termination fees will apply. In the event of such
termination, FPS agrees to refund to the User a pro rata share of the initial
license fees paid by the User under this Agreement for the following:
GOLDTeller, GL GOLD, WinTerm,
7
<PAGE>
GOLDView. This pro rata share will be based on the following equation:
(Remaining number of months of the initial contract term x 2.778% x the above
listed total license fees paid by the User).
Section 5.8 Cooperation on Termination. The second sentence of this section
shall be changed to read as follows: As part of such transition, FPS, at the
request of the User, will deliver such data to the User or its new processor in
test and final form either on tape or on printout, or both, and the User agrees
prior to delivery of final data, to pay FPS the reasonable cost thereof,
including the cost of any required computer and programmer time used in
preparing the tape or the printout.
Section 7.6 Disaster Protection. The fourth sentence in this section shall be
changed to read as follows: FPS will provide the results of its annual disaster
test to the User.
Section 8.2 Limitation of Damages. This section to be changed in its entirety
to read as follows: NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY,
IN NO EVENT SHALL FPS BE LIABLE TO CONSEQUENTIAL, INCIDENTAL, OR SPECIAL DAMAGES
ARISING FROM THIS AGREEMENT OR ITS PERFORMANCE OR FAILURE OF PERFORMANCE, EVEN
IF FPS HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. Without limiting
the foregoing, the total liability of FPS for any and all claims in any way
hereunder, regardless of the form of action, whether in contract or in tort,
including negligence, shall in no event exceed the greater of (a) $50,000, or
(b) six times the average monthly charges paid by the User to FPS pursuant to
this Agreement during the 12 months immediately preceding the date on which the
User first gives FPS written notice of any such claim; provided, however, the
foregoing limitation on liability shall not apply to any refund obligation of
FPS under Section 5.6 herein.
Section 9.3 Governing Law and Limitation on Actions. The first sentence in this
section shall be changed to read as follows: This Agreement is entered into in
the State of California and in all respects shall be construed, interpreted, and
governed by the laws of the State of California.
Section 9.6 Arbitration. The first sentence in this section shall be changed to
read as follows: Any claim arising out of or relating to this Agreement shall
be settled by arbitration at Portland, Oregon, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, and judgment on the
award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
Section 9.7 Binding Effect. A sentence shall be added to this section to read
as follows: In the event of a change in ownership of more than 50% of the
issued and outstanding shares of stock of DHI within any one year period
(excluding any changes in ownership resulting from transfers of stock between
the current owners for the benefit of their spouses, their descendants, or
spouses of descendants), the User shall have the right to terminate this
Agreement without penalty.
Performance Levels:
Downtime: FPS will use its best efforts to achieve a 97% or better availability
of units under this Agreement. Should either the on-line system availability or
the GOLDPhone system availability, other than scheduled downtime, fall below
97%, FPS will use its best efforts to return above 97%. If the availability of
the on-line system falls below an average of 97% in any one month then FPS will
reduce the User's bill for that month as follows:
<TABLE>
<CAPTION>
Monthly Average Availability Percentage Rebate of Monthly Bill
<S> <C>
94%-97% 2.25%
92%-94% 3.00%
91%-89% 5.00%
Less than 89% 8.00%
</TABLE>
Downtime excludes the non-availability for any reason beyond FPS's control
specified in section 8.1. Unscheduled downtime is defined as any time the on-
line is unavailable to the User during hours of
8
<PAGE>
operation as described in section 1.3. without 24 hours advance notice to User.
If the monthly average availability is less than 89% in any two consecutive
months, then User shall have the right, by written notice to FPS, to terminate
this Agreement without any obligation to FPS for liquidated damages.
Response Time: This provision for the measurement of system response time has
been agreed to because of the difficulty which the parties acknowledge exists in
determining average teller transaction response time and average GOLDPhone
transaction response time. Average response time means the average time elapsed
from the time the transaction enters the FPS Central Processing Unit (CPU) in
Provo until the time the response leaves the CPU. The test condition shall be
based on the following:
1. Response time tests shall be run on terminals running the highest priority
for single account inquires or single account file maintenance type
transactions that require only on transmission to and from the CPU.
2. During the response time tests (a) no programs other than the necessary
applications and operating programs shall be running on the CPU, and (b) no
batch type background processing shall be running on the CPU and no program
request shall be running against the User data files which involves heavy
CPU or disk utilization (a request requiring more than 10 disk input-
output operations). A "transaction" is a posting or an inquiry made from a
terminal to the CPU to a specific data base element or elements, and is not
an analytical review of even a portion of the data base nor is it a request
for a report or summary.
3. The determination of average response time shall be determined
automatically by monitoring programs running on the CPU which measure the
time a transaction is in the CPU. These tests will be run at mutually
agreed upon times by the User and FPS.
Penalties for average response times over those specified below shall be
calculated as follows:
<TABLE>
<CAPTION>
Monthly Average Response Monthly Credit
Time
<S> <C>
4 Seconds 2.50%
5 Seconds 3.75%
6 Seconds 5.00%
</TABLE>
If the monthly average response time is greater than six (6) seconds in any two
consecutive months, then User shall have the right, by written notice to FPS, to
terminate this Agreement without any obligation to FPS for liquidated damages.
Other Contract Provisions:
FPS will provide a 20% discount off of G/L GOLD(TM), GOLDTeller(TM), WinTerm and
GOLDView/(R)/ initial licensing fees.
9
<PAGE>
FPS will complete the GOLDPlatform(TM) system by the time the User goes on-line
in accordance with this agreement. In the event the GOLDPIatform system is not
completed, FPS will provide a $600.00 credit per month until such time the
system is completed.
PAN AMERICAN BANK, FSB.
By: /s/ Carol M. Bucci
---------------------------------
Title: Senior Vice President
------------------------------
DHI Computing Service, Inc., dba FPS GOLD
By: /s/ B. Lynn Crandell
---------------------------------
Title: CEO
------------------------------
10
<PAGE>
FPS GOLD/(R)/ ON-LINE COMPUTER SERVICE AGREEMENT
Exhibit A - Approved Equipment
- --------------------------------------------------------------------------------
EQUIPMENT - Below is a list of approved equipment that can be used to access the
FPS Gold Systems:
Modems/Routers:
IBM 5865 Series
IBM 7861 Series
IBM 7868-025
CrossComm XL Series Router
Modems - To be used for dial-up disaster recovery:
IBM 785
IBM 5853
CrossComm XL Series PCMCIA
Modem Splitter - To expand the number of ports hooked directly to modem:
3287 Interlinks protocol converter
Teller Gear -
IBM 4701 Controllers and associated printers and terminals.
IBM 4702 Controllers and associated printers and terminals.
ISC-Bunker Ramo Pinnacle Controllers and associated printers and terminals.
IBM PC's using "CT" or GOLDTeller(TM) software (486, 12MB RAM minimum).
ISC-Bunker Ramo PSP Controllers and associated printers and terminals.
Coax Attached Printers:
IBM 4224 Printer
IBM 4234 Printer
IBM 4245 Printer
Teller Printers:
IBM 4720 used with 4700 hardware
IBM 4722 used with "CT" or GOLDTeller software
Lexmark 2380 series used with "CT" or GOLDTeller software
Lexmark 2390 series used with "CT"or GOLDTeller software
Printers Attached to PC's:
HP Laserjet I, II, IID, III, IIID, VI, VID, & Vsi
Any IBM PC Printer
Any IBM Compatible PC Printer
Personal Computers - PC's hooked to the FPS System as workstations using DHI3270
Software:
All IBM 486 PC's or better
All IBM 486 Compatible PC's or better
Personal Computers - PC's used as communications servers to access the FPS
System:
All IBM PC 486 with clock speeds of 20 Mhz or greater
Local Area Network Hardware:
IBM Token Ring
Ethernet
Local Area Network Software:
Novell Netware 3.1 or better
IBM PC LAN
IBM OS/2 LAN Server
Microsoft NT Server
3270 Boards and Software:
DHI 3270 Boards and Software
Other equipment may work on the FPS System, but it needs to be approved and
tested before FPS can verify that such hardware or software can be used to
access the FPS GOLD systems. Time for testing of other hardware is billable at
$75.00 per hour, plus expenses. Installation and setup all equipment is billable
at $75.00 per hour, plus expenses.
11
<PAGE>
FPS GOLD/(R)/ ON-LINE COMPUTER SERVICE AGREEMENT
Exhibit B - Standard Reports
________________________________________________________________________________
Deposit & G/L Systems
________________________________________________________________________________
Daily
Account Activity Summary
Account Kind Detail Listing
Accounts Pulled for Processing
Auto Deposit In-House Transfers
Auto Funds Reconciliation List
Auto Funds Payment List
Auto-Deposit Exception Report
Automated Entry Register
Card Management Summary Report
Card Issue/Reissue Report
Cash Letter Reconciliation
Cash In and Cash Out by Teller
Closed Account Journal
Credit Card Payment/Advance Report
Daily Deposit Transaction Listing
Daily Regulation -D- Report
Daily Interest Accrual - Deposits
Daily Large Transactions Journal
Daily Withholding Transaction Journal
Earnings Check Register
File Maintenance Journal
General Ledger File Maintenance Journal
General Ledger File Balancing Report
Interest Rate Rollover and Accrual Report
Listing of Accounts Closed Tonight
Management Summary
Name and Address Activity Report
Name and Address Daily Report
Negative Balance NOW Accounts
NOW Account Stop/Hold Report.
NOW Account Service Charges
Opened Account Journal
Overdraft Processing Report
Proof Items in Account/Amount Order
Proof Items for G/L and Acct. Posting
Retirement Account Posting Journal
Savings Earnings Posting Totals
Savings Short Trial Balance
Savings Earnings Posting Report
Statement Error Report
Teller Journal
Teller Cash Report from Proof
Teller Total Summary
Teller Journal for XXXX
Teller Override Listing Report
Transfer System Transaction Report
Uncollected Funds Report
Monthly/Cycled
1099 Report - Numeric List
1099 Report - Social Security List
1099 Tape and Statement Totals
1099 Report - Alpha List.
1099R Report
80 Thousand and Over Report
Accounts Receiving Maturity Notices
Accrual Report
Auto Pay Transaction Journal
Auto Pay Service Charges
Auto-Posting General Ledger Error List
Certificate Information Report
Certificate Maturity Exception Report
Customer Information Report - Savings Deposits
Deposits by Territory
Exception Report for Accounts Without a 1099
Fifty-Nine and One Half Report
General Ledger File Balancing Report
General Ledger Miscellaneous Transaction Journal
General Ledger Auto-Posting Recap Summary
General Ledger Transaction Listing
General Ledger Auto-Posting Recap
Inactive Accounts Listing
Name/Address Listing - Alpha Sequence
Name/Address Listing - Numeric Sequence
Retirement Account by Social Security Number
Retirement Account Service Charge Report
Retirement Accounts in Alpha Sequence
Savings Rate and Maturity Information Report
Savings/Checking Trial Balance
Savings/Checking Trial Balance - Totals Only
Seventy and One Half Report
Statement Savings Report
Teller File Cash Report
Teller Activity Report
Transmatic Payment List
Transmatic Reconciliation List
Transmatic Exception Report
Withholding Report
12
<PAGE>
________________________________________________________________________________
Loan System
________________________________________________________________________________
<TABLE>
<CAPTION>
<C> <S> <C> <C>
Daily 034 Investor Servicing Summary
035 Deferred Loan Costs Amortization
Loan Auto-Payment Reconciliation List 037 Loan Pre-paid/Delinquent Report
002 Account Posting Journal 040 FNMA Active/Removed Trial Balance
002 Tranlog Journal 042 Monthly Reserve Disbursement
006 Daily Loan Participation Payoff Report 043 Single Debit Investor
007 Daily Investor Posting Journal 044 FHLB Section H
008 Daily Loan Posting Journal 045 investor Reconciliation (087)
009 Loan File Maintenance Register 046 Investor Collection Report
011 G/L Autopost Error List 047 Investor Remittance Report
012 G/L Autopost Recap & Summary 048 Investor Loan Exception Report
013 Afterhours Processing Exception Listing 049 FSLIC Settlement Report
014 Interest Rate Table File Maintenance Register 050 FNMA Loan Activity Report
015 Late Notice 051 MGIC Remittance Exception Report
016 Late Notice 053 GNMA Monthly Accounting Report
017 Late Notice 055 Monthly Income
017 Automated Entry Register 057 Company/Agent Reserve Payment Journal
018 Late Notice 058 Interest Rate Journal
020 G/L Misc. Tran. Jnl 064 Loans in Process Trial Balance w/History
022 Coupons 068 1098 Loan Interest Report
026 Report of Coupons Ordered 070 FHLMC Tape and FHLMC Accounting Group Control Report
027 Reserve Disbursement Posting Journal 070 FHMC Loan Level Reporting
028 ACH Entry Register 071 FNMA Monthly Payment/Rate Change
029 Teller Posting Journal 073 Negative Loan Reserve Report
030 Transaction Journal 075 Earnings Report For Rule of 78's Loans
030 Loan Management Summary (By Investor & Type) 076 Long Trial Report For Rule of 78's Loans
031 Transmatic Reconciliation List 077 Amortization of Deferred Fees
031 Transaction Journal By Tran Origination Code 078 Loan Rate & Maturity
033 Reserve Disbursement Posting By Policy Number 079 Late Charge Activity Report
039 AML Letter 081 Deferred Loan Fees Short Trial Balance
041 Posting Journal By TORC 082 Reserve Disbursement Forecast List
054 Loan Closing & Doc Prep Journal 083 Loan Warning Report
059 Contract Collection Seller Disb. Checks 084 Loan Deferred Fees Trial Balance
060 Contract Collection Seller Receipts 086 Simplified Loan Trial Balance
061 Contract Collection Disbursement Register 090 OTS Section A
062 Contract Collection Action Report 091 Loans Sold This Month
063 Coupon Tape Creation 092 Dealer Loan Trial Balance
065 Late Charge Report 093 Single Line Loan Delinquency Report
069 Seller Billings 094 Dealer Loan Collection
085 Proof of Deposit 095 Credit Life/Disability
088 Name and Address Change Journal 096 Income on Loans Eligible For B&O Tax (WA)
089 Daily Loan Accrued Interest 096 Income on Washington B&O Tax
101 LIP Budget Transfers 097 FNMA Investor Report
105 Stop File Tape (Lock Box) 098 FNMA Trial Balance/Tape 100 Interest on Reserve Accrual
100 Interest on Reserves Accrual Report
Monthly/Cycled 103 Check Reconciliation Register
106 Student Loan Report
001 Loan Long Trial Balance w/History 111 Loan Pooling Security Holders Register
004 Investor Delinquent Loan Report 112 Over Credit Limit
005 Trial Balance of Loans Serviced
010 Investor Remittance Report (D47)
014 Loan Delinquency Report
019 Loan Accrued Interest Report
021 Reserve Disbursement Expiration List
023 New Loan Report
024 Closed Loan Report
025 Loan Action Needed Report
026 Loans to One Borrower Report
027 Loan Rate & Maturity Report (78)
032 RMIC Remittance Report
</TABLE>
NOTE: The above lists are representative only and will be subject to change as
new items are added to the system and others are revised. However, the listing
is indicative of the services and reports that will be available, subject to
revision by agreement between the users and FPS.
13
<PAGE>
FPS GOLD/(R) /ON-LINE COMPUTER SERVICE AGREEMENT
Exhibit D - Term Percentage
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Months
Remaining Percent
in Term
-----------------------
<S> <C>
36 20.00%
35 21.29%
34 22.57%
33 23.86%
32 25.14%
31 26.43%
30 27.71%
29 29.00%
28 30.29%
27 31.57%
26 32.86%
25 34.14%
24 35.43%
23 36.71%
22 38.00%
21 39.29%
20 40.57%
19 41.86%
18 43.14%
17 44.43%
16 45.71%
15 47.00%
14 48.29%
13 49.57%
12 50.86%
11 52.14%
10 53.43%
9 54.71%
8 56.00%
7 57.29%
6 58.57%
5 59.86%
4 61.14%
3 62.43%
2 63.71%
1 65.00%
-----------------------
</TABLE>
14
<PAGE>
Exhibit 23.1
The Board of Directors
United PanAm Financial Corp.:
We consent to incorporation by reference in the registration statement (No. 333-
67049) on Form S-8 of United PanAm Financial Corp. of our report dated January
29, 1999, relating to the consolidated statements of financial condition of
United PanAm Financial Corp. and subsidiaries as of December 31, 1998, and 1997,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998, which report is included in the December 31, 1998, annual report on Form
10-K of United PanAm Financial Corp.
/s/ KPMG LLP
San Francisco, California
March 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 5,211,000 15,026,000
<INT-BEARING-DEPOSITS> 47,000,000 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> 348,124,000 268,537,000
<ALLOWANCE> 10,183,000 6,487,000
<TOTAL-ASSETS> 425,559,000 310,754,000
<DEPOSITS> 321,668,000 233,194,000
<SHORT-TERM> 10,930,000 34,237,000
<LIABILITIES-OTHER> 10,048,000 17,472,000
<LONG-TERM> 0 12,930,000
0 0
0 0
<COMMON> 68,378,000 5,237,000
<OTHER-SE> 14,535,000 7,772,000
<TOTAL-LIABILITIES-AND-EQUITY> 425,559,000 310,754,000
<INTEREST-LOAN> 43,999,000 25,872,000
<INTEREST-INVEST> 1,346,000 639,000
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 45,345,000 26,511,000
<INTEREST-DEPOSIT> 15,329,000 10,095,000
<INTEREST-EXPENSE> 19,246,000 12,411,000
<INTEREST-INCOME-NET> 26,099,000 14,100,000
<LOAN-LOSSES> 5,853,000 507,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 1,208,000 946,000
<INCOME-PRETAX> 11,754,000 10,739,000
<INCOME-PRE-EXTRAORDINARY> 11,754,000 10,739,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,763,000 6,248,000
<EPS-PRIMARY> 0.44 0.58
<EPS-DILUTED> 0.42 0.53
<YIELD-ACTUAL> 11.42 11.41
<LOANS-NON> 18,632,000 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> 8,329,000 2,474,000
<RECOVERIES> 1,590,000 1,145,000
<ALLOWANCE-CLOSE> 10,183,000 6,487,000
<ALLOWANCE-DOMESTIC> 10,183,000 6,487,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 588,000
</TABLE>
