<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
/X/ For the Quarterly Period Ended March 31, 1994, or
Transition Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________.
-------------------------------
Commission File Number 0-11008
-------------------------------
CU BANCORP
(Exact name of registrant as specified in its charter)
California 95-3657044
---------- ----------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
818-907-9122
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former
fiscal year if changes since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes /X/ No / /
As of March 31, 1994, the Registrant has outstanding 4,437,312 shares
of its Common Stock, no par value.
<PAGE> 2
CU Bancorp
Quarter Ended March 31, 1994
Table of Contents - Form 10-Q
Page
Part I. Financial Information ----
Item 1. Financial Statements
<TABLE>
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results of Operation. 3
Consolidated Statements of Financial Condition:
-March 31, 1994, and December 31, 1993. 17
Consolidated Statements of Income:
-Three Month Periods Ended March 31, 1994, and
March 31, 1993. 18
Consolidated Statements of Cash Flows:
-Three Month Periods Ended March 31, 1994, and
March 31, 1993. 19
Notes to Consolidated Financial Statements 20
Signatures 24
</TABLE>
Part II. Other Information
<TABLE>
<S> <C>
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Filings on Form 8-K 25
</TABLE>
<PAGE> 3
MANAGMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company earned $578 thousand, or $0.13 per share, during the first
quarter of 1994, compared to $384 thousand, or $0.09 per share, during
the same period in 1993. This represented the fifth consecutive
quarter of increased profits. First quarter 1994 earnings included
profitable performance by the bank and a gain on the sale of a portion
of the mortgage servicing rights retained by the Bank when its
mortgage origination network was sold in 1993.
The Bank's asset quality ratios continue to be exceptionally strong.
At March 31, 1994, nonperforming assets were $1.1 million, down $1.2
million, or 52%, from the prior quarter, and nearly $9.9 million, or
90% from the first quarter of 1993. By March 31, 1994, the Bank did
not have any real estate acquired through foreclosure. The
improvement in asset quality over the past year is illustrated by
Graph 1: Nonperforming Assets. The Bank's allowance for loan losses
as a percent of both nonperforming loans and nonperforming assets at
the end of the first quarter of 1994 was 652%, compared to first
quarter 1993 levels of 164% and 98%, respectively. This trend can be
seen in Graph 2: Ratio of Allowance for Loan Losses to Nonperforming
Assets.
Graph 1: Nonperforming Assets
[GRAPH 1]
<PAGE> 4
Graph 1 Data: Nonperforming Assets
<TABLE>
<CAPTION>
March 31, 1993 June 30, 1993 September 30, 1993 December 31, 1993 March 31, 1994
-------------- ------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
Nonperforming Loans $6,602 $6,530 $1,065 $1,378 $1,108
Nonperforming Assets 11,034 9,988 4,034 2,298 $1,108
</TABLE>
The allowance for loan losses as a percentage of nonperforming loans
and assets has increased as both nonperforming categories were
reduced. During the first quarter of 1994, the Bank enjoyed a net
recovery as recoveries exceeded chargeoffs for the second consecutive
quarter. Net recoveries further increase the allowance's coverage of
the nonperforming loans and assets.
Graph 2: Allowance for Loan Losses to Nonperforming Assets
[GRAPH 2]
Graph 2 Data: Allowance for Loan Losses to Nonperforming Assets
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31, March 31,
1993 1993 1993 1993 1994
Allowance to: ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming Loans 164% 118% 536% 473% 652%
Nonperforming Assets 98% 77% 142% 283% 652%
</TABLE>
Capital ratios are strong, substantially exceeding levels required to
be in the "well capitalized" category established by bank regulators.
The Total Risk-Based Capital Ratio was 17.0%, the Tier 1 Risk-Based
Capital Ratio was 15.7%, and the Leverage Ratio was 10.7% at March 31,
1994, compared to 16.7%, 15.4%, and 9.2%, respectively, at year-end
1993. Regulatory requirements for Total Risk-Based, Tier 1 Risk-
Based, and Leverage capital ratios are a minimum of 8%, 4%,
<PAGE> 5
and 3%, respectively, and for classification as well capitalized, 10%, 6%, and
5%, respectively.
The successful results in 1993 concerning asset quality, regulatory
relations, growth of middle market lending and strategic focus make
expansion and growth possible in 1994. Two new loan production offices
were opened in January 1994. These offices will allow expanded market
penetration and commercial portfolio diversification. Subsequent to
the end of the first quarter of 1994, the Bank acquired the deposits
of the Encino branch of Mechanics National Bank from the FDIC, to
expand and improve deposit mix.
Balance Sheet Analysis
LOAN PORTFOLIO COMPOSITION AND CREDIT RISK
Loan portfolio quality has been a focal point of management's
attention since June 1992. As a result, considerable improvements have
been made. Credit policies have been established to promote quality
production. Further, target markets have been redefined to emphasize
middle market commercial lending and reduce real estate
concentrations.
The Bank's focus on middle market lending, in its infancy at year-end
1992, gained momentum in 1993 and 1994. While total loans decreased
from year-end 1993 to March 31, 1994 the assets of the core commercial
bank increased. Offsetting this, the remaining Held for Sale mortgages
of $10.4 million at December 31, 1993 were sold in the first quarter
of 1994. Excluding this planned liquidation, loans increased by $6.9
million, or 5%, for the quarter ended March 31, 1994.
Table 1 Loan Portfolio Composition
<TABLE>
<CAPTION>
Amounts in thousands of dollars March 31, December 31, March 31,
1994 1993 1993
---- ---- ----
<S> <C> <C> <C>
Commercial & Industrial Loans $126,885 $120,513 $111,181
Real Estate Loans:
Held for Sale 0 10,426 58,576
Mortgages 9,166 8,496 39,081
Construction 1,010 1,226 261
Other Loans 0 0 494
------- ------- -------
Total loans net of unearned fees $137,061 $140,661 $209,593
======= ======= =======
</TABLE>
The Bank's credit policy limits concentrations of loans in any
industry or collateral. Efforts to reduce any remaining concentrations
continue.
<PAGE> 6
Historically, the Bank's real estate loans secured by single family
residences were principally mortgages held for sale that were
originated by the Mortgage Banking Operation. These were sold to
investors through firm commitments, generally in less than 90 days.
The loans amounted to $10.4 million, or 7.4% of the December 31, 1993,
loan portfolio. This part of the loan portfolio historically presents
almost no credit risk. The mortgage origination operation sale
eliminated this loan concentration. The remainder of real estate loans
are generally collateralized by a first or second trust deed position.
Lending efforts have been directed away from commercial real estate,
as well as construction and multifamily lending. The Bank is now
focused on business lending to middle market customers. Current credit
policy now permits commercial real estate lending generally only as
part of a complete commercial banking relationship with a middle
market customer. Existing commercial real estate loans, 19% of the
loan portfolio, or $26 million at March 31, 1994, compared to $27
million at year-end 1993, are secured by first or second liens on
office buildings and other structures. The loans are secured by real
estate that had appraisals in excess of loan amounts at origination.
Monitoring and controlling the Bank's allowance for loan losses is a
continuous process. All loans are assigned a risk grade, as defined by
credit policies, at origination and are monitored to identify changing
circumstances that could modify their inherent risks. These
classifications are one of the criteria considered in determining the
adequacy of the allowance for loan losses.
The amount and composition of the allowance for loan losses is as follows:
Table 2 Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
Amounts in thousands of dollars March 31, December 31, March 31,
1994 1993 1993
---- ---- ----
<S> <C> <C> <C>
Commercial & Industrial Loans $6,392 $5,699 $9,783
Real estate loans - Held for Sale 0 67 128
Real estate loans - Mortgages 277 225 324
Real estate loans - Construction 5 10 45
Other loans 0 0 12
Loans 6,674 6,001 10,292
Unfunded commitments and letters of credit 551 512 531
------ ------ -------
Total Allowance for loan losses $7,225 $6,513 $10,823
====== ====== =======
</TABLE>
Adequacy of the allowance is determined using management's estimates
of the risk of loss for the portfolio and individual loans. Included
in the criteria used to evaluate credit risk are, wherever
appropriate, the borrower's cash flow, financial condition, management
capabilities, and collateral valuations, as well as industry
conditions. A portion of the allowance is established to address the
risk inherent in
<PAGE> 7
general loan categories, historic loss experience,
portfolio trends, economic conditions, and other factors. Based on
this assessment a provision for loan losses may be charged against
earnings to maintain the adequacy of the allowance. The allocation of
the allowance based upon the risks by type of loan, as shown in Table
2, implies a degree of precision that is not possible when using
judgments. While the systematic approach used does consider a variety
of segmentations of the portfolio, management considers the allowance
a general reserve available to address risks throughout the entire
loan portfolio.
Activity in the allowance, classified by type of loan, is as follows:
Table 3 Analysis of the Changes in the Allowance for Loan Loss
<TABLE>
<CAPTION>
Amounts in thousands of dollars For the Periods Ended
March 31, December 31, March 31,
1994 1993 1993
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $6,513 $12,986 $12,986
Loans charged off:
Real estate secured loans 200 3,266 568
Commercial loans secured and unsecured 464 6,582 2,520
Loans to individuals, installment and other loans 0 901 209
Total charge-offs 664 10,749 3,297
Recoveries of loans previously charged off:
Real estate secured loans 493 393 2
Commercial loans secured and unsecured 882 3,189 949
Loans to individuals, installment and other loans 0 244 33
Total recoveries of loans previously charged off 1,377 3,826 984
Net charge-off (recovery) (713) 6,923 2,313
Provision for loan losses 0 450 150
------ ------ -------
Balance at end of period $7,226 $6,513 $10,823
====== ====== =======
Net loan charge-offs (recoveries) as a percentage of
average gross loans outstanding during the period ended (0.52)% 3.49% 1.15%
==== ==== ====
</TABLE>
The Bank's policy concerning nonperforming loans is more conservative
than is generally required. It defines nonperforming assets as all
loans ninety days or more delinquent, loans classified nonaccrual, and
foreclosed, or in substance foreclosed real estate. Nonaccrual loans
are those whose interest accrual has been discontinued because the
loan has become ninety days or more past due or there exists
reasonable doubt as to the full and timely collection of principal or
interest. When a loan is placed on nonaccrual status, all interest
previously accrued but uncollected is reversed against operating
results. Subsequent payments on nonaccrual loans are treated as
principal reductions. At March 31, 1994, nonperforming loans amounted
to $1.1 million, down 20% from $1.4 million at December 31, 1993.
<PAGE> 8
Table 4: Nonperforming Assets
<TABLE>
<CAPTION>
Amounts in thousands of dollars March 31, December 31, March 31,
1994 1993 1993
---- ---- ----
<S> <C> <C> <C>
Loans not performing (1) $308 $378 $3,067
Insubstance foreclosures 800 1,000 3,535
----- ----- -----
Total nonperforming loans 1,108 1,378 6,602
Other real estate owned 0 920 4,432
----- ----- -----
Total nonperforming assets $1,108 $2,298 $11,034
===== ===== ======
Allowance for loan losses as a percent of:
Nonperforming loans 652% 473% 164%
Nonperforming assets 652% 283% 98%
Nonperforming assets as a percent of total assets 0.8% 0.8% 3.3%
Nonperforming loans as a percent of total loans 0.8% 1.0% 3.1%
Note 1:
Loans not performing
Performing as agreed $271 $9 $2,034
Partial performance 0 369 1,162
Not performing 37 0 3,406
------ ------ ------
$308 $378 $6,602
====== ====== ======
Nonaccrual:
Loans $308 $378 $5,595
Troubled debt restructurings 0 0 1,007
(a) Past due with respect to principal and/or interest and continuing to accrue interest.
</TABLE>
SECURITIES
The securities portfolio at March 31, 1994, totaled $68.8 million,
compared to $88.0 million at year-end 1993. The securities are all
held in a Held for Investment portfolio. There was no held for sale
portfolio at March 31, 1994 or year-end 1993. This portfolio is
recorded at amortized cost. It is the Bank's intention to hold these
securities to their individual maturity dates.
There have been no realized gains or losses on securities in the first
quarter of 1994. Gains of $77 thousand were realized in the
comparable quarter of 1993. At March 31, 1994, there were unrealized
gains of $28 thousand and losses of $961 thousand in the securities
portfolio.
Additional information concerning securities is provided in the
footnotes to the accompanying financial statements.
OTHER REAL ESTATE OWNED
At March 31, 1994, there was no Other Real Estate Owned on the Bank's
balance sheet, compared with $920 thousand at December 31, 1994. The
carrying values of these properties are at fair value, which is
determined using recent appraisal values adjusted, if necessary, for
other market conditions. Loan balances in
<PAGE> 9
excess of fair value are charged to the allowance for loan losses when the loan
is reclassified to other real estate. Subsequent declines in fair value are
charged against an allowance for real estate owned losses created by charging
a provision to other operating expenses. Expenses related to Other
Real Estate Owned were $8 thousand in the quarter ended March 31, 1994
and $22 thousand in the first quarter of 1993.
DEPOSIT CONCENTRATION
Due to its historic focus on real estate-related activities, the Bank
developed a concentration of deposit accounts from title insurance and
escrow companies. These deposits are generally noninterest bearing
transaction accounts that contribute to the Bank's interest margin.
Noninterest expense related to these deposits is included in other
operating expense. The Bank monitors the profitability of these
accounts through an account analysis procedure.
The Bank offers products and services allowing these customers to
operate with increased efficiency. A substantial portion of the
services, provided through third party vendors, are automated data
processing and accounting for trust balances maintained on deposit at
the Bank. These and other banking related services, such as messenger
and deposit courier services, will be limited or charged back to the
customer if the deposit relationship profitability does not meet the
Bank's expectations.
Noninterest bearing deposits represent nearly the entire title and
escrow relationship. These balances have been reduced substantially
as the Bank focused on middle market business loans. The balance at
March 31, 1994, was $49.2 million compared to $58.1 million at
December 31, 1993. Costs relative to servicing the above
relationships are the significant portion of the Bank's customer data
processing and messenger and courier costs. Part of the decrease in
these expenses is related to lower general market interest rates, but
the majority is due to the reduced amount of this deposit
concentration.
The Bank had $17.0 million in certificates of deposit larger than $100
thousand dollars at March 31, 1994. The maturity distribution of these
deposits is relatively short term, with $11.2 million maturing within
3 months and the balance maturing within 12 months.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the Bank's ability
to meet cash requirements. The liquidity position is managed giving
consideration to both on and off-balance sheet sources and demands for
funds.
<PAGE> 10
Sources of liquidity include cash and cash equivalents (net of Federal
Reserve requirements to maintain reserves against deposit
liabilities), securities eligible for pledging to secure borrowings
from dealers pursuant to repurchase agreements, loan repayments,
deposits, and borrowings from a $20 million overnight federal funds
line available from a correspondent bank. Potential significant
liquidity requirements are withdrawals from noninterest bearing demand
deposits and funding of commitments to loan customers.
During 1993, the Bank maintained a $20 million line of credit with a
major purchaser of the mortgage loans originated by the mortgage
origination operation. This warehouse line was terminated in
conjunction with the sale of that operation.
From time to time the Bank may experience liquidity shortfalls ranging
from one to several days. In these instances, the Bank will either
purchase federal funds, and/or sell securities under repurchase
agreements. These actions are intended to bridge mismatches between
funding sources and requirements, and are designed to maintain the
minimum required balances. Liquidity volatility was significantly
reduced by the sale of the mortgage origination operation which
created volatility with production volume fluctuations.
The Bank's historical portfolio of large certificates of deposit
(those of $100 thousand or more) has not been significant relative to
the total deposit base. At March 31, 1994 this funding source was
7.8% of average deposits, compared to 7.3% at December 31, 1993. This
funding source has traditionally been used to manage liquidity needs
within the deposit portfolio.
<PAGE> 11
Table 5 Interest Rate Maturities of Earning Assets and Funding Liabilities
at March 31, 1994
<TABLE>
<CAPTION>
Amounts in thousands of dollars Amounts Maturing or Repricing in
---------------------------------------------------------------------
More Than 3 More Than 6 More Than 9
Months But Months But Months But
Less Than 3 Less Than 6 Less Than 9 Less than 12 12 Months &
Months Months Months Months Over
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Earning Assets
Gross Loans (1) $128,971 $348 $886 $838 $5,018
Securities 20,999 4,053 3,416 3,000 38,750
Federal funds sold & other 17,000 --- --- --- ---
-------- ------ ------ ------ ------
Total earning assets 166,970 4,401 4,302 3,838 43,768
-------- ------ ------ ------ ------
Interest-bearing deposits:
Now and money market 62,913 --- --- --- ---
Savings 6,964 --- --- --- ---
Time certificates of deposit:
Under $100 6,479 5,071 3,089 623 1,375
$100 or more 11,193 3,108 1,770 500 425
Non interest-bearing demand deposits 46,080 --- --- --- ---
-------- ------ ------ ------ ------
Total interest-bearing liabilities 133,629 8,179 4,859 1,123 1,800
-------- ------ ------ ------ ------
Interest rate sensitivity gap 33,341 (3,778) (557) 2,715 41,968
-------- ------ ------ ------ ------
Cumulative interest rate sensitivity gap 33,341 29,563 29,006 31,721 73,689
Off balance sheet financial instruments 750 750 --- --- ---
-------- ------ ------ ------ ------
Net cumulative gap $34,091 $30,313 $29,006 $31,721 $73,689
======== ====== ====== ====== ======
Adjusted cumulative ratio of rate sensitive assets
to rate sensitive liabilities (2) 1.25% 1.21% 1.20% 1.21% 1.49%
======== ====== ====== ====== ======
(1) Included in loans are mortgages in the process of being sold.
(2) Ratios greater than 1.0 indicate a net asset sensitive position.
Ratios less than 1.0 indicate a liability sensitive position. A
ratio of 1.0 indicates a risk neutral position.
</TABLE>
Assets and liabilities shown on Table 6 are categorized based on
contractual maturity dates. Maturities for those accounts without
contractual maturities are estimated based on the Bank's experience
with these customers. Noninterest bearing deposits of title and escrow
companies, having no contractual maturity dates, are considered
subject to more volatility than similar deposits from commercial
customers. The net cumulative gap position shown in the table above
indicates that the Bank does not have a significant exposure to
interest rate fluctuations during the next twelve months.
CAPITAL
Total shareholders' equity was $27.6 million at March 31, 1994,
compared to $27.0 million at year-end 1993. This increase was due to
earnings, plus the exercise of stock options. The Bank is guided by
statutory capital requirements, which are measured with three ratios,
two of which are sensitive to the risk inherent in various assets and
which consider off-balance sheet activities in assessing capital
adequacy. During 1994 and 1993, the Bank's capital levels exceeded
the "well capitalized" standards, the highest classification
established by bank regulators.
<PAGE> 12
Table 6 Capital Ratios
<TABLE>
<CAPTION>
Regulatory Standards
---------------------------
March 31, December 31, Well
1994 1993 Minimum Capitalized
---- ---- ------- -----------
<S> <C> <C> <C> <C>
Total Risk Based Capital 17.0% 16.7% 8.0% 10.0%
Tier 1 Risk Base Capital 15.7 15.4 4.0 6.0
Leveraged Capital 10.7 9.2 3.0 5.0
</TABLE>
No dividends have been paid in 1994 or 1993. Capital being generated
by current earnings are currently expected to be used to support
anticipated growth of the Bank.
The common stock of the Company is listed on the National Association
of Securities Dealers Automated Quotation (NASDAQ) National Market
Systems where it trades under the symbol CUBN.
EARNINGS BY LINE OF BUSINESS
Prior to the sale of the mortgage origination network in November,
1993, the Bank operated a commercial bank and a mortgage bank as two
distinct business segments. In 1994, real estate lending is generally
only done as part of a commercial banking relationship. For 1994,
therefore, the Bank consists of only a single segment, the commercial
banking operation. Table 7 shows the pre-tax operating contributions
by the Commercial Banking and Mortgage Banking divisions.
Table 7 Pre-tax operating contribution by line of business (i)
<TABLE>
<CAPTION>
Amounts in thousands of dollars
March 31, 1994 March 31, 1993
-------------- -------------------------------------------
Commercial Mortgage
Consolidated Consolidated Banking Banking
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Net interest income $2,752 $3,814 $3,527 $287
Provisions for loan losses 0 150 150 0
2,752 3,664 3,377 287
Noninterest revenue 903 4,349 284 4,065
Total revenues 3,655 8,013 3,661 4,352
Salaries and related benefits 1,543 2,439 1,553 886
Other operating expenses 1,942 4,932 1,978 2,954
Total operating expenses 3,485 7,371 3,531 3,840
Operating income 170 642 130 512
Gain on sale of mortgage servicing portfolio 838 --- --- ---
------ ------ ------ -----
Income before taxes $1,008 $642 $130 $512
====== ====== ====== =====
(i) Inter-divisional transactions have been eliminated at the
division level.
</TABLE>
The Bank changed its strategic direction during the second half of
1992 when the new management team committed its focus to southern
California's middle market commercial business. Historically, it had
concentrated on commercial real estate and related businesses. The
portfolios of loans and deposits that resulted
<PAGE> 13
from past operations have been substantially replaced by new middle market
commercial customer relationships.
Steps taken to facilitate the expansion and market penetration of the
commercial bank include the creation of loan production offices,
establishment of a Small Business Administration ("SBA") loan
production group, and development of an international trade services
group.
Loan production offices have been established in two strategic
locations in southern California. These will serve the San Gabriel
Valley area and the South Bay area. The offices are staffed with
seasoned commercial lenders whose primary focus is business
development. Such offices are cost effective approaches to business
development and allow the Bank access to wider market exposure. While
these offices are primarily staffed with existing personnel, when
appropriate, key people with specific market knowledge and experience
have been hired.
The Bank has established a group of lenders to focus on the production
of commercial loans that can be participated with the SBA. These loans
are subject to the same credit quality policies and procedures as all
commercial loan production. Fees generated from the sale of the
guaranteed portion of the loans will be an important new source of
noninterest income.
Another new product was added with the creation of an international
trade services group. Many of the Bank's existing commercial customers
and prospects are involved in import and/or export. This product line
includes letters of credit, foreign exchange, and foreign collections,
and is another important element in the total banking relationship
offered to our business customers.
NET INTEREST INCOME AND INTEREST RATE RISK
Net interest income is the difference between interest and fees earned
on earning assets and interest paid on funding liabilities. Net
interest income for the first quarter of 1994 was $2.8 million,
compared to $3.6 million for the same period in 1993. The change is
primarily attributable to changes in volume. As a result of efforts to
deal with credit quality issues and refocus the Bank on middle market
business customers, loans outside target markets have been motivated
to leave the Bank. Initially this has an adverse affect on net
interest margin but subsequent growth of the middle market loan
portfolio replaces these assets and provides a more reliable and
valuable source of interest margin.
Yields on earning assets were approximately 6.5% in the first quarter
of 1994, compared to a 7.6% yield for the same period in 1993. The
lower average yield
<PAGE> 14
on earning assets in 1994 is largely due to the
higher mix of Fed Funds and government securities held in 1994
compared with higher concentrations of mortgage loans in 1993.
Through October 8, 1993, net interest income continued to benefit from
an interest rate swap agreement, discussed below. Rates on interest-
bearing liabilities resulted in an average cost of funds of 3.0% in
1994, compared to 3.1% for 1993.
Shrinkage in the Bank's earning asset and funding liability portfolios
contributed to the reduction in net interest income. Average loans
during the first quarter of 1994 decreased $63 million from $200
million in the first quarter of 1993. As previously discussed, this
resulted from the sale of the held for sale mortgage loans, discussed
below, and management's efforts to improve the quality of the loan
portfolio and redirect production to middle market commercial loans.
Earning assets averaged $226 million in 1994, down $31 million from
$257 million in the same period of 1993
Following the sale of the mortgage origination operation, the Bank's
funded warehouse inventory was sold in the normal course of business.
The liquidation of this mortgage loan portfolio is being used to
increase the Bank's investment portfolio and liquidity position. This
liquidity will fund the expected growth of the Bank's core commercial
loan portfolio. While this transition will have a temporary adverse
impact on net interest margin, it facilitates the commercial loan
growth planned for 1994.
Expressing net interest income as a percent of average earning assets
is referred to as margin. Margin for 1994 was 4.91%, compared to 6.01%
for the same period in 1993. The Bank's margin is strong because it
has funded itself with a significant amount of noninterest bearing
deposits. The lower margin in 1994 is largely due to the maturing of
the interest rate swap discussed below.
Through October 8, 1993, the Bank continued to benefit from an
interest rate swap agreement entered into October 8, 1991, which had a
notional value of $100 million. Under this arrangement, the Bank
received a fixed rate of 8.18% and paid interest at prime rate, which
was 6.0% during 1993. The income earned from the interest rate swap
agreement was $0.5 million in the first quarter of 1993.
OTHER OPERATING INCOME
The majority of other operating income in prior years was earned as
the Mortgage Banking Operation originated and sold mortgage loans. The
trends and composition of other operating income are shown in the
following table.
<PAGE> 15
Table 8 Other operating income
<TABLE>
<CAPTION>
Amounts in thousands of dollars
For the Periods Ended
March 31, 1994 March 31, 1993
--------------- ---------------------------------------------------
Commercial Mortgage
Consolidated Consolidated Banking Banking
------------ ------------ ---------- --------
<S> <C> <C> <C> <C>
Processing fees $225 $225
Capitalization of excess servicing rights 71 71
Fees on loans sold 396 396
Premium on sales of mortgage loans $68 2,625 2,625
Service income 466 480 480
Documentation fees 22 208 $33 175
Other service fees and charges 347 267 196 71
Securities & other nonoperating gains 0 77 77 0
Gain on sale of mortgage servicing portfolio 838 --- --- ---
--- --- --- ---
Total $1,741 $4,349 $306 $4,043
====== ====== ==== ======
</TABLE>
The Mortgage Banking Operation earned fee income on loans originated,
and gains as loans were sold to permanent investors. Loans for which
servicing was retained are conventional mortgages under approximately
$200 thousand which were sold to the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and other
institutional investors. Excess servicing rights were capitalized,
and related gains recognized, based on the present value of the
servicing cash flows discounted over a period of seven years. When
loan prepayments occur within this period, the remaining capitalized
cost associated with the loan is written off.
The servicing rights were retained by the bank following sale of the
mortgage origination operation. The Bank has entered into an agreement
with the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation to dispose of any remaining portion of this
portfolio by the end of 1994 because, with the sale of the mortgage
origination operation, the Bank is no longer a qualified
seller/servicer of such loans. In the first quarter of 1994, the bank
sold a portion of the retained servicing rights at a gain of $838
thousand.
OPERATING EXPENSE
Total operating expense for the commercial bank was $1.9 million in
the first quarter of 1994, compared to $2.0 million for the same
period in 1993. Refocusing productive resources toward commercial
banking activities and eliminating historic inefficiencies allowed
this reduction. The current level of operating expense is deemed to be
adequate and will be leveraged further as the core middle market
business is expanded.
PROVISION FOR LOAN LOSSES
The Bank's made no provision for loan losses in 1994 compared with
$150 thousand in the first quarter of 1993. This change in provision
was made possible
<PAGE> 16
by the significant reduction of nonperforming loans.
The relationship between the level and trend of the allowance for loan
losses and nonperforming assets, combined with the results of the
ongoing review of credit quality, determine the level of provisions.
LEGAL AND REGULATORY MATTERS
In June 1992, the Bank entered into an agreement with the Office of
the Comptroller of the Currency (OCC), the Bank's primary federal
regulator, which required the implementation of certain policies and
procedures for the operation of the bank to improve lending operations
and management of the loan portfolio. In November 1993, after
completion of its annual examination, the OCC released the Bank from
the Formal Agreement. Following this, the Federal Reserve Bank of San
Francisco ("Fed") notified the Company on November 29, 1993, that the
Memorandum of Understanding, which it had signed, was terminated
because the requirements of the agreement were satisfied.
<PAGE> 17
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary
Amounts in thousands of dollars March 31, December 31,
1994 1993
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $37,511 $18,440
Federal funds sold 17,000 28,000
------ ------
Total cash and cash equivalents 54,511 46,440
Time deposits with other financial institutions 1,377 1,377
Investment securities (Market value of $67,908 and $87,889 at March 31,
1994 and December 31, 1993, respectively) 68,842 88,034
Loans, (Net of allowance for loan losses of $7,226 and $6,513 at March
31, 1994, and December 31, 1993, respectively) 129,835 134,148
Premises and equipment, net 872 924
Other real estate owned, net --- 920
Accrued interest receivable and other assets 7,111 7,363
-------- --------
Total Assets $262,548 $279,206
======== ========
LIABILITIES AND SHAREHOLDERS'EQUITY
Deposits:
Demand deposits $123,782 $125,665
Savings deposits 69,505 66,214
Time deposits under $100 16,637 27,753
Time deposits of $100 or more 16,996 19,296
------- -------
Total deposits 226,920 238,928
Accrued interest payable and other liabilities 8,006 13,288
------- -------
Total liabilities 234,926 252,216
------- -------
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 10,000,000 shares
No shares issued or outstanding in 1994 or 1993 --- ---
Common stock, no par value:
Authorized - 20,000,000 shares
Issued and outstanding - 4,437,312 in 1994, and 4,424,306 in 1993. 26,304 26,250
Retained earnings 1,318 740
------ ------
Total Shareholders' equity 27,622 26,990
------ ------
Total Liabilities and Shareholders' equity $262,548 $279,206
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 18
Consolidated Statements of Income CU Bancorp and Subsidiary
<TABLE>
<CAPTION>
Amounts in thousands of dollars, except per share data For the three months ended March 31,
------------------------------------
1994 1993
---- ----
<S> <C> <C>
Revenue from earning assets:
Interest and fees on loans $2,831 $3,773
Benefits of interest rate hedge transactions --- 538
Interest on taxable investment securities 641 462
Interest on tax exempt investment securities 1 10
Interest on time deposits with other financial institutions 16 37
Interest on federal funds sold 147 46
----- -----
Total revenue from earning assets 3,637 4,866
----- -----
Cost of funds:
Interest on interest-bearing demand deposits 361 419
Interest on savings deposits 45 92
Interest on time deposits under $100 214 162
Interest on time deposits of $100 or more 143 200
Interest on federal funds purchased & securities sold under agreements to repurchase 23 27
Interest on other borrowings 99 152
----- -----
Total cost of funds 885 1,052
----- -----
Net revenue from earning assets before provision for loan losses 2,752 3,814
Provision for loan losses 0 150
----- -----
Net revenue from earning assets 2,752 3,664
----- -----
Other operating revenue:
Capitalization of excess servicing rights --- 71
Servicing income - mortgage loans sold 466 480
Other fees & charges - commercial 229 206
Fees on loans sold 0 396
Premium on sales of mortgage loans 68 2,625
Other fees and charges - mortgage 140 494
Gain on sale of mortgage servicing portfolio 838 ---
Gain on sale of investment securities (before taxes of $0, and $11, in 1994, 1993, respectively) --- 28
Gain on sale of securities held for sale (before taxes of $0 and $20 in 1994 and
1993, respectively) --- 49
----- -----
Total other operating revenue 1,741 4,349
----- -----
Other operating expenses:
Salaries and related benefits 1,543 2,439
Selling expenses - mortgage loans 126 2,088
Other operating expenses 1,816 2,844
----- -----
Total operating expenses 3,485 7,371
----- -----
Income before provision for income taxes 1,008 642
Provision for income taxes 430 258
----- -----
Net income $578 $384
===== =====
Earnings per share $0.13 $0.09
===== =====
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 19
CU BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
For the three months
ended March 31,
---------------------
1994 1993
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $578 $384
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses --- 150
Increase (decrease) in cash provided by other operating activities (4,004) 1,307
------ ------
Total adjustments (4,004) 1,457
------ ------
Net cash (used) by operating activities (3,426) 1,841
------ ------
Cash flows from investing activities:
Net (increase) decrease in investment securities 19,192 46,880
Net (increase) decrease in loans 4,313 (11,269)
(Increase) in other investing activities (54) (129)
------ ------
Net cash provided by investing activities 23,451 35,482
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits 1,408 (35,409)
Net increase (decrease) in time certificates of deposit (13,416) 19,002
Net increase in other financing activities 54 0
------ ------
Net cash (used) by financing activities (11,954) (16,407)
------ ------
Net increase in cash and cash equivalents 8,071 20,916
Cash and cash equivalents at beginning of year 46,440 55,989
------- -------
Cash and cash equivalents at end of year $54,511 $76,905
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 20
Notes to Consolidated Financial Statements
March 31, 1994
UNAUDITED
Note A. BASIS OF PRESENTATION
The accounting and reporting policies of CU Bancorp ("the Company")
and its wholly owned subsidiary, California United Bank, N.A. ("the
Bank"), are prepared in accordance with generally accepted accounting
principles used in the banking industry. All material inter company
balances have been eliminated and all material interim period
adjustments which, in the opinion of management, are necessary for a
fair presentation of financial condition, results of operations, and
cash flow have been made.
Note B. EARNINGS PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during
the periods presented, except when the effect of the latter would be
anti-dilutive.
NOTE C. SECURITIES
The Bank has the intent and ability to hold its investment securities
until maturity. Accordingly, investment securities are carried at
cost, adjusted for amortization of premiums and accretion of discounts
on a straight-line basis, which approximates the effective interest
method. Gains and losses recognized on the sale of investment
securities are based upon the adjusted cost and determined using the
specific identification method.
The Bank has no securities classified as "held for sale", indicating
the willingness to sell these securities under certain conditions.
These securities would be carried at current market value with
unrealized gains or losses not recognized as current income but
reported as an increase or decrease to capital in the statements of
financial condition and in the statements of shareholders' equity.
The following tables set forth the book value and market value, of
investment securities at March 31, 1994.
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized
(Thousands of dollars) Book Value Gains Losses Market Value
---------- ----- ------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $57,516 $(961) $56,555
U.S. Government Agency Securities 10,143 10,143
State and Municipal Securities 750 $28 778
Other 0 0
Federal Reserve Bank Stock 433 433
------- --- ----- -------
Total $68,842 $28 $(961) $67,909
======= === ===== =======
</TABLE>
At March 31, 1994, investment securities with a book value of $20.8
million were pledged to secure U.S. District Court deposits and for
other purposes as required or permitted by law. Included in interest
on investment securities is $1.0 thousand of interest from tax-exempt
securities.
<PAGE> 21
Note D. AVERAGE FEDERAL RESERVE BALANCES
The average cash reserve required to be maintained at the Federal
Reserve Bank was approximately $6 million, $9 million, and $8 million
for the periods ending March 31, 1994 and December 31 and March 31,
1993, respectively.
Note E. PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
Amortization of leasehold improvements is also computed using the
straight-line method over the shorter of the useful life of the
improvement or the term of the lease.
Note F. OTHER REAL ESTATE OWNED
Real estate owned, acquired either through foreclosure or deed in lieu
of foreclosure, is carried at the lower of cost or fair value. When
acquired, any excess of the loan amount over the fair value is charged
to the allowance for loan losses. Subsequent write-downs, if any, are
charged to operation expenses in the periods that they become known.
There was no other real estate owned as of March 31, 1994. Other real
estate owned at December 31, and March 31, 1993 was $.9 million and
$4.4 million, respectively.
Note G. INCOME TAXES
Effective January 1, 1993, the Bank implemented the provisions of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." The implementation had no significant impact on the financial
condition or operations of the Bank. SFAS No. 109 utilizes the
liability method and deferred taxes are determined based on the
estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities given the provisions
of the enacted tax laws.
Note H. LOANS
Loans are carried at face amount, less payments collected, allowance
for loan losses, and unamortized deferred fees. Interest on loans is
accrued monthly on a simple interest basis. The general policy of the
Bank is to discontinue the accrual of interest and transfer loans to
nonaccrual (cash basis) status where reasonable doubt exists with
respect to the timely collectibility of such interest. Payments on
nonaccrual loans are accounted for using a cost recovery method.
Loan origination fees and commitment fees, offset by certain direct
loan origination costs, are deferred and recognized over the
contractual life of the loan as a yield adjustment.
The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can reasonably be anticipated.
Management considers current economic conditions, historical loan loss
experience, and other factors in determining the adequacy of the
allowance. The allowance is based on estimates and ultimate losses may
differ from current estimates. These estimates are reviewed
periodically and as adjustments become necessary, they are charged to
earnings in the period in which they become known. The allowance is
increased by provisions charged to operating expenses, increased for
recoveries of loans previously charged-off, and reduced by charge-
offs.
Note I. RECLASSIFICATIONS
Certain items have been reclassified in the prior period financial
statements presented herein, in order to conform to classifications
followed for March 31, 1994.
<PAGE> 22
Note J. LEGAL MATTERS
In the normal course of business the Bank occasionally becomes a party
to litigation. In the opinion of management, based upon consultation
with legal counsel, other than as set forth below, pending or
threatened litigation involving the Bank will have no adverse material
effect upon its financial condition, or results of operations.
The Bank is a defendant in multiple lawsuits related to the failure of
two real estate investment companies, Property Mortgage Company, Inc.,
("PMC") and S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a
federal action by investors in PMC and SLGH (the "Federal Investor
Action"), at least three state court actions by groups of Investors
(the "State Investor Actions"), and an action filed by the Resolution
Agent for the combined and reorganized bankruptcy estate of PMC and
SLGH (the "Neilson" Action). An additional action was filed by an
individual investor and his related pension and profit sharing plans
(the "Individual Investor Action").
Other defendants in these multiple actions and in related actions
include financial institutions, title companies, professionals,
business entities and individuals, including the principals of PMC and
SLGH. The Bank was a depositary bank for PMC, SLGH and related
companies and was a lender to certain principals of PMC. The Bank
denies any participation in the sale of the interests which are the
principal gravamen of the complaints.
Plaintiffs allege that PMC/SLGH was or purported to be engaged in the
business of raising money from investors by the sale and issuance of
interests in promissory notes secured by trust deed and real property
notes secured, or purported to be secured, by real property.
Plaintiffs allege that false representations were made, and the
investment merely constituted a "Ponzi" scheme. Other charges relate
to the Bank's conduct with regard to the depositary accounts, the
lending relationship with the principals and certain collateral taken
in conjunction with these loans. The lawsuits allege inter alia
violations of federal and state securities laws, fraud, negligence,
breach of fiduciary duty, and conversion as well as conspiracy and
aiding and abetting counts with regard to these violations. The Bank
denies the allegations of wrongdoing.
Damages in excess of $100 million have been alleged, and compensatory
and punitive damages have been sought generally against all
defendants, although no specific damages have been prayed for with
regard to the Bank, nor has there been any apportioning of liability
among defendants or attributable to the various claims asserted. A
former officer and director of the Bank has also been named as a
defendant.
Despite the complexity of the case and the length of time the actions
have been on file, very little discovery has been taken. The Federal
Investor and the Neilson Actions are proceeding slowly. The Federal
Court in that case denied the plaintiff's request for class
certification for litigation purposes but granted such certification
for settlement purposes, at least as to one unrelated defendant. As a
result of the denial of the class action status, the plaintiffs filed
the State Investor Actions in the Los Angeles County Superior Court.
The Neilson Action remains in the United States District Court for the
Central District of California.
During 1993, the Bank filed a motion to dismiss racketeering ("RICO")
claims in the Federal Investor Action, originally stated, which motion
was granted.
In early 1994, the Bank's motion for a summary judgment in the
Individual Investor Action was granted, thereby dismissing the case as
to the Bank, subject to appeals of that decision. That case primarily
included allegations regarding the Bank's aiding and abetting the sale
of securities by PMC and SLGH and state securities claims with regard
thereto. It did not make claims with regard to the Bank's depositary
or lending relationships with PMC, SLGH or the principal thereof. No
officer or director of the Bank was named in that case.
The Bank and its former officer have filed claims with insurance
carriers for coverage regarding the remaining litigation. The
attorneys for the Investor and Neilson Actions have made a settlement
demand on the Bank and its former officer for payment of full policy
limits by certain insurance carriers.
On the basis of the current pleadings, no carriers have accepted or
acknowledged coverage, but are continuing to monitor the cases. It is
anticipated that further pleadings and supplemental presentations will
clarify the plaintiffs' claims and the applicability of insurance
coverage. The Bank believes that should insurance be available to its
officers and directors, that the applicable deductible will be between
$500,000 and $1,000,000, and that the maximum coverage available will
be $10,000,000. The applicable policies are reimbursement policies
and do not provide any defense or legal fees coverage at this time.
Notwithstanding this, one of the
<PAGE> 23
insurers has indicated its intention to take over (and assume the cost of) the
defense of the director/officer named in the litigation, subject to a
reservation of rights, and subject to a statement that it is not obligated to
do so.
Based on the limited discovery to date, the Bank is not aware of any
factual basis for the plaintiffs' allegations of intentional
wrongdoing by the Bank or its former officer. The Bank officers
involved in the subject matter deny these allegations. The Bank
believes that the litigation is an attempt to recover from solvent
defendants and their insurers for the alleged wrongdoing of the
PMC/SLGH entities.
Settlement negotiations are ongoing among all the parties to the
lawsuits. In the event of a failure of these negotiations, the Bank
intends to vigorously contest the charges, and believes it has
meritorious legal and factual defenses assertable in connection with
the same.
Note K. REGULATORY MATTERS
On November 2, 1993, the Office of the Comptroller of the Currency
("OCC"), after completion of their annual examination of the Bank,
terminated the Formal Agreement entered into in June, 1992. In
December 1993, the Fed terminated the Memo of Understanding entered
into in August, 1992.
The Formal Agreement had been entered into in June 1992 and required
the implementation of certain policies and procedures for the
operation of the Bank to improve lending operations and management of
the loan portfolio. The Formal Agreement required the Bank to
maintain a Tier 1 Risk Weighted Capital ratio of 10.5% and a 6.0% Tier
1 Leverage Ratio. The Formal Agreement mandated the adoption of a
written program to essentially reduce criticized assets, maintain
adequate loan loss reserves and improve bank administration, real
estate appraisal, asset review management and liquidity policies, and
restricted the payment of dividends.
The agreement specifically required the Bank to: 1) create a
compliance committee; 2) have a competent chief executive officer and
senior loan officer, satisfactory to the OCC, at all times; 3) develop
a plan for supervision of management; 4) create and implement policies
and procedures for loan administration; 5) create a written loan
policy; 6) develop and implement an asset review program; 7) develop
and implement a written program for the maintenance of an adequate
Allowance for Loan and Lease Losses, and review the adequacy of the
Allowance; 8) eliminate criticized assets; 9) develop and implement a
written real estate appraisal policy; 10) obtain and improve
procedures regarding credit and collateral documentation; 11) develop
a strategic plan; 12) develop a capital program to maintain adequate
capital (this provision also restricts the payment of dividends by the
Bank unless (a) the Bank is in compliance with its capital program;
(b) the Bank is in compliance with 12 U.S.C. 55 and 60 and (c) the
Bank receives the prior written approval of the OCC District
Administrator); 13) develop and implement a written liquidity, asset
and liability management policy; 14) document and support the
reasonableness of any management and other fees to any director or
other party; 15) correct violations of law; and 16) provide reports to
the OCC regarding compliance.
The Memorandum of Understanding was executed in August 1992 and
required 1) a plan to improve the financial condition of CU Bancorp
and the Bank; 2) development of a formal policy regarding the
relationship of CU Bancorp and the Bank, with regard to dividends,
inter-company transactions, tax allocation and management or service
fees; 3) a plan to assure that CU Bancorp has sufficient cash to pay
its expenses; 4) ensure that regulatory reporting is accurate and
submitted on a timely basis; 5) prior approval of the Federal Reserve
Bank prior to the payment of dividends; 6) prior approval of the
Federal Reserve Bank prior to CU Bancorp incurring any debt and 7)
quarterly reporting regarding the condition of the Company and steps
taken regarding the Memorandum of Understanding.
<PAGE> 24
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Registrant
has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CU BANCORP
May 12, 1994
By: PATRICK HARTMAN
---------------
Patrick Hartman
Chief Financial Officer
<PAGE> 25
Part II - Other Information
Item 1. Legal Proceedings
Please refer to Notes J and K, on pages 22 and 23 above, for a
complete discussion of both legal and regulatory matters.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Filings on Form 8-K
(a) Exhibits:
(10) Material Contracts
(i) Mortgage Servicing Purchase and Sale Agreement
Dated March 31, 1994 pg. 26
(b) Reports on Form 8-K:
None.
<PAGE> 1
MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT
between
HAMILTON FINANCIAL CORPORATION
(PURCHASER)
and
CALIFORNIA UNITED BANK, N.A.
(SELLER)
Dated March 31, 1994
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
DEFINITIONS 2
ARTICLE 2
SALE AND TRANSFER OF SERVICING 5
ARTICLE 3
PURCHASE PRICE 8
ARTICLE 4
GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER 10
ARTICLE 5
REPRESENTATIONS AND WARRANTIES AS TO LOANS 16
ARTICLE 6
PURCHASER'S REPRESENTATIONS AND WARRANTIES 17
ARTICLE 7
COVENANTS 20
ARTICLE 8
INTERIM SERVICING 26
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER 31
ARTICLE 10
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER 33
ARTICLE 11
TERMINATION 34
ARTICLE 12
MISCELLANEOUS 36
THIS MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT (the
"Agreement") is made and entered into March 31, 1994 by and between
HAMILTON FINANCIAL CORPORATION, a California corporation ("Purchaser")
and CALIFORNIA UNITED BANK, N.A. ("Seller").
<PAGE> 3
R E C I T A L S:
A. Purchaser and Seller have entered into a Letter of Intent
effective as of March 18, 1994 (the "Letter"), pursuant to which
Seller agreed to sell to Purchaser the right to service approximately
1,049 mortgage loans serviced by Seller with an aggregate principal
balance of approximately $ 151,863,473 (collectively hereinafter the
"Loans") and more particularly described on Exhibit "A" attached
hereto. This transaction is also referred to as the "First Quarter
Transaction".
B. Purchaser agreed in the Letter to acquire all right, title
and interest in and to, and to assume the duties relating to, Seller's
Servicing, all on the terms and conditions described herein, which
supersede in their entirety the terms and conditions set forth in the
letter.
C. Buyer and Seller wish to set forth the terms and conditions
of the sale and transfer of the Servicing.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, Purchaser and Seller agree as follows:
ARTICLE 1
DEFINITIONS
Unless the context in which it is used clearly requires
otherwise, as used herein:
1.1 "Advances" means amounts that, as of the Transfer Date(s),
have been advanced in connection with servicing the Loans (including
without limitation, principal, interest, taxes and insurance premiums)
and which are required to be paid by Seller as the servicer for the
Loans pursuant to applicable Investor requirements and the terms of
the applicable Servicing Agreements.
1.2 "Agreement" means this Purchase and Sale Agreement and
all Exhibits hereto as the same may from time be amended or
supplemented by one or more instruments executed by all Parties
hereto.
1.3 "Agreement Date" means the date of execution of this
Agreement by all parties hereto.
1.4 "Business Day" means any day other than (a) a Saturday
or Sunday, or (b) a day on which banking institutions in the state of
California are authorized or obligated by law or by executive order to
be closed.
1.5 "CPI" means Computer Power, Inc. the computer service
bureau for Purchaser and Seller.
1.6 "Delinquent Mortgage" means a mortgage that is ninety
(90) calendar days or more past due.
1.7 "FNMA" means the Federal National Mortgage Association,
or any Successor thereto.
1.8 "FNMA Loans" are those certain FNMA mortgage loans
serviced by Seller, described on Exhibit "A" hereof and the servicing
of which is intended by Seller to be sold to Purchaser.
1.9 "Foreclosure Mortgage" shall mean a Mortgage as of the
Sale Date (1) as to which a summons and complaint have
<PAGE> 4
been filed against the Mortgagor seeking foreclosure of the mortgage, (2)
on which publication in a proceeding to foreclosure by advertisement
against the Mortgagor has occurred, (3) which has been referred to legal
counsel for foreclosure, (4) on which any action has been taken to obtain
title to the mortgage property through exercise a power of sale or (5) in
respect of which one or more of the obligors thereunder is in a proceeding
under Chapters 7, 11, 12 or 13, or any successor provisions thereof, of the
Bankruptcy Code.
1.10 "Investor" is FNMA, or any Private Investor as the case may
be, who owns any of the Loans or holds beneficial title to the Loans.
1.11 "Loans" means the Loans set forth on Exhibit "A".
1.12 "Mortgage" means the mortgage, deed of trust or other
instrument creating a first lien or a first priority ownership or security
interest in an estate in fee simple (except for loans secured by
condominiums in states where such ownership interest is not considered to
be a fee simple interest in real property securing a loan). The term also
includes the related promissory note secured by the Mortgage and is
sometimes used synonymously with the term "Loan" depending on the context.
1.13 "Mortgagor" means the person or persons shown as mortgagors
on the Mortgage, and the borrowers under the related loan.
1.14 "Prior Servicer" means the servicers who serviced any of
the Mortgage Loans prior to Seller, if any.
1.15 "Private Investor" is defined as one of the three investors
identified in the Hamilton, Carter, Smith & Co., Inc. offering WC-5010 and
more specifically identified in Exhibit "A".
1.16 "Purchase Price" is as defined in Section 3.1 hereof.
1.17 "Purchaser" means HAMILTON FINANCIAL CORPORATION.
1.18 "Related Escrow Accounts" means Mortgage
escrow/impound accounts maintained by Seller relating to the
Servicing.
1.19 "Sale Date" means March 31, 1994.
1.20 "Seller" means CALIFORNIA UNITED BANK, N.A.
1.21 "Seller's Knowledge" or "Best of Seller's Knowledge"
mean the actual knowledge of the senior officers of Seller or that
knowledge that such an officer would have obtained upon a reasonable
examination of the official corporate records of Seller.
1.22 "Servicer" means the party responsible for Servicing a
Loan.
1.23 "Servicing" means all of Seller's right, title and
interest in and to the Loans, including its rights and duties as
servicer of FNMA/Private Investor Loans pursuant to the servicing
agreements between Seller & FHLMC/FNMA/Private Investor relating to
the Loans.
1.24 "Servicing Agreements" means the respective mortgage
loan servicing agreements between Seller and FNMA, or Private Investor
pursuant to which Seller performs mortgage servicing with respect to
any of the Loans.
1.25 "Total Servicing Fee" means that with respect to each
Loan, the amount of interest received on a loan by the Seller
exceeding the amount of interest and guaranty fees
<PAGE> 5
the Seller is contractually obligated to remit to FNMA, or Private Investor.
1.26 "Transfer Date" means the date on which Purchaser
shall assume the actual performance of the duties under the Servicing
Agreements from Seller at the end of the "Interim Period" as defined
in Section 8.1 hereof, and shall be
October 1, 1994 (for FNMA and Private Investors).
ARTICLE 2
SALE AND TRANSFER OF SERVICING
2.1 Sale of Right to Servicing. Subject to and upon the
terms and conditions of this Agreement, Seller as of the Sale Date
does hereby sell, transfer, assign and deliver to Purchaser all
beneficial right, title and interest in and to the Servicing,
including without limitation, the right to receive servicing fees on
the Loans.
2.2 Transfer Date. On the applicable Transfer Date:
(a) Purchaser shall assume and Seller shall
cease all servicing responsibilities related to the Loans owned by
FNMA, or Private Investors for which servicing responsibility is
transferred; and
(b) Seller shall transfer to Purchaser the right to
all accrued receivables relating to the Loans including but not
limited to accrued late charge balances and impound/escrow advances.
2.3 Obligations of Seller. Seller covenants and agrees
that:
(a) from the Sale Date until the applicable Transfer
Date, that Seller shall pay, perform and discharge all of its
liabilities and obligations relating to ownership of the Servicing and
all the rights, obligations and duties with respect to the Related
Escrow Accounts, in accordance with the terms and conditions of
Article 8 hereof, until the transfer of such items on the applicable
Transfer Date; and
(b) On or prior to the applicable Transfer Date,
Seller shall assign to Purchaser, by appropriate endorsements and
assignments, all of Seller's rights, title and interest in and to the
Servicing, and the promissory notes and Loans as required by FNMA, or
Private Investor or as reasonably requested by Purchaser. Seller
shall execute or cause to be executed assignments for each Mortgage as
Purchaser may reasonably request. Seller shall prepare and record the
assignments at its sole cost and expense. Seller shall also prepare
assignments of Loans from Purchaser to FNMA, or Private Investor, if
required by FNMA, or Private Investor.
2.4 Obligations of Purchaser. Purchaser covenants and
agrees, that from and after the applicable Transfer Date it shall
service the Loans for which servicing responsibility is transferred on
such date in accordance with the terms and conditions of the Servicing
Agreements, all applicable statutes, regulations and contractual
provisions, and prudent mortgage banking practices. Purchaser shall
not be responsible for the acts or omissions of Seller or prior
servicers, nor for any other obligations or liabilities of Seller or
prior servicers
<PAGE> 6
whatsoever, except those obligations or liabilities
which would not have occurred but for the acts or neglect of the Purchaser.
2.5 Approval to Transfer Servicing.
(a) Seller shall obtain FNMA, or Private Investor
approvals and any other approvals necessary to transfer the Servicing
from Seller to Purchaser; provided that any corporate, regulatory or
other approvals which apply only to Purchaser, shall be obtained by
Purchaser. Seller shall prepare the requests for approval in a manner
to secure from FNMA, or Private Investors a prompt written
determination of the acceptability of the transfer of Servicing.
(b) On or before the applicable Transfer Date, Seller
shall prepare and execute all forms, documents and other information
reasonably requested by FNMA, or Private Investors or others in
connection with the transfer of the Servicing.
2.6 Cooperation. Purchaser and Seller shall cooperate with
and assist each other, and use their best efforts to assure the
orderly transfer of the Servicing from Seller to Purchaser under this
Agreement. Seller and Purchaser shall execute and deliver all
documents, provide all information which is not confidential, and take
or forebear from all such action as may be reasonably necessary,
convenient or appropriate to achieve the purposes of this Agreement.
Each party shall designate an employee to coordinate and be
responsible for the orderly transfer of the Servicing.
ARTICLE 3
PURCHASE PRICE
3.1 Purchase Price. The purchase price for the Servicing
shall be the product of multiplying .70% by the unpaid principal
balance as of the Sale Date of all Loans other than Loans which, as of
the Sale Date, are (a) more than 60 days past due, (b) in litigation,
(c) in foreclosure, (d) in which a bankruptcy action has been filed,
(e) are subject to forbearance or modification agreements less than
180 days old. Loans which are the subject of a standard earthquake
forbearance arrangement in which no more than three monthly payments
have been deferred, to repaid in full on or by March 1995, shall not
be considered a part of the excluded Loans per a, b, c, d, or e above
for purposes of this agreement. Notwithstanding same, on March 1, 1995
these Loans (as detailed in Exhibit B) shall be reviewed for current
status and if delinquent will have their purchase price refunded to
Purchaser within five (5) business days. Such purchase price will be
calculated by multiplying .8336% by the unpaid principal balance on
Exhibit B.
3.2 Payment. Payment of the purchase price will be as
follows:
a. On the Sale Date, Purchaser will wire twenty
percent (20%) of the estimated total purchase price to an account
designated by Seller.
b. Thirty five percent (35%) of the purchase price
shall be wired to the Seller to an account designated by
<PAGE> 7
Seller on June 30, 1994.
c. Thirty five percent (35%) of the purchase price
shall be wired to the Seller to an account designated by Seller within
3 business days of receipt of the final transfer reports.
d. Ten percent (10%) of the purchase price minus final
adjustments will be wired to Purchaser within 15 days of the Transfer
Date(s) upon a successful reconciliation of all transfer balances.
3.3 Other Costs.
(a) Seller shall bear the entire cost of securing any
approvals of the transfer of Servicing from Seller to Purchaser,
including all transfer fees due to FNMA or Private Investors; provided
that any corporate, regulatory or other approvals applicable only to
Purchaser shall be obtained at the sole cost and expense of Purchaser.
(b) Seller shall comply, at its sole cost and expense,
with Purchaser's reasonable requirements pertaining to the processing
and shipping of loan files, insurance files, tax records and
collection records which are reasonably necessary to service the
Loans.
ARTICLE 4
GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER
As an inducement to Purchaser to enter into this Agreement,
Seller represents and warrants with the knowledge that each such
representation and warranty relates to material matters upon which
Purchaser has relied, and it being further understood that each such
representation and warranty is made to the Purchaser as of the Sale
Date except with respect to Sections 4.8 and
4.10 - 4.19.
4.1 Due Incorporation and Good Standing. Seller is
properly licensed and qualified to transact business in all
appropriate jurisdictions to conduct all activities performed with
respect to origination and servicing of the Loans, except where the
failure to be so licensed or qualified would not have a material
adverse effect thereon.
4.2 Authority and Capacity. Seller has all requisite
corporate power, authority and capacity to enter into this Agreement
and to perform the obligations required of it hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, have each been duly and validly
authorized by all necessary corporate action. This Agreement
constitutes the valid and legally binding Agreement of Seller
enforceable in accordance with its terms, except to the extent
enforceability may be limited by applicable bankruptcy, insolvency or
other laws affecting creditors rights generally and by general
principles of equity.
4.3 Effect. The execution, delivery and performance of
this Agreement by Seller, its compliance with the terms hereof and the
consummation of the transactions contemplated hereby (assuming receipt
of the various consents necessary to consummate this Agreement) will
not violate, conflict with, result in a
<PAGE> 8
breach of, constitute a default under, be prohibited by or require any
additional approval under its certificate of incorporation, articles of
incorporation, bylaws, or any material instrument or Agreement to which it is a
party or by which it is bound, or which affects the Servicing, or any state
or federal law rule or regulation or any judicial or administrative
decree, order, ruling or regulation applicable to it or to the
Servicing.
4.4 Compliance with Contracts and Regulations. Seller and,
to the Best of Seller's Knowledge, Prior Servicers have complied with
all material obligations under all contracts to which any of them was
or is a party, and with all applicable federal, state and local laws
and regulations, with respect to and which might affect any of the
Servicing. The laws and regulations which Seller has complied with
include but are not limited to all applicable FNMA or Private Investor
requirements, as the case may be.
4.5 Filing of Reports. For each Loan, Seller and, to the
Best of Seller's Knowledge, Prior Servicers have filed or Seller shall
file through the Transfer Date(s), all required reports including but
not limited to investor reports to FNMA or Private Investor, reports
to all governmental agencies having jurisdiction over the Servicing
and all appropriate private mortgage insurance companies.
4.6 Title to the Servicing and Related Escrow Accounts.
Seller is the lawful owner of the Servicing, is custodian of the
Related Escrow Accounts and has the sole right and authority to
transfer the Servicing and the Related Escrow Accounts as contemplated
hereby. The transfer, assignment and delivery of the Servicing and of
the Related Escrow Accounts in accordance with the terms and
conditions of this Agreement shall vest in Purchaser all rights as a
FNMA/Private Investor servicer free and clear of any and all claims,
charges, defenses, offsets and encumbrances of any kind of nature
whatsoever.
4.7 Related Escrow Accounts. All Related Escrow Accounts
are being maintained in accordance with applicable law and in
accordance with the Servicing Agreements and the terms of the
Mortgages related thereto. Except as to payments which are past due
under the Loans, all escrow balances required by the Loans and paid to
Seller for the account of the Mortgagors are on deposit in the
appropriate escrow/impound accounts.
4.8 Litigation; Compliance with Laws. There is no
litigation, proceeding or governmental investigation pending, or any
order, injunction or decree outstanding which might materially affect
any of the Loans or the Servicing, except for Foreclosure Mortgages.
Additionally, there is no litigation, proceeding or governmental
investigation existing or pending or, to the knowledge of Seller,
threatened, or any order, injunction or decree outstanding against, or
relating to Seller, a Prior Servicer or the Servicing which could have
a material adverse effect upon any of the Loans or the Servicing,
except for Foreclosure Mortgages. Neither Seller nor, to the Best of
Seller's Knowledge, any Prior Servicer has violated any applicable
law, regulation, ordinance, order, injunction or decree, or any other
requirement of any governmental body or
<PAGE> 9
court, which may materially affect any of the Loans or the Servicing.
4.9 Statements Made. No representation, warranty or
written statement made by Seller in this Agreement, or in any exhibit,
schedule, written statement or certificate delivered to Purchaser
pursuant hereto or made in or pursuant to the Letter contains or will
contain any untrue statement of material fact as of the date made or
omits or will omit to state a material fact necessary to make the
statements contained herein or therein not misleading as of the date
made.
4.10 No Accrued Liabilities. To the Best of Seller's
Knowledge, there are no accrued liabilities of Seller with respect to
breaching Seller's responsibility to the Loans or the Servicing or
circumstances under which such accrued liabilities will arise against
Purchaser as successor to the Servicing, with respect to occurrences
prior to the Transfer Date(s).
4.11 FNMA/Private Investor Requirements. Seller and, to
the Best of Seller's Knowledge, each Prior Servicer has performed
under the respective FNMA or Private Investor requirements with
respect to the Servicing, and no event has occurred and is continuing
which, but for the passage of time or the giving of notice or both,
would constitute an event of default thereunder. Seller and, to the
Best of Seller's Knowledge, each Prior Servicer has serviced the Loans
and has kept and maintained complete and accurate books and records in
connection therewith, all in accordance with the respective FNMA and
Private Investor requirements.
4.12 Compliance with Insurance Contracts. Seller has
complied with all obligations under all applicable insurance
contracts, including private mortgage insurance, with respect to, and
which might affect, any of the Servicing. Seller has not taken any
action or failed to take any action which might cause the cancellation
of or otherwise adversely affect any of the insurance policies on a
Loan.
4.13 Private Mortgage Insurance.
(a) Each Mortgage which is represented by Seller to
have private mortgage insurance ("PMI") is insured in the amounts
represented.
(b) As to each private mortgage insurance certificate,
Seller further warrants that it has complied with applicable
provisions of federal status and regulations and applicable PMI
requirements, the insurance is in full force and effect with respect
to each Mortgage, and, to the Best of Seller's Knowledge, no event or
condition exists within the control of Seller which can result in a
revocation of any such insurance.
(c) If a Loan transferred and/or assigned to Purchaser
hereunder which is represented by Seller as having PMI fails to have
PMI, or subsequently loses its PMI by reason of any act or omission of
Seller or any Prior Servicer occurring prior to the Transfer Date(s),
then, upon receipt of written notice from Purchaser, Seller shall have
sixty (60) days to remedy the problem causing loss on insurance. If
Seller is unable within sixty (60) days after receipt of notice to
remedy the problem,
<PAGE> 10
then Seller shall repurchase the loan, provided
FNMA or Private Investors requires such repurchase, as well as the
Servicing from Purchaser within ten (10) Business Days after the
expiration of the sixty (60) day remedial period at the price computed
according to Section 12.5(b), and against delivery of the purchase
price thereof, Purchaser shall assign its rights in such Loan to
Seller and transfer its related Servicing and all mortgage servicing
records related to the Loan, all free and clear of all liens, charges
or encumbrances whatsoever.
4.14 Title Insurance. A title policy currently in effect
running to the benefit of the owner of the Loan has been issued for
each Loan insuring that the Mortgage relating thereto is a valid first
lien on the property therein described, which
has not been modified, and that the mortgaged property is free and
clear of all encumbrances and liens having priority over the first
lien of the mortgage or deed of trust, except for liens for real
estate taxes and special assessments not yet due and payable and
except for easements and restrictions of record identified in the
title policy.
4.15 Non-Recourse Servicing. All loans which were sold to
the Investors were sold without recourse to the Servicer, except as
may arise from any misrepresentation or breach of warranty or covenant
made under the Servicing Agreements or otherwise in connection with
the Servicing.
4.16 Payment of Taxes, Insurance Premiums, Etc. All
applicable taxes, special assessments, ground rents, flood insurance
premiums and mortgage insurance premiums have been paid, by the
Mortgagor or Seller, as required by and in accordance with the terms
of the Loans or the Servicing Agreements.
4.17 Effective Insurance. All required insurance policies,
including hazard, flood, and PMI, remain in full force
and effect, and such policies are with companies acceptable to FNMA
and Private Investor in accordance with the Servicing Agreements.
4.18 Payoff Statements. All payoff and assumption
statements with respect to each Loan provided by Seller to Mortgagors
or their agents were complete and accurate.
4.19 Interest on Escrows. Seller has paid to the mortgagor
all interest required to be paid on any escrow/impound account through
the Transfer Date(s). Evidence of such payment shall be provided to
Purchaser upon request.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES AS TO LOANS
As further inducement to Purchaser to enter into this Agreement,
Seller represents and warrants to Purchaser as of the Sale Date, that
to the Best of Seller's Knowledge:
5.1 Mortgage Documents. The Mortgage documents are
genuine, duly executed by a borrower of legal capacity, and all
insertions in any loan document are correct.
5.2 No Defenses. There are no defenses, set-offs or
counterclaims against the Loan.
<PAGE> 11
5.3 Validity of Note. There is nothing which would impair
the validity of the promissory note, the Mortgage, or any other
material loan document.
5.4 Compliance with Law. The origination and closing of
each Loan complied in all material respects with each of the
federal or state laws or regulations which were in effect at the time
of origination and pertain to the origination and closing of the Loan.
ARTICLE 6
PURCHASER'S REPRESENTATIONS AND WARRANTIES
As an inducement to Seller to enter into this Agreement,
Purchaser represents and warrants as follows, it being acknowledged
that each such representation and warranty relates to material matters
upon which Seller relied, and it being understood that each such
representation and warranty is made to Seller as of the Sale Date and
shall be deemed remade as of the Transfer Date(s):
6.1 Due Incorporation and Good Standing. Purchaser is a
corporation duly organized, validly existing and in good standing
under the laws of the state of California, and is properly licensed
and qualified to transact business in each jurisdiction in which such
qualification is necessary to the conduct of its servicing activities
with respect to the Loans following the respective transfer dates,
except where the failure to be so licensed or qualified would not have
a material adverse effect on the servicing of the Loans after the
Transfer Date(s).
6.2 Authority and Capacity. Purchaser has all requisite
corporate power, authority and capacity to enter into this Agreement
and to perform the obligations required of it hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have each been duly and validly
authorized by all necessary corporate action. This Agreement
constitutes the valid and legally binding agreement of Purchaser
enforceable in accordance with its terms, except to the extent
enforceability may be limited by applicable bankruptcy, insolvency or
other laws affecting the enforcement of creditors rights generally and
by general principles of equity.
6.3 Effect of Agreement. The execution, delivery and
performance of this Agreement by Purchaser, its compliance with the
terms hereof and the consummation of the transactions contemplated
hereby (assuming receipt of the various consents necessary to
consummate this Agreement) will not violate, conflict with, result in
a breach of, constitute a default under, be prohibited by or require
any additional approval under its charter, articles of incorporation,
bylaws, or any material instrument or agreement to which it is a party
or by which it is bound, or any state or federal law, rule or
regulation or any judicial or administrative decree, order, ruling or
regulation applicable to it, except such violation, conflict, breach
or default that would not have a material adverse effect on the
servicing of the Loans following the respective Transfer Date(s).
<PAGE> 12
6.4 Approvals and Compliance. Purchaser is an approved
FNMA Seller/Servicer in good standing. Purchaser is not in material
default under the terms of any agreement between Purchaser and FNMA.
6.5 Litigation. There is no litigation, proceeding or
governmental investigation existing or pending, or to the knowledge of
Purchaser, threatened, or any order, injunction or decree outstanding,
against or relating to Purchaser that could have a material adverse
effect upon the Servicing being purchased by Purchaser hereunder or
the performance of Purchaser of its obligations under the Servicing
Agreements, nor does Purchaser know of any basis for any such
litigation, proceeding or governmental investigation.
6.6 Facts and Omissions. No representation or warranty of
Purchaser contained in this Agreement or in any schedule or written
statement delivered to Seller pursuant hereto contains or will contain
any untrue statement of material fact, or omits or will omit to state
a material fact necessary to make the statements contained herein and
therein not misleading.
ARTICLE 7
COVENANTS
7.1 Notice to Mortgagors. Seller shall, at Seller's
expense, mail to the Mortgagor of each Loan a letter advising the
Mortgagor of the transfer of Servicing to Purchaser no later than
fifteen (15) days prior to the Transfer Date(s) or earlier if required
by state or federal law or by FNMA, provided, however, the content and
format of the letter shall be subject to the prior written approval of
Purchaser, which approval shall not be unreasonably withheld.
Purchaser shall mail to the Mortgagor of each Mortgage, no sooner than
the date of Seller's notice pursuant to this Section 7.1 and no later
than five (5) days after the date of Seller's notice, a letter (in
form and substance reasonably satisfactory to Seller) confirming
Seller's notice of the transfer of the Servicing.
7.2 Notice to Mortgage Insurers. Seller shall, at Seller's
expense, notify all relevant private mortgage insurance companies no
later than fifteen (15) Business Days prior to the Transfer Date(s) by
certified mail, return receipt required, that all insurance premium
billings for the Loans must thereafter be sent to Purchaser. Seller
shall provide Purchaser with a copy of the certified receipt.
Additionally, Seller shall, prior to the Transfer Date(s), obtain the
written consent of any private mortgage insurance companies which have
the contractual right to approve transfer of the Servicing.
7.3 Notice to Taxing Authorities and Insurance Companies.
No later than fifteen days prior to the Transfer Date(s), unless
otherwise agreed by the parties, Seller shall, at Seller's expense,
notify applicable taxing authorities, tax service agencies and
insurance companies and/or agents by certified mail, of the assignment
of the Servicing and instructions to deliver all notices, tax bills
and insurance
<PAGE> 13
statements, as the case may be, to Purchaser from and
after the Transfer Date(s).
7.4 Delivery of Loan Documents/Files. Against delivery of
final payment under Paragraph 3.2(b), Seller shall forward to
Purchaser in a manner reasonably acceptable to Purchaser no later than
three (3) Business Days after the FNMA and Private Investor Transfer
Date(s) all loan documentation in Seller's possession relating to each
Mortgage.
7.5 Delivery of Servicing Records. Against delivery of
final payment under Paragraph 3.2(c), Seller shall deliver to
Purchaser, in a manner acceptable to Purchaser, on the relevant
Transfer Date, all servicing records necessary to effectuate a proper
transfer of servicing.
7.6 Delivery of Data Base Record Definition. Against
delivery of Transfer Date(s) payment under Paragraph 3.2(a), Seller
shall forward to Purchaser no later than ten (10) Business Days after
the Sale Date, or earlier if so requested by Purchaser, a full
definition of user developed field uses of any and all data base
fields ("Data Base").
7.7 Delivery of Data Base Records.
(a) Against delivery of final payment under Paragraph
3.2(b), Seller shall direct the computer service bureau to deliver to
Purchaser on the close of business on the "trial conversion date" (to
be established by Purchaser) the data base records which represent the
Data Base for the Loans as of close of business on the "trial
conversion date".
(b) Against delivery of final payment under Paragraph
3.2(b), Seller shall direct their computer service bureau to deliver
to Purchaser on close of business, within two (2) Business Days of
September 30, 1994, the data base records which represent the Data
Base for the Loans as of close of business on the applicable Transfer
Date(s).
7.8 Escrow/Impound Balance . Within three (3) Business
Days after the Transfer Date(s), Seller shall deliver to Purchaser, in
immediately available funds, the net (net of any Advances) escrow and
suspense balances and all loss draft and buydown balances associated
with the Loans, together with an accounting statement of escrow and
suspense balances and loss draft balances and buydown balances
sufficient to enable Purchaser to reconcile the amount of such funds
with the accounts of the Loans.
7.9 Payoffs and Assumptions. Seller shall provide to
Purchaser on the Transfer Date(s) copies of all assumption and payoff
statements generated by Seller on the Mortgages within the preceding
thirty (30) days. Seller shall notify Purchaser prior to the Transfer
Date(s) of all payoffs and assumptions in process or of which Seller
has any notice or knowledge.
7.10 Mortgage Payments Received Prior to Transfer Date.
Prior to the Transfer Date, all payments received by Seller on each
Mortgage shall be properly applied by Seller to the account of the
particular Mortgagor.
7.11 Mortgage Payments Received After Transfer Date. Any
Mortgage payments received by Seller within sixty (60) days after the
Transfer Date(s) shall be delivered to Purchaser in the
<PAGE> 14
form received within two (2) Business Days after receipt by Seller, properly
endorsed by Seller to Purchaser. Seller shall notify Purchaser of the
particulars of the payment, which notification shall be satisfied if
Seller forwards with its payment sufficient information to permit
appropriate processing of the payment by Purchaser. If certain
Mortgagors persist in forwarding payments to Seller after the Transfer
Date(s), Seller shall notify Purchaser and Purchaser shall take all
steps reasonably necessary to assure that such Mortgagors remit
payments directly to Purchaser.
7.12 Misapplied Payments. Misapplied payments shall be
processed as follows:
(a) Both parties shall cooperate in correcting
misapplication errors.
(b) The party receiving notice of a misapplied payment
occurring prior to the Transfer Date(s) and discovered after the
Transfer Date(s) shall immediately notify the other party.
(c) If a misapplied payment that occurred prior to the
Transfer Date(s) cannot be identified by either party and it has
resulted in a shortage in a Mortgage account, Seller shall be liable
for the amount of such shortage. Seller shall reimburse Purchaser for
the amount of such shortage within thirty (30) days after receipt of
written demand from Purchaser.
(d) If a misapplied payment resulted in the incorrect
calculation of the Purchase Price, a check in the amount of the
shortage and payable to the party shorted shall be delivered by the
other party within ten (10) Business Days after notice thereof.
(e) Any check issued under the provisions of this
Section 7.12 shall be accompanied by a statement indicating the
purpose of the check, the Mortgagor and property address involved, and
the corresponding Seller and/or Purchaser account number.
7.13 Payment of Taxes and Insurance. Before the Transfer
Date(s) Seller will pay all taxes and insurance premiums (including
hazard and PMI premiums) payable from escrow accounts which are (a)
due on or before the Transfer Date(s) whether or not Seller has
received bills for those payments, or (b) due within thirty (30) days
after the Transfer Date(s). Seller shall provide a list to Purchaser
on or before the Transfer Date(s) of tax and insurance bills coming
due thirty (30) days after Transfer Date(s) for which Seller has not
received bills on or before the Transfer Date(s). Seller shall send
to Purchaser within two (2) Business Days of Seller's receipt, any tax
or insurance (hazard or PMI) bills received by Seller after the
Transfer Date(s) on the Loans. Purchaser and Seller agree to
cooperate to make sure all bills relating to the Loans and due thirty
(30) days after the Transfer Date(s) are paid by the respective due
dates.
7.14 Missing Payments. Seller agrees to indemnify and
remit to Purchaser any missing escrow funds or unremitted principal
and interest which preceded the transfer of Servicing; provided that
this obligation shall exist only to the extent
<PAGE> 15
Seller was responsible for such shortages under the terms of the Servicing
Agreements and provided further that Purchaser shall reimburse Seller to the
extent such missing payment represented an advance otherwise reimbursable to
Seller under Section 3.3 hereof.
7.15 Tax Contracts. Seller, at its expense, shall assign
to Purchaser on the Transfer Date(s), a fully paid, transferable, life-
of-the-loan, tax service contract with Transamerica Realty Tax
Service. The tax service contract so assigned shall cover each of the
Loans for their respective remaining terms.
7.16 Annual Report to Mortgagors and IRS. Seller agrees to
provide the IRS and each Mortgagor whose Loan Servicing is transferred
under this Agreement with an annual year-end statement in accordance
with IRS and state regulations and FNMA/Private Investor requirements.
Such statement(s) shall reflect the status of the Loan up to the
applicable Transfer
Date. Purchaser shall have no responsibility for providing this
information for the period of time the Loan was serviced by the Seller and
Seller is likewise not responsible for providing this information for the
period of time the Loan is serviced by Purchaser or its successors. Seller
agrees to mail the applicable information to the mortgagor on or after
January 15, 1995, along with a 1099 INT (Interest on Escrow), if
applicable.
7.17 Further Solicitation. Seller agrees that it shall not
solicit the Mortgagors for any mortgage-related services, including but not
limited to, refinancing their mortgage loan, credit insurance and
homeowner's insurance. General solicitation to the public and borrower
initiated contacts shall not constitute solicitations hereunder.
ARTICLE 8
INTERIM SERVICING
8.1 Servicing of Mortgages. In the event the Transfer Date(s)
with respect to the Servicing or any portion thereof occurs later than the
Sale Date, Seller shall service the Loans relating thereto on behalf of the
Purchaser during that time period (the "Interim Period") as provided
herein. Purchaser agrees and acknowledges that Seller shall perform all
servicing responsibilities through a designated subservicer. Seller
acknowledges that it shall be responsible for any errors and omissions
committed by same subservicer. In the event the Transfer Date(s) with
respect to the Servicing occurs simultaneously with the Sale
Date, these provisions of this Article 8 shall be inapplicable to those
Loans already transferred.
8.2 Assumption of Duties; Standard of Care. Seller agrees that,
throughout the Interim Period, it shall observe and perform all warranties,
representations, covenants and agreements
with respect to the Loans and the Servicing required to be observed
and performed by Seller as servicer under the Servicing Agreements.
Seller shall at all times, service the Loans in accordance with all
applicable statutes, regulations, contractual provisions, and in
accordance with prudent mortgage banking
<PAGE> 16
practices. It is understood and agreed that Seller shall exercise the same
standard of care that it exercises in the servicing of mortgages for its own
account. Among the services to be provided by Seller during the Interim Period
are:
(a) Receive and process Mortgagor's payments;
(b) Make all escrow disbursements in its own name;
(c) Handle all collection efforts with Mortgagor in
its own name;
(d) Provide and handle insurer delinquency notices in
its own name;
(e) Prepare and forward all remittances due for the
months during the Interim Period;
(f) Prepare and submit all cut-off reports for the
months of the Interim Period;
(g) Resolve all items prior to Transfer Date(s)
appearing on reports listed in Section 8.4 (e) and (f).
8.3 Servicing Fee. As consideration for servicing the Mortgages
during the Interim Period, Seller shall receive for each Loan for each
month the Loan is serviced by Seller a servicing fee of five dollars ($
5.00) per Loan. The monthly servicing fee with respect to any Loan is
payable from the principal and interest payment actually received during
the month for that Loan. Seller shall promptly remit to Purchaser on the
day accounting reports are due to FNMA or Private Investor for each month
during the Interim Period, the Total Servicing Fee for each Loan less the
servicing fee retained by Seller under this Section 8.3.
8.4 Reporting by Seller. Servicer shall provide to Purchaser
within five (5) business days of each respective cutoff (FNMA and Private
Investor), a Trial Balance report which shall set forth for the prior
investor accounting period for each Mortgage, subtotaled by pool (as
applicable): (a) collections of principal and interest; (b) the remaining
principal balance; (c) the mortgage interest rate; (d) the servicing fee
retained by Servicer; (the following (e) and (f) will be separate reports,
not part of the Trial Balances); (e) a report with any real estate taxes
still delinquent with anticipated resolution date by account number; (f) a
report listing all hazard insurance expired with anticipated resolution
dates by account number; and (g) such other information as may be
reasonably requested in writing by Purchaser with reasonable notice.
8.5 Notifications. If required by FNMA, or Private Investor
Servicer shall upon execution of this Agreement, notify FNMA, or Private
Investor in writing that Servicer shall service the Loans during the
Interim Period. Purchaser hereby authorizes FNMA or Private Investor to
communicate with, issue instructions to, accept directives from and
otherwise deal with Seller in the manner and to the extent permitted
pursuant to applicable rules and regulations.
8.6 Fees and Advances. During the Interim Period, Servicer
shall be responsible for payment of all guarantee fees to FNMA and for all
advances required by FNMA or Private Investor. Servicer shall also be
responsible for any advances required for the various Mortgage
escrow/impound accounts, and shall be responsible for prompt payment of all
mortgage insurance premiums, hazard insurance premiums and real estate
taxes during the Interim Period. If adequate funds are not
<PAGE> 17
held in escrow to pay, when due, real estate taxes or insurance premiums on any
property securing a Loan, Servicer shall advance sufficient funds to cover any
such deficiency in a manner to ensure timely payment of such taxes or insurance
premiums. Servicer shall be reimbursed for all Advances made pursuant to
this Section 8.6 in accordance with Section 7.8 of this agreement.
8.7 Escrows. Until the Transfer Date(s), Seller shall credit to
the account of borrower all interest required to be credited, or otherwise
accrued, to any escrow amount by applicable law or Investor requirement.
Also, during the Interim Period, Servicer shall maintain all escrow/impound
accounts at a financial institution or institutions of its choice,
consistent with the Servicing Agreements and applicable laws, rules and
regulations.
8.8 After Transfer Date. Following the Transfer Date(s),
Servicer shall endorse and forward to Purchaser all funds received by
Servicer related to the Loans as provided in Section 7.9.
8.9 Suspension. Should Seller at any time during the Interim
Period have its right to service for FNMA or Private Investor temporarily
or permanently suspended, then Purchaser shall, in its sole discretion and
without liability of any kind to Seller, elect to:
(a) Immediately accelerate performance of the provisions of
this Agreement to require immediate transfer of the Servicing and payment
of the purchase Price, provided all necessary approvals can be obtained.
If such approvals cannot be obtained, then;
(b) Immediately terminate this Agreement, at which time
Seller shall be required to refund to Purchaser all portions of the
Purchase Price which have been previously paid by Purchaser plus costs as
provided for in Section 11.2(b) below and Purchaser shall assign its rights
in the Loans and transfer and assign the related servicing and deliver any
and all mortgage servicing records in its possession to Seller.
8.10 Termination. The provisions of Article 8 of this Agreement
shall terminate with respect to the Servicing or portion thereof
transferred on the Transfer Date(s).
8.11 Maintenance of Books and Records. Seller shall keep full
and complete records pertaining to (i) each Mortgage and the collections
made thereon, and (ii) each check paid as distribution of principal and
interest collected, to appropriate parties. During the Interim Period,
Purchaser or its representative, upon three (3) Business Days' written
notice to Seller may examine any and all such records at such time or times
as it may elect during the Seller's regular business hours, subject to the
provisions of Section 12.8.
8.12 Insurance. In addition to insurance required to be
maintained by Seller under the Servicing Agreements, Seller shall also at
its own expense maintain at all times during the Interim Period policies of
fidelity, theft, forgery and errors and omissions insurance. Such policies
shall be in reasonable amounts with acceptable standard coverages in
accordance with industry standards.
8.13 Relationship of Parties. Nothing herein contained shall be
deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Seller
<PAGE> 18
shall be rendered by the Seller as an independent contractor and not as an
agent of Purchaser. The Seller shall have full control of all
of its acts, doings, proceedings, relating to or requisite in
connection with the discharge of its duties and responsibilities under
this Agreement.
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
All of the obligations of Purchaser under this Agreement are
subject to the fulfillment prior to or on the Sale Date and/or the
Transfer Date(s), as the case may be, of each of the following
conditions, any one or more of which may be waived in writing by
Purchaser:
9.1 Accuracy of Representatives and Warranties. The
representations and warranties of Seller contained herein or in any
certificate, schedule or other document delivered pursuant to the
provisions hereof or in connection herewith shall be true and correct
in all material respects as of the Sale Date and the Transfer Date(s),
except to the extent such representations and warranties expressly
relate only to an earlier date, in which case they shall be true and
correct in all material repects only as of such earlier date and
except for changes contemplated by this Agreement or approved by
Purchaser.
9.2 Compliance with Conditions. Seller shall have
performed and complied in all material respects with all conditions
and agreements required by this Agreement to be complied with or
performed by it prior to or on the Sale Date and the Transfer Date(s).
9.3 No Actions. There shall not have been commenced or, to
the knowledge of any party hereto, threatened prior to or on the Sale
Date or the Transfer Date(s) any action, suit or proceeding which may
materially and adversely affect Seller's ability to consummate the
transactions contemplated hereby.
9.4 Consents and Approvals. Seller shall have obtained
prior to or on the Transfer Date(s), all consents and approvals
required for consummation of the transaction contemplated hereby,
including those contemplated by Section 2.5 hereof. Purchaser shall
have obtained all consents and approvals required for the consummation
of the transaction contemplated hereby.
9.5 Sale Date Documents. Seller shall have delivered to
Purchaser on the Sale Date a copy of the resolution of the board of
directors of Seller approving the execution, delivery and performance
of this Agreement, certified as of the Sale Date by the Secretary or
Assistant Secretary of Seller.
ARTICLE 10
CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER
All of the obligations of Seller under this Agreement are subject
to the fulfillment prior to or on the Sale Date and/or the Transfer
Date(s), as the case may be, of each of the
<PAGE> 19
following conditions, any one or more of which may be waived in writing by
Seller.
10.1 Accuracy of Representations and Warranties. The
representations and warranties of Purchaser contained herein or in any
certificate, schedule or other document delivered pursuant to the
provisions hereof or in connection herewith shall be true and correct
in all material respects as of the Sale Date and Transfer Date(s),
except to the extent such representations and warranties expressly
relate only to an earlier date, and except for changes contemplated by
this Agreement or approved by Seller.
10.2 Compliance with Conditions. Purchaser shall have
performed and complied in all material respects with all conditions
and agreements required by this Agreement to be performed or complied
by it prior to or on the Sale Date and Transfer Date(s).
10.3 No Actions. There shall not have been commenced or,
to the knowledge of any party hereto, threatened prior to or on the
Sale Date or Transfer Date any action, suit or proceeding which may
materially and adversely affect Purchaser's ability to consummate the
transaction contemplated hereby.
10.4 Consents and Approvals. Seller shall have obtained
prior to or on the Transfer Date all consents and approvals required
for consummation of the transaction contemplated hereby including
those contemplated by Section 2.5 hereof. Purchaser shall have
obtained all consents and approvals required for the consummation of
the transaction contemplated hereby.
10.5 Sale Date Document. Purchaser shall have delivered to
Seller on the Sale Date a copy of the resolutions of the board of
directors of Purchaser approving the execution, delivery and
performance of this Agreement, certified as of the Sale Date by the
Secretary or an Assistant Secretary of Purchaser.
ARTICLE 11
TERMINATION
11.1 Events of Termination. To the extent and under the
circumstances set forth below, this Agreement may be terminated at any
time by Purchaser or Seller prior to the Transfer Date(s) upon written
notice to the other party as follows:
(a) By Purchaser at any time in the event that the
examination of the books and records of Seller relating to the
Mortgages, the Related Escrow Accounts or the Servicing reveals that
there has been on or before the Sale Date any information provided to
Purchaser in this Agreement or any Exhibit or Schedule hereto was
materially inaccurate or incomplete (as of the date as of which the
information spoke), which can not adequately be remedied by the
payment by the Seller or Purchaser of damages;
(b) By Purchaser or Seller, if FNMA or Private
Investor disapproves or fails to timely approve the transfer of
Servicing in accordance with Section 2.5 hereof;
<PAGE> 20
(c) By Purchaser or Seller if an action, suit or
proceeding of the type the absence of which would be a condition
precedent to either party's obligations described in Section 9.3 and
10.3, respectively, shall have been commenced, or, to the knowledge of
either hereto, threatened;
(d) By Purchaser or Seller, if the other shall
materially breach any material term of this Agreement, which breach
can not adequately be remedied by the payment by Seller or Purchaser
of damages, and such breach shall not have been cured within thirty
(30) days following notice thereof by the other party, but in any
event prior to the Transfer Date(s); and
(e) By Purchaser or Seller, if the conditions
precedent to its obligation to consummate on the Transfer Date(s) the
transaction contemplated hereby have not been satisfied or waived on
or prior to such Transfer Date(s), or such later date as may be
mutually agreed upon in writing by the parties hereto, which can not
adequately be remedied by the payment by the Seller or Purchaser of
damages; provided, however, that neither Purchaser nor Seller shall
have any obligation to waive a condition precedent to its obligation
or to extend the date for satisfaction thereof.
11.2 Requirements and Effects of Termination.
(a) Upon valid and proper termination of this
Agreement pursuant to any provision of Section 11.1, all right, title
and interest in or to the Servicing, the Related Escrow Accounts and
the Mortgages shall revert to Seller and no party hereto shall have
any liability or further obligation to the other party hereunder
except as provided in Paragraphs 11.2(b), 12.1 and 12.10 hereof.
(b) Except as specifically set forth or referred to in
Paragraph 11.2(a) above, if this Agreement is terminated with cause or
the transaction contemplated hereby is not consummated, any amounts
paid by Purchaser pursuant to Paragraphs 3.2(a) or 3.2(b) shall be
immediately refunded by Seller to Purchaser. If such termination
occurs on or before May 31, 1994 Seller shall also reimburse Purchaser
for all costs it has incurred to the date of termination.
ARTICLE 12
MISCELLANEOUS
12.1 Costs and Expenses. Except as otherwise provided for
in this Agreement, costs and expenses incurred in connection with the
transactions contemplated hereby shall be paid as follows:
(a) Seller shall pay all the standard and customary
costs associated with the transfer of the Servicing to Purchaser,
including without limitation, any recording or filing fees, FNMA or
Private Investor transfer fees, any fees related to obtaining any
required approvals, custodian charges, cost of shipping and delivery
of mortgage files to Purchaser, Tax Service tax contract fees, Flood
Service contract fees, and all other
<PAGE> 21
costs associated with the preparation and filing of Mortgage assignments or
any other transfer documents; and
(b) Except as provided in Section 12.1(a) above,
Purchaser shall pay the expenses incurred by it or its affiliates in
connection with the transactions contemplated hereby whether or not
the transactions are consummated.
12.2 Indemnification by Seller.
(a) Subject to the further terms and conditions of
this Agreement, Seller shall indemnify and hold Purchaser harmless
from and shall reimburse Purchaser for any losses, damages,
deficiencies or expenses of any nature (including reasonable
attorneys' fees) incurred by Purchaser before or after the Transfer
Date(s) to the extent that such loss, damage, deficiency or expense
results from:
(1) Any knowing, intentional or negligent
misrepresentation made by Seller in this Agreement, or any knowing,
intentional or negligent inaccurate information or omission in any
schedule, written statement or certificate furnished by Seller
pursuant to this Agreement;
(2) (x) any representation or warranty set forth
in Article 4 or article 5 hereof being untrue in any material respect
as the date made, (y) the failure of Seller to perform its material
obligations under any covenant set forth in Article 7 or Article 8, or
(z) any representation or warranty set forth in the certificate
referenced in Section 9.5 being untrue in any material respect as of
the date of such Exhibit or certificate.
(3) Any material defect in any Loans existing as
of the Transfer Date(s) (including those defects subsequently
discovered), or as a result of any act or omission of Seller prior
thereto:
(4) Material errors in originating or servicing
any of the Loans (e.g., failure to follow underwriting or appraisal
guidelines, misquoted payoffs, misapplied payments, failure to file
timely notice of default or failure to pay taxes or other charges
including penalties and interest) prior to the Transfer Date(s) or as
a result of Seller's act or omission prior thereto. Such errors may
include, without limitation, improper action or failure to act when
required to do so.
Provided, however, that Purchaser has taken reasonable and
appropriate actions to mitigate any such loss, damage, deficiency,
claim or expense. For purposes of this Section 12.2(a) the word
"material" means a misrepresentation, misstatement, breach,
nonperformance, defect, error or omission resulting in a loss to
Purchaser of $500 or more.
12.3 Indemnification of Seller.
(a) Subject to the further terms and conditions of this
Agreement, Purchaser shall indemnify and hold Seller harmless from,
and shall reimburse Seller for any losses, damages, deficiencies or
expenses of any nature (including reasonable attorneys' fees) incurred
by Seller before or after the Transfer Date(s) to the extent that such
loss, damage, deficiency or expense results from:
<PAGE> 22
(1) Any knowing, intentional or negligent
misrepresentation made by Purchaser in this Agreement, or any knowing,
intentional or negligent inaccurate information or omission in any
schedule, written statement or certificate furnished by Purchaser
pursuant to this Agreement,
(2) Any breach of a representation or warranty by
Purchaser or the failure to perform any covenant or condition of
Purchaser contained in this Agreement, or in any schedule, written
statement or certificate furnished by Purchaser pursuant to this
Agreement.
Provided, however, that Seller has taken reasonable and
appropriate actions to mitigate any such loss, damage, deficiency,
claim or expense. For purposes of this Section 12.2(a) the word
"material" means a misrepresentation, misstatement, breach,
nonperformance, defect, error or omission resulting in a loss to
Seller of $500 or more.
12.4 Notice and Settlement of Claims. Each party to this
Agreement shall promptly notify the other party in writing of the
existence of any material fact known to it giving rise to any
obligations of the other party under these Section 12.2 and 12.3 and,
in the case of any claim or any litigation brought by a third party,
which may give rise to any such obligations, each party shall promptly
notify the other party of the making of such claim or the commencement
of such action by a third party as and when same becomes known to it.
12.5 Cure by Seller. If Purchaser notifies Seller of any
claim giving rise to Seller's obligations under Section 12.2, Seller,
at its option, may:
(a) cure or correct the underlying cause of such claim
in a manner and within a time reasonably acceptable to Purchaser and
FNMA or Private Investor (but not exceeding 60 days) as the case may
be;
(b) repurchase from Purchaser the Servicing with
respect to those Loans which are affected by such claim within fifteen
(15) Business Days following receipt by Purchaser of written notice
from Seller of such election as follows; (i) Purchaser shall assign
its rights in such Loan and transfer and assign the related Servicing
and all mortgage servicing records in its possession to Seller, free
and clear of all liens, charges and encumbrances whatsoever, and (ii)
Seller shall (x) reimburse Purchaser for the cost of purchasing such
Loan, if applicable, (y) pay to Purchaser a repurchase price for the
Servicing equal to .8336% of the remaining principal balance of such
Loan as of the date of repurchase, and (z) reimburse Purchaser for any
advances made by Purchaser in connection with the Loan, including
without limitation, any unrecovered advance reimbursements previously
paid to Seller pursuant to Section 3.3; or
(c) if such Loans are in foreclosure or foreclosed,
purchase the property securing such Loans at a price equal to the then
outstanding fair market value or no greater than the outstanding
principal balance of such Loan and reimburse Purchaser for any
advances and other losses made by Purchaser in connection with the
Loans, including without limitation, any
<PAGE> 23
unrecovered advance receivable reimbursements previously paid to Seller
pursuant to Section 3.3.
12.6 Cure by Purchaser. If Seller notifies Purchaser of
any claim giving rise to Purchaser's obligations under Section 12.3,
Purchaser shall have 60 days from the day it receives that notice to
cure or correct the underlying cause of such claim.
12.7 Repurchase of Loan. If FNMA or Private Investor
requests Purchaser to repurchase one or more Loans (including those
from any pools, if applicable), Seller shall promptly repurchase that
Loan(s) and the related servicing out of the appropriate pool(s) or
promptly repurchase that Loan(s) from Purchaser and shall promptly
reimburse Purchaser for any costs Purchaser incurred in handling that
Loan(s); provided, however, that the requested repurchase by FNMA or
Private Investor is not due primarily to an act or omission of
Purchaser. Before Seller's obligation to repurchase Loans arises
under this Section, Purchaser shall notify Seller in writing of the
requested repurchase and Seller shall have sixty (60) days to cure the
problem causing the request for repurchase or to other wise defend
against the repurchase request made by FNMA or Private Investor. The
repurchase of Loans is in addition to the obligations of Seller and
Purchaser to reassign and pay for the servicing on the repurchased
Loan(s) under Section 12.5(b), and shall not otherwise limit Seller's
indemnification of Purchaser under Section 12.2. Seller's repurchase
of Loans shall not alter its rights to indemnification from Purchaser
under Section 12.3. For example, if Seller is required to repurchase a
Loan pursuant to this Section 12.7 and because of an act or omissions
of Purchaser (such as the failure to maintain mortgage or hazard
insurance or to pay applicable taxes or assessments on time), Seller
suffers a loss on the Loan repurchased greater than would have
occurred absent the act or omission of Purchaser, then Purchaser shall
indemnify and hold Seller harmless for such excess loss.
12.8 Supplementary Information. From time to time prior to
and after Transfer Date(s), Seller shall furnish Purchaser such
incidental information, which is reasonably available to Seller,
supplementary to the information contained in the documents and
schedules delivered pursuant hereto as Purchaser may reasonably
request.
12.9 Access to Information. Seller shall give to Purchaser
and its counsel, accountants and other representatives, upon receipt
of written notice not less than one (1) Business Day in advance,
reasonable access during normal business hours throughout the period
prior to the Transfer Date(s), to all of Seller's files, books and
records relating to the Servicing and Related Escrow Accounts.
12.10 Confidentiality. Each party understands that certain
information which has been furnished and will be furnished in
connection with this transaction, including, but not limited to,
information concerning customers or business procedures, servicing
fees or prices, policies or plans of the other party or any of its
affiliates, and also including specifically information in which
Seller has a proprietary
<PAGE> 24
interest such as the identity of the mortgagors under the mortgages, the
remaining principal balances of the Loans and purchase by such mortgagors of
ordinary life, ordinary health, credit life, credit health, credit unemployment
and any other forms of group or individual insurance coverage or of any other
financial services of products of any nature, is confidential and
proprietary, and each party agrees that it will maintain the
confidentiality of such information and will not disclose it to others
or use it except in connection with the proposed acquisition
contemplated by this Agreement, without the consent of the party
furnishing such information. Information which is generally known in
the industry concerning a party or among such party's creditors
generally or which has been disclosed to the other party by third
parties who have a right to do so shall not be deemed confidential or
proprietary information for these purposes. If the proposed
acquisition is not consummated pursuant to Article 12 or otherwise,
each party agrees to promptly return to the other all confidential
materials, and all copies thereof, which have been furnished to it in
connection with the transactions contemplated hereby.
12.11 No Broker's Fees. Except for Seller's broker, Hamilton,
Carter, Smith & Co., Inc., each party hereto represents and warrants
to the other that it has made no agreement to pay any agent, finder,
or broker or any other representative, any fee or commission in the
nature of a finders' fee or originators' fee arising out of or in
connection with the subject matter of this Agreement. The Seller is
responsible for all broker fees to Hamilton, Carter, Smith & Co.,
Inc.; provided this Agreement shall not create any rights, third party
beneficiary or otherwise, in Hamilton, Carter, Smith & Co., Inc.
12.12 Survival of Representations and Warranties. Each party
hereto covenants and agrees that the representations and warranties in
this Agreement, and in any document delivered or to be delivered
pursuant hereto, shall survive the Transfer Date(s).
12.13 Notices. All notices, requests, demands and other
communications which are required or permitted to be given under this
Agreement shall be in writing and shall be deemed served, given and
received when personally delivered to an officer of such party, or in
lieu of such personal service or delivery, when deposited in the U.S.
mail, registered or certified mail, postage prepaid, return receipt
requested, and received on three days from the date of such mailing,
whichever first occurs addressed as follows:
(a) HAMILTON FINANCIAL CORPORATION
525 Market Street, 9th Floor
San Francisco, CA 94105
Attn: Terry W. Malone CMB, EVP
(b) CALIFORNIA UNITED BANK, N.A.
16030 Ventura Boulevard
Encino, CA 91436
Attn: Patrick Hartman, CFO
or to such other address as Purchaser or Seller shall have specified
in writing to the other.
<PAGE> 25
12.14 Waivers. Either Purchaser or Seller may, by written
notice to the other:
(a) Extend the time for the performance of any of the
obligations or other transactions of the other;
(b) Waive compliance with any of the terms, conditions
or covenants required to be complied with by the other hereunder; and
(c) Waive or modify performance of any of the
obligations of the other hereunder.
The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a
waiver of any other subsequent breach.
12.15 Entire Agreement, Amendment. This Agreement and the
documents, instruments and agreements to be executed and delivered
herewith constitute the entire agreement between the parties with
respect to the sale of the Servicing and supersede all prior with
respect thereto, including without limitation, the Letter of Intent.
This Agreement may be amended and any provision hereof waived, but
only in writing signed by the party against whom such amendment or
waiver is sought to be enforced.
12.16 Binding Effect. This Agreement shall inure to the benefit
of and be binding upon parties hereto and their permitted successors
and assigns. Seller may not assign this Agreement or delegate any of
its duties hereunder without the express written consent of Purchaser.
Purchaser may assign this Agreement at any time after the final
payment to its parent corporation or any other subsidiary of its
parent corporation but may not make any other assignment hereof
without the express written consent of Seller. No permitted
assignment or delegation of duties shall relieve the party making such
assignment or delegation from its representations, warranties and the
obligations undertaken pursuant to Section 12.2 or 12.3, or 12.7
hereof.
12.17 Headings. Section titles or captions to this Agreement
are for convenience only and do not define, limit, augment, extend or
describe the content or scope of intent of this Agreement and shall
not be deemed to be a part hereof.
12.18 Choice of Law. This Agreement shall be interpreted and
construed in accordance with the laws of the state of California,
provided in applying the laws of California, its conflict of law rules
shall not be employed to apply the substantive or procedural laws or
equitable principals of any
other state. The parties agree that if any action at law or suit in
equity is commenced with respect to this Agreement or any parties'
obligations hereunder, that venue shall be proper in San Francisco
County, California.
12.19 Incorporation of Exhibits. Exhibits "A" and "B" attached
hereto shall be incorporated herein and shall be understood to be a
part hereof as though included in the body of this Agreement.
12.20 Counterparts. This Agreement may be executed
simultaneously in several counterparts, each of which shall be deemed
an original but all of which together shall constitute one and the
same contract.
<PAGE> 26
12.21 Further Acts. Each of the parties to this Agreement shall
execute and deliver all documents, provide all information which is
not confidential, take or forbear from all such action as may be
necessary, convenient, or appropriate to achieve the purposes of this
Agreement.
IN WITNESS WHEREOF, each of the undersigned parties to this
Agreement has caused this to be duly executed in its corporate
name by one of its duly authorized officers, all as of the date
first above written.
CALIFORNIA UNITED BANK, N.A.
ATTEST: By: PATRICK HARTMAN
DOUGLAS GODDARD Patrick Hartman
Its: Controller Its: Chief Financial Officer
HAMILTON FINANCIAL CORPORATION
By: TERRY W. MALONE
ATTEST: Terry W. Malone CMB
RUSTY LACKEY Its: Executive Vice President
Its: Vice President Loan Administration
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