26
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 June 30, 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 June 30, 1994, the Registrant has outstanding 4,437,312 shares of its
Common stock, no par value.
CU BANCORP
Quarter Ended June 30, 1994
Table of Contents - Form 10-Q
<TABLE>
Page
Part I. Financial Information
Item 1. Financial Statements
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results of Operation. 3
Consolidated Statements of Financial Condition:
-June 30, 1994, and December 31, 1993. 21
Consolidated Statements of Income:
-Three and Six Month Periods Ended June 30, 1994, and
June 30, 1993. 22
Consolidated Statements of Cash Flows:
-Six Month Periods Ended June 30, 1994, and
June 30, 1993. 23
Notes to Consolidated Financial Statements 24
Signatures 27
Part II. Other Information
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Filings on Form 8-K 28
</TABLE>
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
The Company earned $608 thousand, or $0.13 per share, during the second
quarter of 1994, compared to $557 thousand, or $0.12 per share, during the
same period in 1993. This represented the sixth consecutive quarter of
increased profits. Second 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
June 30, 1994, nonperforming assets were $1.0 million, down $0.1 million,
or 9%, from the prior quarter, and nearly $9.0 million, or 90% from the
second quarter of 1993. At June 30, 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 second quarter of 1994 was 699%,
compared to second quarter 1993 levels of 118% and 77%, respectively. This
trend can be seen in Graph 2: Ratio of Allowance for Loan Losses to
Nonperforming Assets.
<TABLE>
GRAPH 1 DATA: NONPERFORMING ASSETS
June 30, September 30, December 31, March 31, June 30,
1993 1993 1993 1994 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonperforming Loans $6,530 $1,065 $1,378 $1,108 $1,042
Nonperforming Assets 9,988 4,034 2,298 1,108 1,042
</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 half 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.
<TABLE>
GRAPH 2 DATA: ALLOWANCE FOR LOAN LOSSES TO NONPERFORMING ASSETS
June 30, September 30, December 31, March 31, June 30,
1993 1993 1993 1994 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance to:
Nonperforming Loans 118% 536% 473% 652% 699%
Nonperforming Assets 77% 142% 283% 652% 699%
</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 17.2%, the Tier 1 Risk-Based Capital Ratio was
15.9%, and the Leverage Ratio was 10.6% at June 30, 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%, 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. On April 1, 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 continues to be a focal point of management's
attention. As a result, considerable improvements have been made. Credit
policies have been established to promote quality production. Target
markets have been redefined to emphasize middle market commercial lending
and reduce real estate concentrations. Further, the Bank's credit policy
limits concentrations of loans in any industry or collateral.
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
December 31, 1993 to June 30, 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 $13 million, or 9%,
for the six months ended June 30, 1994.
<TABLE>
TABLE 1 LOAN PORTFOLIO COMPOSITION
Amounts in thousands of dollars June 30, December 31, June 30,
1994 1993 1993
-------- -------- --------
<S> <C> <C> <C>
Commercial & Industrial Loans $135,725 $120,513 $125,583
Real Estate Loans:
Held for Sale 0 10,426 59,032
Mortgages 6,456 8,496 11,578
Construction 846 1,226 244
Other Loans 223 0 481
-------- -------- --------
Total loans net of unearned fees $143,250 $140,661 $196,918
======== ======== ========
</TABLE>
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, 16% of the loan portfolio, or $23 million at
June 30, 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>
TABLE 2 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Amounts in thousands of dollars June 30, December 31, June 30,
1994 1993 1993
------ ------ ------
<S> <C> <C> <C>
Commercial & Industrial Loans $5,971 $5,699 $6,672
Real estate loans - Held for Sale 0 67 238
Real estate loans - Mortgages 643 225 407
Real estate loans - Construction 100 10 37
Other loans 2 0 11
------ ------ ------
Loans 6,716 6,001 7,365
Unfunded commitments and letters of credit 563 512 368
------ ------ ------
Total Allowance for loan losses $7,279 $6,513 $7,733
====== ====== ======
</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 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>
TABLE 3 ANALYSIS OF THE CHANGES IN THE ALLOWANCE FOR LOAN LOSS
Amounts in thousands of dollars For the Periods Ended
June 30, December 31, June 30,
1994 1993 1993
------- ------- -------
<S> <C> <C> <C>
Balance at January 1 $6,513 $12,986 $12,986
------- ------- -------
Loans charged off:
Real estate secured loans 361 3,266 2,223
Commercial loans secured and unsecured 501 6,582 4,614
Loans to individuals, installment and other loans 0 901 339
------- ------- -------
Total charge-offs 862 10,749 7,176
------- ------- -------
Recoveries of loans previously charged off:
Real estate secured loans 519 393 2
Commercial loans secured and unsecured 1,106 3,189 1,434
Loans to individuals, installment and other loans 3 244 187
------- ------- -------
Total recoveries of loans previously charged off 1,628 3,826 1,623
------- ------- -------
Net charge-off (recovery) (766) 6,923 5,553
Provision for loan losses 0 450 300
------- ------- -------
Balance at end of period $7,279 $6,513 $7,733
======= ======= =======
Net loan charge-offs (recoveries) as a
percentage of average gross loans outstanding
during the period ended (0.56%) 3.49% 2.68%
======= ======= =======
</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 June 30, 1994, nonperforming loans
amounted to $1.0 million, down 24% from $1.4 million at December 31, 1993.
<TABLE>
TABLE 4: NONPERFORMING ASSETS
Amounts in thousands of dollars June 30, December 31, June 30,
1994 1993 1993
------ ------ ------
<S> <C> <C> <C>
Loans not performing (1) $342 $378 $3,853
Insubstance foreclosures 700 1,000 2,677
------ ------ ------
Total nonperforming loans 1,042 1,378 6,530
Other real estate owned 0 920 3,458
------ ------ ------
Total nonperforming assets $1,042 $2,298 $9,988
====== ====== ======
Allowance for loan losses as a percent of:
Nonperforming loans 699% 473% 118%
Nonperforming assets 699% 283% 77%
Nonperforming assets as a percent of total assets 0.4% 0.8% 3.3%
Nonperforming loans as a percent of total loans 0.7% 1.0% 3.0%
Note 1:
Loans not performing
Performing as agreed $118 $9 $1,361
Partial performance 99 369 2,415
Not performing 125 0 77
------ ------ ------
$342 $378 $3,853
====== ====== ======
Nonaccrual:
Loans $342 $378 $3,071
Troubled debt restructurings 0 0 782
(a) Past due with respect to principal and/or interest and continuing to accrue interest.
</TABLE>
SECURITIES
The securities portfolio at June 30, 1994, totaled $58 million, compared to
$88 million at year-end 1993. The securities are all held in a Held for
Investment portfolio. This portfolio is recorded at amortized cost. It is
the Bank's intention to hold these securities to their individual maturity
dates. There was no held for sale portfolio at June 30, 1994 or year-end
1993.
There have been no realized gains or losses on securities in the first half
of 1994. Gains of $77 thousand were realized in the first six months of
1993. At June 30, 1994, there were unrealized gains of $22 thousand and
losses of $1.5 million in the securities portfolio.
Additional information concerning securities is provided in the footnotes
to the accompanying financial statements.
OTHER REAL ESTATE OWNED
At June 30, 1994, there was no Other Real Estate Owned on the Bank's
balance sheet, compared with $920 thousand at December 31, 1993. 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 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 $12
thousand in the six months ended June 30, 1994, with no expenses incurred
in the second quarter. This compares to $75 thousand and $88 thousand in
the three and six month periods ended June 30, 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 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 June 30, 1994, was
$60.9 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.
There have been no significant changes in these costs in the first six
months of 1994.
<TABLE>
TABLE 5 REAL ESTATE ESCROW AND TITLE INSURANCE COMPANY DEPOSITS
Average Balance
Six Months Ended Six months ended
Amounts in thousands of dollars June 30, 1994 June 30, 1994
Percent of Percent of
Amount Total Percent of Amount Total Percent of
Deposits Class Deposits Class
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1994 Balances
Noninterest bearing demand deposits $60,904 25% 49% $51,112 23% 47%
Interest-bearing demand & savings deposits 1,063 1% 1% 2,227 1% 2%
-------- -------- -------- -------- -------- --------
Total deposit concentration $61,967 26% $53,339 24%
======== ======== ========
December 31, 1993 - Year to Date Balances $58,943 25% $70,238 26%
======== ======== ======== ========
</TABLE>
The Bank had $15.9 million in certificates of deposit larger than $100
thousand dollars at June 30, 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.
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.
The Bank had no Federal Funds purchased or borrowings under repurchase
agreements in the first six months of 1994.
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 June 30, 1994 this funding source was 6.5% 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.
<TABLE>
TABLE 6 INTEREST RATE MATURITIES OF EARNING ASSETS AND FUNDING LIABILITIES AT JUNE 30, 1994
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 Less Than Less Than Less than 12 Months
3 Months 6 Months 9 Months 12 Months & Over
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Earning Assets
Gross Loans $134,149 $803 $2,178 $423 $5,697
Securities 3,036 4,391 3,000 3,003 45,953
Federal funds sold & other 33,000 --- --- --- ---
--------- --------- --------- --------- ---------
Total earning assets 170,185 5,194 5,178 3,426 51,650
--------- --------- --------- --------- ---------
Interest-bearing deposits:
Now and money market 81,346
Savings 8,951
Time certificates of deposit:
Under $100 8,397 2,650 1,225 1,399 106
$100 or more 11,156 3,181 600 835 105
Non interest-bearing demand deposits 45,159 --- --- --- ---
--------- --------- --------- --------- ---------
Total funding liabilities 155,009 5,831 1,825 2,234 211
--------- --------- --------- --------- ---------
Interest rate sensitivity gap 15,176 (637) 3,353 1,192 51,439
--------- --------- --------- --------- ---------
Cumulative interest rate sensitivity gap 15,176 14,539 17,892 19,084 70,523
Off balance sheet financial instruments 0 0 0 0 0
--------- --------- --------- --------- ---------
Net cumulative gap $15,176 $14,539 $17,892 $19,084 $70,523
========= ========= ========= ========= =========
Adjusted cumulative ratio of rate sensitive
assets to rate sensitive liabilities (1) 1.10% 1.09% 1.11% 1.12% 1.43%
========= ========= ========= ========= =========
(1) 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 $28.2 million at June 30, 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.
<TABLE>
TABLE 7 CAPITAL RATIOS
Regulatory Standards
June 30, December 31, Adequately Well
1994 1993 Capitalized Capitalized
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Risk Based Capital 17.2% 16.7% 8.0% 10.0%
Tier 1 Risk Base Capital 15.9 15.4 4.0 6.0
Leveraged Capital 10.6 9.2 4.0 5.0
</TABLE>
No dividends have been paid in 1994 or 1993. Capital being generated by
current earnings is 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.
<TABLE>
TABLE 8 STOCK PRICES - UNAUDITED
1994 1993
High Low High Low
---- ---- ---- ----
<S> <C> <C> <C> <C>
First Quarter $7.50 $6.50 $6.25 $3.38
Second Quarter 7.00 5.75 7.00 4.75
Third Quarter --- --- 6.25 5.00
Fourth Quarter --- --- 7.25 5.75
</TABLE>
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.
Tables 9A and 9B show the pre-tax operating contributions by the Commercial
Banking and Mortgage Banking divisions for the three and six months ended
June 30, 1994 and 1993.
<TABLE>
TABLE 9A PRE-TAX OPERATING CONTRIBUTION BY LINE OF BUSINESS (I)
Amounts in thousands of dollars For the three For the three
months ended months ended
June 30, 1994 June 30, 1993
------------- -------------
Commercial Mortgage
Consolidated Consolidated Banking Banking
------------ ------------ ------- -------
<S> <C> <C> <C> <C>
Net interest income $3,320 $3,830 $3,479 $351
Provisions for loan losses 0 150 75 75
------ ------ ------ -----
3,320 3,680 3,404 276
Noninterest revenue 592 5,985 179 5,806
------ ------ ------ -----
Total revenues 3,912 9,665 3,583 6,082
------ ------ ------ -----
Salaries and related benefits 1,536 2,822 1,648 1,174
Other operating expenses 2,016 5,906 1,845 4,061
------ ------ ------ -----
Total operating expenses 3,552 8,728 3,493 5,235
------ ------ ------ -----
Operating income 360 937 90 847
Gain on sale of mortgage servicing portfolio 720 --- --- ---
------ ------ ------ -----
Income before taxes $1,080 $937 $90 $847
====== ====== ====== ======
(i) Inter-divisional transactions have been eliminated at the division
level.
</TABLE>
<TABLE>
TABLE 9B PRE-TAX OPERATING CONTRIBUTION BY LINE OF BUSINESS (I)
Amounts in thousands of dollars For the six For the six
months ended months ended
June 30, 1994 June 30, 1993
------------- -------------
Commercial Mortgage
Consolidated Consolidated Banking Banking
------------ ------------ ------- -------
<S> <C> <C> <C> <C>
Net interest income $6,072 $7,644 $7,006 $638
Provisions for loan losses 0 300 225 75
------ ------ ------ ------
6,072 7,344 6,781 563
Noninterest revenue 1,495 10,334 463 9,871
------ ------ ------ ------
Total revenues 7,567 17,678 7,244 10,434
------ ------ ------ ------
Salaries and related benefits 3,079 5,303 3,243 2,060
Other operating expenses 3,958 10,796 3,782 7,014
------ ------ ------ ------
Total operating expenses 7,037 16,099 7,025 9,074
------ ------ ------ ------
Operating income 530 1,579 219 1,360
Gain on sale of mortgage servicing portfolio 1,558 --- --- ---
------ ------ ------ ------
Income before taxes $2,088 $1,579 $219 $1,360
====== ====== ====== ======
(i) Inter-divisional transactions have been eliminated at the division
level.
</TABLE>
The Bank continues to take steps to facilitate the expansion and market
penetration of the commercial bank including 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 was $3.3 million and $6.1 million for the three and six month
periods ended June 30, 1994, compared to $3.8 million and $7.6 million for
the comparable periods 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.
<TABLE>
Table 10 Analysis of Changes in Net Interest Income (1)
Amounts in thousands of dollars Six months ended June 30, Six months ended June 30,
1994 compared to 1993 1993 compared to 1992
--------------------- ---------------------
Increases(Decreases) Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans, net $(2,811) $52 $(2,759) $(2,634) $(92) $(2,726)
Investments 449 (25) 424 (652) (532) (1,184)
Federal Funds Sold 256 39 295 (305) (102) (407)
------- ---- ------- ------- ------- -------
Total interest income (2,106) 66 (2,040) (3,591) (726) (4,317)
------- ---- ------- ------- ------- -------
Interest Expense
Interest-bearing deposits:
Demand 56 (72) (16) (185) (348) (533)
Savings (70) (3) (73) (62) (77) (139)
Time Certificates of deposit:
Under $100 (84) (1) (85) 262 (47) 215
$100 or more (209) 12 (197) (202) (167) (369)
Federal funds purchased / Repos 0 (43) (43) (16) (4) (20)
Other borrowings (60) 6 (54) 0 242 242
------- ---- ------- ------- ------- -------
Total interest expense (367) (101) (468) (203) (401) (604)
------- ---- ------- ------- ------- -------
Net interest income $(1,739) $167 $(1,572) $(3,388) $(325) $(3,713)
======= ==== ======= ======= =======
(1) The change in interest income or interest expense that is attributable to both change in average balance and average rate has
been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the
absolute amounts of the changes in each.
</TABLE>
Yields on earning assets were approximately 7.5% and 7.1% for the three and
six months ended June 30, 1994, compared to an 8.1% yield for both periods
in 1993. The lower average yield 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 deposits
resulted in an average cost of funds of 2.7% in 1994, compared to 2.9% for
the same period in 1993.
Shrinkage in the Bank's earning asset and funding liability portfolios
contributed to the reduction in net interest income. Average loans during
the second quarter of 1994 decreased $60 million from $191 million in the
second 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 $220
million in 1994, down $23 million from $243 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.
<TABLE>
TABLE 11 AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
Six months ended Six months ended
Amounts in thousands of dollars June 30, 1994 June 30, 1993
------------- -------------
Interest Interest
Income or Annual Income or Annual
Balance Expense Yield or Rate Balance Expense Yield or Rate
-------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans, Net $130,601 $6,043 9.25% $191,361 $8,802 9.20%
Investments 65,755 1,290 3.92 40,486 826 4.08
Certificates of Deposit in other banks 1,377 32 4.65 3,903 72 3.69
Federal Funds Sold 22,594 399 3.53 7,652 104 2.72
-------- -------- ---- -------- -------- ----
Total Earning Assets 220,327 7,764 7.05 243,402 9,804 8.06
Non Earning Assets
Cash & Due From Banks 28,762 49,440
Other Assets 8,009 16,795
-------- --------
Total Assets $257,098 $309,637
Interest-bearing Liabilities
Demand $66,945 778 2.32 $62,384 794 2.55
Savings 8,283 101 2.44 14,082 174 2.47
Time Certificates of Deposits
Less Than $100 19,260 349 3.62 23,932 434 3.63
More Than $100 17,318 276 3.19 30,454 473 3.11
Fed Funds Purchased / Repos --- --- --- 2,588 43 3.32
-------- -------- ---- -------- -------- ----
Total Interest-bearing Liabilities 111,806 1,504 2.69 133,440 1,918 2.87
Noninterest-bearing Deposits 109,787 141,375
-------- --------
Total Deposits 221,593 1,504 1.36 274,815 1,918 1.40
Other Borrowings 5,476 188 6.87 7,221 242 6.70
-------- -------- ---- -------- -------- ----
Total Funding Liabilities 227,069 1,692 1.49 282,036 2,160 1.53
Other Liabilities 2,812 2,306
Shareholders' Equity 27,217 25,295
-------- --------
Total Liabilities and Shareholders' Equity $257,098 $309,637
======== ========
Net Interest Income $6,072 5.51% $7,644 6.28%
======== ==== ======== ====
Shareholders' Equity to Total Assets 10.59% 8.17%
===== =====
</TABLE>
Expressing net interest income as a percent of average earning assets is
referred to as margin. Margin was 6.03% and 5.51% for the three and six
months ended June 30, 1994, compared to 6.30 and 6.28% for the same periods
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 $543 thousand
and $1.1 million in the three and six month periods ending June 30, 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.
<TABLE>
TABLE 12A OTHER OPERATING INCOME
Amounts in thousands of dollars For the three For the three
months ended months ended
June 30, 1994 June 30, 1993
------------- -------------
Commercial Mortgage
Consolidated Consolidated Banking Banking
------------ ------------ ------- -------
<S> <C> <C> <C> <C>
Processing fees $333 $333
Capitalization of excess servicing rights 128 128
Fees on loans sold $15 311 311
Premium on sales of mortgage loans 15 4,168 4,168
Servicing income 249 523 523
Documentation fees 22 277 $27 250
Other service fees and charges 291 245 160 85
Securities & other nonoperating gains 0 0 0 0
Gain on sale of mortgage servicing portfolio 720 --- --- ---
------ ------ ------ ------
Total $1,312 $5,985 $187 $5,798
====== ====== ====== ======
</TABLE>
<TABLE>
TABLE 12B OTHER OPERATING INCOME
Amounts in thousands of dollars For the six For the six
months ended months ended
June 30, 1994 June 30, 1993
------------- -------------
Commercial Mortgage
Consolidated Consolidated Banking Banking
------------ ------------ ------- -------
<S> <C> <C> <C> <C>
Processing fees $566 $566
Capitalization of excess servicing rights 199 199
Fees on loans sold $15 708 708
Premium on sales of mortgage loans 83 6,793 6,793
Servicing income 714 1,003 1,003
Documentation fees 44 485 $60 425
Other service fees and charges 639 503 324 179
Securities & other nonoperating gains 0 77 77 0
Gain on sale of mortgage servicing portfolio 1,558 --- --- ---
------- ------- ------- -------
Total $3,053 $10,334 $461 $9,873
======= ======= ======= =======
</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.
During the first half of 1994, the bank sold a portion of the retained
servicing rights realizing gains of $838 thousand in the first quarter and
$720 thousand in the second quarter.
OPERATING EXPENSE
Total operating expense for the commercial bank was $3.6 million and $7.0
million in the three and six months ended June 30, 1994, compared to $3.5
million and $7.0 million for the same periods in 1993. Operating expenses
for the consolidated Bank have declined in 1994, primarily due to the sale
of the mortgage origination operation at the end of 1993. 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 second quarter of 1993. This change in provision was made
possible 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.
<TABLE>
Consolidated Statements of Financial Condition CU Bancorp and Subsidiary
Amounts in thousands of dollars June 30, December 31,
1994 1993
<S> <C> <C>
Assets ---- ----
Cash and due from banks $42,500 $18,440
Federal funds sold 33,000 28,000
------ ------
Total cash and cash equivalents 75,500 46,440
Time deposits with other financial institutions 1,377 1,377
Investment securities (Market value of $56,502 and $87,889
June 30, 1994 and December 31, 1993, respectively) 58,005 88,034
Loans, (Net of allowance for loan losses of $7,279 and $6,513 at
June 30, 1994, and December 31, 1993, respectively) 135,971 134,148
Premises and equipment, net 790 924
Other real estate owned, net 0 920
Accrued interest receivable and other assets 6,754 7,363
-------- --------
Total Assets $278,397 $279,206
======== ========
Liabilities and Shareholders' equity
Deposits:
Demand deposits $122,739 $125,665
Savings deposits 90,297 66,214
Time deposits under $100 13,777 27,753
Time deposits of $100 or more 15,877 19,296
------- -------
Total deposits 242,690 238,928
Accrued interest payable and other liabilities 7,477 13,288
------- -------
Total liabilities 250,167 252,216
------- -------
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 1,926 740
------- -------
Total Shareholders' equity 28,230 26,990
-------- --------
Total Liabilities and Shareholders' equity $278,397 $279,206
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Income CU Bancorp
and Subsidiary
Amounts in thousands of dollars, For the three months For the six months
except per share data ended June 30, ended June 30,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue from earning assets:
Interest and fees on loans $3,211 $3,948 $6,043 $7,721
Benefits of interest rate hedge transactions 0 543 0 1,081
Interest on taxable investment securities 647 343 1,288 805
Interest on tax exempt investment securities 1 11 2 21
Interest on time deposits with other financial institutions 16 35 32 72
Interest on federal funds sold 252 58 399 104
----- ----- ----- -----
Total revenue from earning assets 4,127 4,938 7,764 9,804
----- ----- ----- -----
Cost of funds:
Interest on interest-bearing demand deposits 417 375 778 794
Interest on savings deposits 56 82 101 174
Interest on time deposits under $100 135 272 349 434
Interest on time deposits of $100 or more 133 273 276 473
Interest on federal funds purchased & securities sold
under agreements to repurchase 0 16 0 43
Interest on other borrowings 66 90 188 242
Total cost of funds 807 1,108 1,692 2,160
----- ----- ----- -----
Net revenue from earning assets before provision for
loan losses 3,320 3,830 6,072 7,644
Provision for loan losses 0 150 0 300
----- ----- ----- -----
Net revenue from earning assets 3,320 3,680 6,072 7,344
----- ----- ----- -----
Other operating revenue:
Capitalization of excess servicing rights 0 128 0 199
Servicing income - mortgage loans sold 249 523 714 1,003
Other fees & charges - commercial 301 179 530 385
Fees on loans sold 15 311 15 708
Premium on sales of mortgage loans 15 4,168 83 6,793
Other fees and charges - mortgage 12 676 153 1,169
Gain on sale of mortgage servicing portfolio 720 --- 1,558 ---
Gain on sale of investment securities (before taxes of $0,
and $11, in 1994, 1993, respectively) 0 0 0 28
Gain on sale of securities held for sale (before taxes of $0
and $20 in 1994 and 1993, respectively) 0 0 0 49
----- ----- ----- ------
Total other operating revenue 1,312 5,985 3,053 10,334
----- ----- ----- ------
Other operating expenses:
Salaries and related benefits 1,536 2,822 3,079 5,261
Selling expenses - mortgage loans 120 3,081 246 5,169
Other operating expenses 1,896 2,825 3,712 5,669
----- ----- ----- ------
Total operating expenses 3,552 8,728 7,037 16,099
----- ----- ----- ------
Income before provision for income taxes 1,080 937 2,088 1,579
Provision for income taxes 472 380 902 638
----- ----- ------ ------
Net income $608 $557 $1,186 $941
===== ===== ====== ======
Earnings per share $0.13 $0.12 $0.26 $0.21
===== ===== ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statement of Cash Flows CU Bancorp and Subsidiary
Amounts in thousands of dollars For the six months ended June 30,
Increase(decrease) in cash and cash equivalents 1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $1,186 $940
------ ------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization 251 416
Amortization of real estate mortgage servicing rights 15 183
Provision for losses on loans and other real estate owned -- 300
Gain on sale of investment securities, net 0 (77)
(Increase) decrease in other assets 1,686 (4,167)
(Decrease) in other liabilities (5,759) (2,436)
(Increase) Decrease in accrued interest receivable (172) 549
Increase in deferred loan fees 84 62
Capitalization of excess mortgage servicing rights 0 (199)
(Decrease) in accrued interest payable (52) (4)
Net amortization of premium on securities 592 149
Accrued benefits from interest rate hedge transactions 0 34
Total adjustments (3,355) (5,190)
------ ------
Net cash provided by operating activities (2,169) (4,250)
------ ------
Cash flows from investing activities
Proceeds from investment securities sold or matured 49,851 58,115
Purchase of investment securities (20,414) 0
Net decrease in time deposits with other financial institutions 0 (2,901)
Net (increase) decrease in loans (1,907) 4,096
(Purchases) of premises and equipment, net (117) (256)
------ ------
Net cash provided by (used in) investing activities 27,413 59,054
------ ------
Cash flows from financing activities
Net increase (decrease) in demand and savings deposits 21,157 (32,700)
Net increase (decrease) in time certificates of deposit (17,395) 11,087
Proceeds from exercise of stock options and director warrants 54 190
------ -------
Net cash provided (used) by financing activities 3,816 (21,423)
------ -------
Net increase in cash and cash equivalents 29,060 33,381
Cash and cash equivalents at beginning of year 46,440 55,989
------- -------
Cash and cash equivalents at end of year $75,500 $89,370
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
June 30, 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 June 30, 1994.
<TABLE>
Gross Gross
Book Unrealized Unrealized Market
(Thousands of dollars) Value Gains Losses Value
------- ------ -------- -------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $50,960 $(1,488) $49,472
U.S. Government Agency Securities 5,862 (37) 5,825
State and Municipal Securities 750 $22 772
Federal Reserve Bank Stock 433 433
------- --- ------- -------
Total $58,005 $22 $(1,525) $56,502
======= === ======= =======
</TABLE>
At June 30, 1994, investment securities with a book value of $40.5 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 $2 thousand of interest from tax-exempt securities.
Note D. AVERAGE FEDERAL RESERVE BALANCES
The average cash reserve required to be maintained at the Federal Reserve
Bank was approximately $5.8 million, $9.0 million, and $8.8 million for the
periods ending June 30, 1994 and December 31 and June 30, 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 June 30, 1994. Other real estate owned at
December 31, and June 30, 1993 was $0.9 million and $3.5 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 June 30, 1994.
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
depository bank for PMC, SLGH and related companies and was a lender to
certain principals of PMC and SLGH ("Individual Loans").
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 loans evidenced by promissory notes 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 depository accounts, the lending relationship
with the principals and certain collateral taken , pledged by PMC and SLGH
in conjunction with the Individual 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. The Bank and the named
officer/director have notified the Bank's insurance carriers of the various
lawsuits.
In August 1994, the Bank entered into a settlement agreement with the
representatives of the various plaintiffs, which, if approved as more fully
set forth below, will dismiss all of the above referenced cases, with
prejudice, against the Bank, its officers and directors, with the exception
of the officer/director previously named. In connection with the
settlement, the Bank will release its security interest in certain disputed
collateral and cash proceeds thereof, which the Bank received from PMC,
SLGH, or the principals, in connection with the Individual Loans. This
collateral has been a subject of dispute in the Neilson Action, with both
the Bank and the representatives of PMC/SLGH asserting the right to such
collateral. All the loans have been charged off, previously. The Bank
will also make a cash payment to the Plaintiffs in connection with the
settlement. In connection with the settlement the Bank will assign its
rights, if any, under various insurance policies, to the Plaintiffs. The
settlement does not resolve the claims asserted against the
officer/director.
The settlement requires the approval of each of the courts in which actions
have been filed, and the Federal Bankruptcy Court. There are a number of
technical issues related to the settlement which must be resolved prior to
its effectiveness.
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 Memorandum of Understanding was executed in August 1992.
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
August 11, 1994
By: PATRICK HARTMAN
---------------
Patrick Hartman
Chief Financial Officer
Part II - Other Information
Item 1. Legal Proceedings
Please refer to Notes J and K, on page 26 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 April 1, 1994 pg. 29
(b) Reports on Form 8-K:
None.
MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT
between
HAMILTON FINANCIAL CORPORATION
(PURCHASER)
and
CALIFORNIA UNITED BANK, N.A.
(SELLER)
Dated: April 1, 1994
CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
DEFINITIONS 2
ARTICLE 2
SALE AND TRANSFER OF SERVICING 5
ARTICLE 3
PURCHASE PRICE 7
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 32
ARTICLE 11
TERMINATION 34
ARTICLE 12
MISCELLANEOUS 36
</TABLE>
THIS MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT (the "Agreement")
is made and entered into April 1, 1994 by and between HAMILTON FINANCIAL
CORPORATION, a California corporation ("Purchaser") and CALIFORNIA UNITED
BANK, N.A. ("Seller").
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 755 mortgage
loans serviced by Seller with an aggregate principal balance of
approximately $ 103,805,000 (collectively hereinafter the "Loans") and more
particularly described on Exhibit "A" attached hereto.
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 rights, 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, 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 to 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 "FHLMC" means Federal Home Loan Mortgage Corporation, or any
Successor thereto.
1.8 "FHLMC Loans" are those certain FHLMC 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 "FNMA" means the Federal National Mortgage Association, or
any Successor thereto.
1.10 "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.
1.11 "Foreclosure Mortgage" shall mean a Mortgage as of the Sale
Date (1) as to which a summons and complaint have
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 of 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.
1.12 "Investor" means FNMA or FHLMC, as the case may be, who owns
any of the Loans or holds beneficial title to the Loans.
1.13 "Loans" means the Loans set forth on Exhibit "A".
1.14 "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.
1.15 "Mortgagor" means the person or persons shown as mortgagors on
the Mortgage, and the borrowers under the related loan.
1.16 "Prior Servicer" means the servicers who serviced any of the
Mortgage Loans prior to Seller, if any.
1.17 "Purchase Price" is as defined in Section 3.1 hereof.
1.18 "Purchaser" means HAMILTON FINANCIAL CORPORATION.
1.19 "Related Escrow Accounts" means Mortgage escrow/impound
accounts maintained by Seller relating to the Servicing.
1.20 "Sale Date" means April 1, 1994.
1.21 "Seller" means CALIFORNIA UNITED BANK, N.A.
1.22 "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.
1.23 "Servicer" means the party responsible for Servicing a
Loan.
1.24 "Servicing" means all of Seller's right, title and interest
in and to the Loans, including its rights and duties as servicer of
FHLMC/FNMA Loans pursuant to the servicing agreements between Seller &
FHLMC/FNMA relating to the Loans.
1.25 "Servicing Agreements" means the respective mortgage loan
servicing agreements between Seller and FHLMC or FNMA pursuant to which
Seller performs mortgage servicing with respect to any of the Loans.
1.26 "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 the Seller is contractually obligated
to remit to FHLMC or FNMA.
1.27 "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
September 16th (for FHLMC), October 1, 1994 (for FNMA).
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 FHLMC or FNMA
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 FHLMC or FNMA 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 FHLMC or
FNMA, if required by FHLMC or FNMA.
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 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 FHLMC or FNMA 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 FHLMC or FNMA
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 FHLMC or FNMA 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 1.0291% 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 on Exhibit B) shall be reviewed for
current status and if delinquent will have their purchase price refunded to
Purchaser within 5 business days. Such purchase price will be calculated
by multiplying .8336% by the unpaid balance as reported 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 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.
e. Prepayment protection. The purchase price will be
reduced by .8336% of all loans that pay off in full between Sale Date and
May 31, 1994. The purchase price will also be reduced by .8336% of all
loans in another transaction (the "First Quarter Transaction") between the
parties hereto that will be consummated on or about March 31, 1994 for the
servicing to approximately $151,863,473, that pay off in full between March
31, 1994 and May 31, 1994.
f. As a penalty for deficient subservicing after the Sale
Date, Seller shall pay a penalty of 4.926 basis points (.04926%) of the
aggregate principal balance of the Loans for each integral increase of
0.50% of the total delinquency rate (including 30, 60, and 90 day
delinquencies, foreclosures and loans in bankruptcy, but excluding
delinquent loans the subject of an earthquake forbearance) for the Loan
balances for this transaction and the "First Quarter Transaction" if the
aggregate exceeds 1.71% measured at Transfer Date(s).
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 FHLMC or FNMA; 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 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 FHLMC or FNMA 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 FHLMC or FNMA 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 FHLMC/FNMA 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 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 FHLMC/FNMA Requirements. Seller and, to the Best of
Seller's Knowledge, each Prior Servicer has performed under the respective
FHLMC or FNMA 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
FHLMC and FNMA 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, then
Seller shall repurchase the loan, provided FHLMC or FNMA 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 FHLMC or
FNMA 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.
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).
6.4 Approvals and Compliance. Purchaser is an approved FHLMC
and FNMA Seller/Servicer in good standing. Purchaser is not in material
default under the terms of any agreement between Purchaser and FHLMC or
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
FHLMC or 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 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 FHLMC/FNMA 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(s), 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
16, 1994 (For FHLMC) and September 30, 1994 (For FNMA), the data base
records which represent the Data Base for the Loans as of close of business
on the applicable Transfer Date.
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(s), 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 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 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 FHLMC and FNMA 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 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 FHLMC or FNMA 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 (FHLMC and FNMA), 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 FHLMC or FNMA, Servicer shall
upon execution of this Agreement, notify FHLMC or FNMA, in writing that
Servicer shall service the Loans during the Interim Period. Purchaser hereby
authorizes FHLMC or FNMA 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 FHLMC or FNMA and for all
advances required by FHLMC or FNMA. 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 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 FHLMC or FNMA 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 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 respects 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.
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 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(s) 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(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.
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 FHLMC or FNMA disapproves or
fails to timely approve the transfer of Servicing in accordance with
Section 2.5 hereof;
(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 the 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, FHLMC or FNMA 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 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:
(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 FHLMC or
FNMA (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 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 FHLMC or FNMA 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 FHLMC or FNMA 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 FHLMC, or FNMA. 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
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.
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.
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: DOUG GODDARD By: PATRICK HARTMAN
------------ ---------------------------
Patrick Hartman
Its: Controller
Its: Chief Financial Officer
HAMILTON FINANCIAL CORPORATION
By: TERRY W. MALONE
-------------------
ATTEST: RUSTY LACKEY Terry W. Malone CMB
Its: Executive Vice President
Its: Vice President Loan Administration
