<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------------------
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ______
Commission file number 2-94289
PRESIDENTIAL MORTGAGE COMPANY
(Exact name of Registrant as specified in its charter)
California 95-3611304
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
21031 Ventura Boulevard
Woodland Hills, California 91364
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (818) 992-8999
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class C and D Units
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of February 29, 1996, the aggregate market value of the voting
limited partnership interests of the Registrant held by non-affiliates of the
Registrant, based on the price at which such interests were originally sold, was
as follows: Class A Limited Partnership Interests: $278,750; Class B Limited
Partnership Interests: $2,581,000; Class C Limited Partnership Interests:
$13,234,375; Class D Limited Partnership Interests: $11,980,500; Class E Limited
Partnership Interests: $10,497,000; Distribution Reinvestment Plan Units:
$255,723; aggregate total of all Limited Partnership Interests held by
non-affiliates: $38,827,348.
Documents Incorporated by Reference
None.
<PAGE> 2
ITEM 1. BUSINESS
THE PARTNERSHIP
Presidential Mortgage Company, is a California limited partnership
formed in 1981 (referred to herein on a consolidated basis with its subsidiaries
as "the Partnership" and on an unconsolidated basis as "Presidential"). Since
1986, Presidential Management Company has been the sole general partner of the
Partnership. The Partnership has four operating subsidiaries: Pacific Thrift and
Loan Company ("Pacific Thrift"), a California corporation; Consolidated
Reconveyance Company ("CRC"), a California limited partnership; Lenders Posting
and Publishing Company ("LPPC"), a California limited partnership; and
Consolidated Reconveyance Corporation, a Washington corporation ("CRC
Washington"). The Partnership operates in two business segments: (i) the real
estate lending business, which is conducted through Presidential and Pacific
Thrift and (ii) the trust deed foreclosure service business, which is conducted
through CRC and LPPC. (See Note 18 of the Notes to Consolidated Financial
Statements.) In 1994, the Partnership formed two new subsidiaries, Pacific
United Group, Inc., a Delaware corporation, and Pacific Unified Mortgage, Inc.,
a Delaware corporation, in preparation for a proposed restructuring plan of the
Partnership. See "Business -- Restructuring Plan." Neither of these subsidiaries
has conducted any significant business operations as of December 31, 1995.
Until 1990, Presidential conducted lending activities directly and
through Pacific Thrift. Since 1990 new lending activities have been conducted
exclusively through Pacific Thrift, and Presidential has acted primarily as a
holding company for the operations of its subsidiaries. The executive offices of
the Partnership and the Corporation are located at 21031 Ventura Boulevard,
Woodland Hills, California, telephone number (818) 992-8999.
PACIFIC THRIFT
Pacific Thrift is a California licensed industrial loan company that
commenced business in 1988 and is supervised and regulated by the California
Department of Corporations ("DOC") and the Federal Deposit Insurance Corporation
("FDIC"). The deposits of Pacific Thrift are insured by the FDIC up to
applicable limits. Pacific Thrift conducts its operations at its main office in
Woodland Hills and produces loans through five loan production offices located
in Walnut Creek, San Jose, Costa Mesa and West Covina, California and, Bellevue,
Washington. In addition, Pacific Thrift originates loans through 60 commission
based loan representatives (as of December 31, 1995) who operate in California,
Washington and nine other states, but Pacific Thrift does not maintain offices
for such representatives except those based in California and Washington.
Pacific Thrift focuses its lending activities exclusively on real estate secured
loans to individuals and small businesses. Pacific Thrift does not offer lease
financing or credit lines. Pacific Thrift offers passbook accounts, term
certificates and money market certificates. Pacific Thrift does not offer other
traditional banking services, such as checking accounts, travelers' checks or
safe deposit boxes.
For the past year, management of Pacific Thrift has concentrated on
improving its operations, by: (i) increasing fee income from loans originated
for sale; (ii) improving asset quality; and (iii) restoring and maintaining
capital ratios in excess of regulatory requirements. Management believes that it
has successfully achieved these goals. Gains on sale of loans originated for
sale increased by $7.7 million (890.0%), to $8.6 million for the year ended
December 31, 1995 compared with $.9 million for the year ended December 31,
1994. Management's goal is to continue growth of gains on sale of loans through
1996. Asset quality, measured as the percentage of adversely classified assets
compared with the total loan and OREO portfolio, improved to 9.65% at December
31, 1995 compared to 14.5% at December 31, 1994. Capital ratios improved from
"adequately capitalized" to levels which would be deemed "well capitalized" in
the absence of an order requiring the maintenance of capital. However, since
Pacific Thrift was subject to a Cease and Desist Order issued May 18, 1995 by
the FDIC (the "1995 Order") as of December 31, 1995, Pacific Thrift was
classified as "adequately capitalized" on that date, in spite of its higher
capital ratios. In March 1996, as a result of its improved capital ratios and
operations, the FDIC proposed that Pacific Thrift enter into a Memorandum of
Understanding ("MOU") with the FDIC that would replace the 1995 Order. See
"Supervision and Regulation -- Regulatory Actions."
Pacific Thrift earned net income of $3.2 million for the year ended
December 31, 1995, compared with net losses of approximately $2.9 million and
$3.2 million for the years ended December 31, 1994 and 1993, respectively. The
net income earned in 1995 reflect primarily the substantial increase in gains on
sale of loans in 1995 compared with all prior periods. Net losses in 1994 and
1993 were due primarily to increased loan losses on Pacific Thrift's loan
portfolio caused by continuing declines in the value of California real estate
held as collateral.
CRC, CRC WASHINGTON AND LPPC
CRC is a California limited partnership formed by the General Partner
in December 1986 and purchased by the Partnership in 1990. CRC provides
foreclosure related services on real estate trust deeds, including conduct of
foreclosure sales and trust deed reconveyances. LPPC was formed by the General
Partner in 1990 and purchased by the Partnership in the same year. LPPC provides
posting and publishing of notices of default and notices of sale for CRC and
other trust deed foreclosure companies. CRC provides services on California
trust deeds to over 300 banks, thrifts, mortgage banks, life insurance companies
and federal regulatory agencies located across the country.
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Approximately one-third of CRC's revenues are derived from lenders located
outside of California, and management anticipates that this percentage will
continue to grow. Less than 5% of the revenues of CRC or of LPPC are derived
from services provided to the Partnership and Pacific Thrift.
In October 1995, the Partnership incorporated a new wholly-owned
subsidiary, CRC Reconveyance Corporation, a Washington corporation ("CRC
Washington"). CRC Washington will provide foreclosure related services on real
estate trust deeds secured by property located in the State of Washington. CRC
Washington will reimburse Pacific Thrift for office space used by CRC Washington
at the office of Pacific Thrift in Bellevue, Washington. CRC Washington has not
conducted significant business operations as of the date hereof.
Trustee foreclosure services accounted for net income of approximately
$.9 million, $.9 million and $1.4 million for each of the years ended December
31, 1995, 1994 and 1993, respectively. Management believes that the primary
reason for the decline in net income has been the merger or acquisition of many
small lending companies into larger banks and lending companies. The acquiring
entities often have affiliated foreclosure service companies or arrangements
with other foreclosure service companies, resulting in the loss of business to
CRC. CRC has been able to replace many of its lost customers with new customers,
which has partially mitigated the loss of some accounts. CRC has now refocused
its marketing strategy to target primarily small and medium-sized lenders. CRC
has hired a sales representative in the San Diego area, and is seeking a sales
representative for the northern California area. In the meantime, CRC's southern
California sales representatives are covering the northern California area.
Management of CRC believes that it can increase net income by increasing its
volume of sales through its current marketing strategy. There can be no
assurance, however, that it will successfully increase net income.
RESTRUCTURING PLAN
On November 24, 1995, the Partnership filed a Registration Statement on
Form S-4 with the Securities and Exchange Commission ("SEC") in connection with
a proposed restructuring plan of the Partnership, the terms of which will be
presented for the vote of the limited partners in 1996. On March 1, 1996, an
Amendment to the Registration Statement on Form S-4 was filed with the SEC,
together with a Registration Statement on Form S-1 in connection with a proposed
public offering to be conducted concurrently with the restructuring plan. The
terms of the restructuring plan and concurrent public offering are subject to
change, and will not be finalized until the Registration Statements are declared
effective by the SEC. Management currently anticipates that the restructuring
plan will be presented for the vote of the limited partners of the Partnership
in April 1996.
BUSINESS STRATEGY
Management of the Partnership has developed a business strategy which
emphasizes the continued growth of loan fee income from loans originated for
sale and securitization. The following are the major components of this
strategy:
- CONTINUE TO EMPHASIZE FEE INCOME FROM LOANS ORIGINATED FOR
SALE. Pacific Thrift has developed the ability to originate a
high volume of mortgage loans for sale to larger mortgage
lenders for securitization. For the year ended December 31,
1995, Pacific Thrift increased gains on sale of loans
originated for sale by $7.7 million (890%), to $8.6 million
from $.9 million for the prior year. By focusing its business
on the origination of loans for sale, Pacific Thrift has
reduced its reliance on interest income, the primary source of
income for traditional banks and mortgage lenders. The
origination of loans for sale substantially mitigates the
credit risks associated with loan defaults, because the risk
of loss on loans is transferred to the loan purchasers,
subject to standard representations and warranties made by
Pacific Thrift to the loan purchasers at the time of sale for
which Pacific Thrift remains liable.
- INCREASE VOLUME OF LOANS ORIGINATED FOR SALE IN STATES IN
WHICH PACIFIC THRIFT HAS RECENTLY COMMENCED LENDING
OPERATIONS. In 1994, management of Pacific Thrift began to
implement a geographic expansion strategy to increase the
volume of loans originated for sale. Pacific Thrift first
expanded operations into the western states of Washington,
Oregon and Nevada, where certain officers had previous
experience with mortgage lending operations. Pacific Thrift
later expanded lending operations into Colorado, Arizona and
Utah, and began exploring other regions for possible lending
operations. As of December 31, 1995, Pacific Thrift had loan
representatives in 11 states, including the states of
Washington, Oregon, California, Idaho, Nevada, Arizona, Utah,
Colorado, New York, Connecticut and Massachusetts. In
addition, as of December 31, 1995, Pacific Thrift was in the
early stages of commencing operations in Minnesota, Missouri,
Illinois, Florida, Georgia, Virginia, Pennsylvania, Delaware
and Maryland.
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<PAGE> 4
- EXPAND LOAN OPERATIONS INTO NEW STATES. Now that Pacific
Thrift has developed policies and procedures for expanding the
origination of loans for sale in new states, management
believes that it may continue its expansion into new
geographic areas in a manner consistent with safe and sound
banking practices. As of December 31, 1995, management was
preparing to commence operations in Texas, New Mexico, North
Carolina and South Carolina. Management has targeted the
states of West Virginia, Kentucky, Tennessee, Hawaii, Ohio,
Indiana, Wisconsin, Michigan, Vermont, New Hampshire, Kansas,
Oklahoma, Louisiana, Iowa, New Jersey, Rhode Island and the
District of Columbia for commencing loan origination activity
within the next 12 months.
- MINIMIZE OVERHEAD COSTS BY OPERATING WITHOUT OFFICES IN MOST
AREAS. Management of Pacific Thrift has developed an operating
system which allows it to expand lending operations in new
areas without opening loan production offices. Whenever
possible, a senior loan officer with experience in an existing
Pacific Thrift office is transferred to a new region to hire
local loan representatives on a commission-only basis. The
senior loan officer supervises and trains the local
representatives, all of whom operate independently without
office space. Local loan representatives typically have
contacts with local mortgage loan brokers, which provide
sources of loan referrals. All loan applications and
supporting documentation are delivered to Pacific Thrift's
California loan review office for all processing and
underwriting. As operations expand in one or more locations,
Pacific Thrift may consider renting small offices as necessary
to facilitate business operations. However, management
believes that Pacific Thrift may effectively conduct business
without the expense and risk of undertaking long-term lease
and other overhead obligations in most locations.
- CONTINUE TO EVALUATE POSSIBLE SECURITIZATION PROGRAMS.
Although management does not believe that historical loan
volume levels support securitization programs by Pacific
Thrift directly, management will continue to evaluate possible
programs to securitize loans to the extent that future lending
volume permits. Management believes that such programs could
further enhance revenues of Pacific Thrift because, as sponsor
of securitization programs, Pacific Thrift would earn more by
retaining the interest spread and servicing fees which it
currently releases for a premium as a seller of loans. In
addition, Pacific Thrift would then consider the purchase of
loan production from other originators to enhance loan volume.
- GRADUALLY REBUILD PACIFIC THRIFT'S LOAN PORTFOLIO BALANCE.
Although management intends to emphasize loans originated for
sale, it also intends to gradually rebuild Pacific Thrift's
loan portfolio balance with residential and commercial
mortgage loans. Moreover, management believes that some
diversification of revenue sources is a prudent business
policy which allows for adaptation to changing economic and
business conditions.
- CONTINUE TO IMPROVE ASSET QUALITY. In 1994, management of
Pacific Thrift began an ongoing effort to improve loan
underwriting policies and procedures. Lending criteria were
revised to place a greater emphasis on the borrower's ability
to repay, and appraisal standards for real property collateral
were strengthened. These changes have substantially improved
asset quality. While loan delinquencies over 60 days on loans
originated prior to January 1, 1994 were approximately 9.23%
of all such loans at December 31, 1995, loan delinquencies
over 60 days on loans originated after January 1, 1994 were
only .93% of all of those loans as of December 31, 1995. There
can be no assurance that the level of delinquencies
experienced with respect to loans originated after January 1,
1994 will not increase as the pool of loans continues to age.
- CONTINUE TO EXPAND THE BUSINESS OF CRC, CRC WASHINGTON AND
LPPC. The trust deed foreclosure services and posting and
publishing services businesses of CRC, CRC Washington and LPPC
provide a secondary source of fee income that capitalizes on
management's expertise in servicing mortgage loans. CRC, CRC
Washington and LPPC offer their services to over 300 banks,
thrifts, mortgages banks, life insurance companies and federal
regulatory agencies with trust deeds on real property located
in California, Nevada and Washington. In addition, insofar as
foreclosures increase during periods of a weakening economy,
these businesses provide a counter-cyclical source of revenues
that can partially offset reduced revenues or losses in the
lending business which may occur during these periods.
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LENDING ACTIVITIES
For the past three years, the Partnership has conducted all new lending
activity exclusively through Pacific Thrift. Under an arrangement between
Presidential and Pacific Thrift effective January 1, 1994, Pacific Thrift
provides loan servicing for all of Presidential's outstanding loans for a loan
servicing fee of 1.5% per annum of the principal amount of each loan serviced.
Management's strategy for the Partnership's lending business has been
to focus on the B and C credit lending market. Accordingly, substantially all of
the Partnership's loans are made to borrowers whose credit histories or other
factors limit their ability to qualify for low-rate financing at larger
financial institutions. For the past two years, competition in this market has
increased as larger mortgage lenders have sought to expand their markets to
include B and C loans to replace some of the volume lost at the end of the home
loan refinancing boom of the early 1990's. However, management believes that
senior management's over 20 years of experience in the B and C credit market
provide it with competitive advantages over new entrants to this lending market,
and that this experience has enabled Pacific Thrift to substantially increase
new loan originations notwithstanding the increase in competition.
Over the years that the Partnership and Pacific Thrift have been in
business, they have developed relationships with over 1500 independent mortgage
brokers, who provide the substantial majority of new lending opportunities.
Management has developed policies and procedures with these brokers which
emphasize timely decision making and funding and a competitive fee structure,
which provide incentives for brokers to continue bringing new loans to Pacific
Thrift. Following is a brief description of the types of loans originated by
Pacific Thrift.
LOANS ORIGINATED FOR SALE
Pacific Thrift originates first and second trust deed residential loans
for sale in the secondary loan market. Loans originated for sale generally have
loan-to-value ratios of from 60% to 85% and meet the credit criteria established
in advance by the loan purchasers. Pacific Thrift originated and sold the
following amounts of loans during each of the months of 1994 and 1995:
<TABLE>
<CAPTION>
Originated Sold
---------- -----
<S> <C> <C>
1994
January $ 1,088,000 -0-
February $ 239,000 -0-
March $ 1,609,000 -0-
April $ 734,000 -0-
May $ 1,319,000 -0-
June $ 3,526,000 $ 3,969,000
July $ 981,000 $ 1,210,000
August $ 4,218,000 $ 4,561,000
September $ 3,598,000 $ 5,272,000
October $ 4,853,000 $ 3,560,000
November $ 4,594,000 $ 6,897,000
December $ 8,023,000 $ 4,130,000
1995
January $ 8,621,000 $ 8,917,000
February $ 6,953,000 $ 9,133,000
March $10,358,000 $11,425,000
April $11,294,000 $11,575,000
May $10,708,000 $ 9,299,000
June $12,711,000 $12,672,000
July $10,587,000 $12,040,000
August $10,235,000 $ 9,707,000
September $14,312,000 $13,225,000
October $17,080,000 $15,728,000
November $15,694,000 $14,346,000
December $22,135,000 $16,915,000
</TABLE>
Pacific Thrift and Presidential each entered agreements with Aames
Capital Corporation ("Aames") as of December 1, 1993, pursuant to which Pacific
Thrift and the Partnership agreed to sell to Aames an aggregate of
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up to $75 million of loans secured by residential property over a period of up
to 18 months. Pacific Thrift had sold $75 million of loans under that agreement
as of May 26, 1995. All loans sold by Pacific Thrift were included in pools of
loans securitized by Aames. Credit enhancement was provided for each
securitization through private credit insurance, and each pool was rated AAA by
one or more rating services. Aames acts as loan servicer for each of the pools.
All loans were sold nonrecourse except for the obligation to repurchase any loan
which does not meet certain customary representations and warranties or to
repurchase loans adversely affected by any breach of general representations and
warranties. As of December 31, 1995, five loans ($275,000 aggregate principal
amount) had been repurchased by Pacific Thrift and no loans additional loans
have been requested to be repurchased. Pacific Thrift does not expect to incur a
loss on the five loans repurchased. Except for an initial sale of approximately
$3.9 million in loans, all loans sold by Pacific Thrift to Aames were sold for a
premium above face value of the loans sold. Pacific Thrift received a servicing
release fee payable quarterly on the principal amount of each loan sold from
September 19, 1994 to January 1995. Effective February 1, 1995, the servicing
release fee was increased on the principal amount of each loan sold, including
the loans sold from September 1994 to May 26, 1995, until each loan is paid off.
Pacific Thrift retains an interest in the net spread (i.e. all interest and fees
paid on the loans less servicing and other costs) in $3.9 million in loans sold
to Aames in December 1993, which management estimates will represent a return of
approximately 3.3% on the principal amount of the $3.9 million of loans sold.
Pacific Thrift entered into a new agreement with Aames Capital
Corporation effective June 21, 1995, pursuant to which it will continue to sell
pre-approved residential loans to Aames. The new agreement provides for Pacific
Thrift to receive a higher cash premium on the face amount of each loan sold
which meets preset interest rate requirements upon date of sale. An additional
premium will be paid for all loans sold during any quarter if at least $22.5
million of loans are sold during that quarter. The premium for all loans sold in
excess of $25 million per calendar quarter will be further increased. In
addition, Pacific receives a servicing release fee on the principal amount of
each loan sold prior to December 31, 1995, payable on a quarterly basis, until
the loan is paid off. Since January 1, 1996 the agreement was revised to
eliminate the servicing release fee and replace it with a higher premium on
sale.
During 1995, Pacific Thrift sold an aggregate of $145 million of
pre-approved securitizable loans to Aames and other purchasers. Pacific Thrift
has no commitment to offer or sell any specified amount of loans to any
purchaser, but has entered arrangements whereby other purchasers may pre-approve
loans to be made by Pacific Thrift prior to funding, which are sold within
approximately one month from origination.
To the extent that Pacific Thrift originates loans for sale, it bears
an interest rate risk between the date of origination of each loan and the time
that each loan is sold. However, loans are generally sold on a monthly basis,
which reduces the risk of interest rate fluctuations between the date of
origination and date of sale. Loans which are held for sale during the period
prior to sale are accounted for at the lower of cost or market value of such
loans.
PORTFOLIO LENDING
Pacific Thrift has historically originated for its own loan portfolio
primarily first and second trust deed real estate loans secured by one-to-four
family residential, multi-family residential, commercial and, to a very minor
extent, undeveloped, property. The characteristics of the combined loan
portfolio of Presidential and Pacific Thrift are described herein under
"BUSINESS -- Lending Policies."
HOME IMPROVEMENT LOANS
From 1990 until March 31, 1993, Pacific Thrift operated a home
improvement loan division, which originated three types of home improvement
loans, including (i) loans partially insured by the Federal Housing
Administration ("FHA") under Title I of the National Housing Act ("Title I
Loans"); (ii) loans partially insured by a policy of credit insurance issued by
a private insurer; and (iii) uninsured loans subject to an additional annual fee
paid by the borrower to Pacific Thrift. The program was discontinued on March
31, 1993. All home improvement loans were made under substantially the same loan
underwriting standards and policies set by the U.S. Department of Housing and
Urban Development ("HUD"), including a requirement that each loan be secured by
a first or second priority lien on residential property having a value of at
least 100% of the loan amount plus all prior encumbrances. Home improvement
loans were made in amounts not in excess of $25,000 on loans secured by single
family residences and not in excess of $60,000 on loans secured by multi-family
residences.
Pacific Thrift held $1.7 million of home improvement loans and loan
participations at December 31, 1995, compared with $3.4 million and $7.7 million
at December 31, 1994 and 1993, respectively. Due to claims made on Title I Loans
and privately insured loans for the four years ended December 31, 1994, there is
no material amount of insurance coverage remaining on any of the outstanding
home improvement loans. Pacific Thrift has continued to service all outstanding
home improvement loans in the manner that is required pursuant to its contracts
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with the purchasers of loan participations. However, the fact that there is no
material insurance coverage available on any home improvement loans exposes
Pacific Thrift to contingent risks of loss on home improvement loans and loan
participations held by Pacific Thrift.
Pacific Thrift has resumed a Title I Loan origination program, in which
Pacific Thrift acts exclusively as a correspondent lender for one or more larger
mortgage lenders who securitize Title I Loans. Pacific Thrift anticipates that
these loans would be sold without recourse within 30 days of origination, and
would result in additional fee income, which would be received immediately upon
sale of the loans.
No home improvement loans were originated between March 1993 and July,
1995. In August, 1995, Pacific Thrift resumed originating Title I loans for
sale. During 1995, Pacific Thrift sold $1,976,307 of home improvement loans,
including $1,126,307 of seasoned home improvement loans originated prior to
March 1993 at par value and $850,000 in new Title I loans at a premium.
LENDING POLICIES
The following description of lending policies refers to the lending
policies of Pacific Thrift for portfolio loans. Presidential ceased originating
new loans in 1990. The description of the existing loan portfolio as of December
31, 1995, refers to the combined loan portfolio of both Presidential and Pacific
Thrift.
GEOGRAPHIC CONCENTRATION. At December 31, 1995, the combined loan
portfolio of Presidential and Pacific Thrift included loans geographically
distributed approximately 74% in Southern California (south of San Luis Obispo),
20% in Northern California, 5% in Washington and 1% in Oregon, based on
principal loan balances. Pacific Thrift's loan policy limits the total dollar
amount of loans and total number of loans made in each zip code area to no more
than 5% of its total outstanding loans.
Although Pacific Thrift originates loans in states outside California,
substantially all of such loans (by dollar volume) are pre-approved loans for
sale. At the present time, Pacific Thrift intends to limit the origination of
loans for retention in its loan portfolio to loans secured by California real
estate, and, to a minor extent to loans secured by real estate located in the
various other states in which it does business.
COLLATERAL REQUIREMENTS. Although substantially all of the loans
originated by Pacific Thrift for sale are residential loans, changes in the
pricing structure for residential loans due to increased competition have caused
management to redirect Pacific Thrift's portfolio lending over the past year to
loans secured by commercial property. Commercial properties accepted by Pacific
Thrift as collateral include primarily retail, multi-unit residential and light
industrial properties. No more than 30% of Pacific Thrift's total loan portfolio
may be secured by multi-unit residential property, and no more than 3% by
unimproved land. Loans secured by commercial property are generally made at 65%
or less loan to value ratios.
At December 31, 1995, approximately 33% of the aggregate principal
amount of loans comprising the combined loan portfolio of Presidential and
Pacific Thrift were secured by one-to-four family residential property, 21% by
multi-family residential property, 42% by commercial property, and 4% by
undeveloped property.
At each of the dates set forth below the combined gross loan portfolio
of Presidential and Pacific Thrift (which does not reflect reserves for loan
losses) was collateralized by the following types of real property:
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<TABLE>
<CAPTION>
Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1994
Principal Loan Percentage of Principal Loan Percentage of
Balances Total Portfolio Balances Total Portfolio
<S> <C> <C> <C> <C>
One-to-four family
residential property
1st TDs $5,553,762 11.33% $ 6,271,007 10.66%
2nd TDs 8,149,818 16.62 11,983,931 20.39
3rd TDs 968,926 1.98 1,833,001 3.12
Home Imp. Loans 1,742,976 3.55 2,298,050 3.91
--------- ---- ---------- -----
TOTAL 16,415,482 33.48 22,385,989 38.08
========== ===== ========== =====
Five and Over
Multi-Family
residential property
1st TDs 8,534,795 17.41 13,531,290 23.02
2nd TDs 1,811,741 3.70 3,154,197 5.37
3rd TDs -0- -0- 34,993 .06
----------- ------ ---------- -----
TOTAL 10,346,536 21.11 16,720,480 28.45
========== ===== ========== =====
Commercial
Property
1st TDs 18,145,302 37.02 14,184,456 24.13
2nd TDs 2,172,655 4.43 3,579,936 6.09
3rd TDs 68,766 .14 104,212 .18
------------ ----- ---------- ------
TOTAL 20,386,723 41.59 17,868,604 30.40
========== ===== ========== =====
Undeveloped
Property
1st TDs 1,873,953 3.82 1,805,151 3.07
2nd TDs -0- -0- -0- 0.00
3rd TDs -0- -0- -0- 0.00
--------- ----- --------- -----
TOTAL 1,873,953 3.82 1,805,151 3.07
========= ===== ========= =====
TOTAL
PORTFOLIO
1st TDs 34,107,812 69.58 35,791,904 60.88
2nd TDs 12,134,214 24.75 18,718,064 31.85
3rd TDs 1,037,692 2.12 1,972,206 3.36
Home Imp. Loans 1,742,976 3.55 2,298,050 3.91
--------- ----- ----------- ------
TOTAL $49,022,694 100.00% $58,780,224 100.00%
=========== ======= =========== ======
</TABLE>
LOAN ORIGINATION AND UNDERWRITING. Pacific Thrift's loans are primarily
originated through referrals from mortgage loan brokers and other licensed
referral sources for which the borrower pays a referral fee. As of December 31,
1995 Pacific Thrift employed 60 loan representatives, who maintain contacts with
loan referral sources and provide customer service.
At December 31, 1995, the maximum amount that Pacific Thrift could loan
to one borrower was $1,227,000. On that date, the largest Presidential loan in
the combined portfolio was $656,939 and the largest Pacific Thrift loan in the
portfolio was $761,094. There were 14 loans in the combined loan portfolio which
exceeded $500,000. The average loan balance at December 31, 1995, not including
Home Improvement Loans, was $168,096 for Pacific Thrift and $96,834 for
Presidential.
For each loan made by Pacific Thrift for its own loan portfolio (other
than "piggyback" loans as described below), Pacific Thrift analyzes each loan
applicant's credit and repayment ability by ordering
-8-
<PAGE> 9
credit histories from independent credit reporting companies and requiring proof
of income, including two years of income tax returns, a current paycheck stub or
a current profit and loss statement. The maximum debt to income limit for
portfolio loans over $25,000 is 50%.
Pacific Thrift also makes "piggyback loans," which are real property
secured loans made in tandem with loans originated for sale. Management uses
piggyback loans to enhance the loan products available from its loan purchasers,
and thereby increase production of loans originated for sale. Piggyback loans
meet the same credit and documentation requirements as the companion senior loan
originated for sale, except that the loan to value ratio may be up to 5% higher
than the loan to value ratio allowed by the purchaser of the senior loan. To
compensate for the lower credit standards, Pacific Thrift provides higher
general reserves for piggyback loans. As of December 31, 1995, Pacific Thrift
held 160 piggyback loans with an aggregate principal balance of $1,382,000.
Loans originated by Pacific Thrift for sale are made in accordance with
the guidelines provided in advance by the purchasers of the loans. In general,
purchaser guidelines allow a higher debt to income limit and lower loan to value
ratios than loans originated by Pacific Thrift for its loan portfolio. In
addition, some loan programs offered by loan purchasers do not require
verification of income, as required by Pacific Thrift on all loans originated
for its loan portfolio.
Pacific Thrift obtains independent third party appraisals or
evaluations of all properties securing its loans (other than home improvement
loans originated for sale, which do not require appraisal under the loan
purchaser's origination guidelines) prior to loan origination. Presidential also
requires third party appraisals on all of its outstanding loans at loan
origination. Pacific Thrift maintains an approved appraiser list and specifies
minimum criteria which must be met by every appraisal. These minimum standards
include: (i) all residential appraisal reports must comply with generally
accepted appraisal standards as evidenced by the Uniform Standards of
Professional Appraisal Practice promulgated by the Appraisal Standards Board of
the Appraisal Foundation, unless principles of safe and sound banking require
compliance with stricter standards; (ii) all residential appraisal reports must
be prepared on the most current version of the appropriate Federal National
Mortgage Association ("FNMA")/Federal Home Loan Mortgage Corporation ("FHLMC")
form or on a comparable standardized appraisal form; (iii) the zoning of the
site must allow the improvement located on the property; (iv) all plat maps,
location maps and diagrams must be included in the report; (v) all reports must
be based on market value, be written and contain sufficient information and
analysis to support the decision to engage in the transaction; (vi) an analysis
and report must be made of all appropriate deductions and discounts for proposed
construction or renovation, partially leased buildings, non-market lease terms
and tract developments with unsold units; (vii) all appraisals must be performed
by state licensed or certified appraisers; (viii) photos must be provided of the
subject property, including a front view, rear view, street scenes, interior and
any extraordinary amenities; (ix) any known hazardous condition on the subject
property or any site within the vicinity of the property must be disclosed;
(vii) any major code violations discovered must be reported and analyzed for the
impact on value and an estimate of cost to correct; (viii) a list of all
significant deferred maintenance must be noted, with an estimate of the cost to
cure; (ix) any agreements of sale, option or listing of the property within the
last 12 months must be disclosed; (x) any information required or deemed
pertinent to completion of the report which was not available must be disclosed;
(xi) a statement of the final appraised value of the property on an "as is"
basis must be disclosed, together with a statement of the value of the proposed
improvements or additions, subject to re-inspection upon completion, along with
an estimate of the cost to complete; and (xii) all reports must contain the
licensed/certified appraiser signature, designation and license number and, if
signed by a co-signing appraiser, must contain the appropriate co-signing
appraisal certification.
Following an analysis of a loan applicant's credit, repayment ability
and the collateral appraisal, every loan must be approved by one of four senior
officers. Any loan in excess of $150,000 must be approved by (i) the President
or the Chief Executive Officer; (ii) either the Executive Vice President - New
Products or the Vice President - Credit; and (iii) two non-officers directors of
Pacific Thrift. Loan rewrites, extensions and troubled debt restructurings
require the approval of the Vice President of the Debt Restructuring Department
or the President or Chief Executive Officer of Pacific Thrift.
Pacific Thrift's loan policies, in conformity with FDIC regulations,
require that maximum loan to value ratios be limited as follows with respect to
the following types of properties (except for home improvement loans described
below): 90% for owner-occupied one-to-four family residential property with
mortgage insurance or readily marketable collateral; 85% for all other improved
property; 85% for construction of one-to-four family residential property; 80%
for construction of commercial, multi-family and non-residential property; 75%
for land development and 65% for unimproved land. Pacific Thrift generally seeks
to originate portfolio loans with loan to value ratios which are generally 5% or
more lower
-9-
<PAGE> 10
than these maximum ratios. Loans to facilitate sale of properties acquired in
settlement of loans (also known as "other real estate owned, or "OREO") may be
higher than the maximum loan to value ratios allowed for new loans. Due to the
significant decline in Southern California real estate values over the past five
years, management believes that the current values of properties securing loans
made prior to 1994 do not meet the original loan to value ratios.
It is anticipated by management that Pacific Thrift's Board of
Directors will periodically adjust and modify its collateral requirements and
underwriting criteria in response to economic conditions and business
opportunities.
The following table sets forth the combined loan originations by
category and purchases, sales and repayments for 1995:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
1995
(Dollars in Thousands)
<S> <C>
Beginning Balance(1) $65,056
Loans Originated for Sale................. 151,538
Portfolio Loans originated:
Real estate:
One- to four-family....................... 3,067
Multi-family.............................. 4,521
Commercial................................ 11,585
Construction and land..................... 150
Home improvement.......................... -0-
----------
Total loans originated.................... 19,323
Loans purchased.................................... -0-
----------
Total..................................... 235,917
Less:
Principal repayments............................. (12,905)
Sales of loans originated for sale............... (145,832)
Sales of portfolio loans......................... (13,371)
Transfers of OREO net of reserves................ (7,944)
Other net changes(2)............................. 620
-------
Total loans(1)............................ $56,485
=======
</TABLE>
(1) Includes loans held for sale.
(2) Other net changes includes changes in allowance for loan losses,
deferred loan fees, loans in process and unamortized premiums and
discounts.
-10-
<PAGE> 11
MATURITIES AND RATE SENSITIVITIES OF LOAN PORTFOLIO
Loan Maturity. The following table sets forth the contractual
maturities of the combined gross loans at December 31, 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
---------------------------------------------------------------
MORE MORE
MORE THAN MORE THAN THAN 5 THAN 10 MORE
ONE YEAR 1 YEAR TO 3 YEARS YEARS TO YEARS TO THAN 20 TOTAL
OR LESS 3 YEARS TO 5 YEARS 10 YEARS 20 YEARS YEARS LOANS
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family . $6,122 $1,293 $1,820 $ 1,084 $1,352 $3,002 $14,673
Multi-family ........ 1,185 939 3,329 2,708 1,133 1,052 10,346
Commercial .......... 1,732 1,092 2,505 10,170 2,827 2,061 20,387
Construction and land 124 1,227 274 0 0 249 1,874
Home improvement .... 0 0 0 1,743 0 0 1,743
------ ------ ------ ------- ------ ------ -------
Total amount due .... $9,163 $4,551 $7,928 $15,705 $5,312 $6,364 $49,023
====== ====== ====== ======= ====== ====== =======
</TABLE>
The following table sets forth, as of December 31, 1995, the dollar
amounts of gross loans receivable that are contractually due after December 31,
1996 and whether such loans have fixed or adjustable interest rates:
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1996
-------------------------
FIXED ADJUSTABLE(1) TOTAL
--------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family .... $2,465 $ 6,086 $ 8,551
Multi-family ........... 571 8,590 9,161
Commercial ............. 2,707 15,948 18,655
Construction and land .. 630 1,120 1,750
Home improvement ....... 1,743 0 1,743
------ ------- -------
Total loans receivable $8,116 $31,744 $39,860
====== ======= =======
</TABLE>
(1) Includes approximately $1.2 million in loans to facilitate the sale of real
estate held in foreclosure.
-11-
<PAGE> 12
Pacific Thrift generally rewrites loans at maturity if the borrower makes
a new loan application. In cases where the loan to value ratio has declined on
an existing loan and no longer meets Pacific Thrift's loan to value guidelines,
Pacific Thrift's policy is to make an exception and rewrite the loan.
Presidential followed the same policies with respect to its policies.
A substantial portion of the combined loan portfolio is repriced, pays
off or matures approximately every two years. Of the 24% of all loans bearing
fixed rates at December 31, 1995, 52% were due in two years or less. Based upon
these facts, over 89% of the combined loan portfolio (exclusive of home
improvement loans) at December 31, 1995, consisted of either variable rate loans
or fixed rate loans which mature within two years. Management therefore expects
that within two years, approximately 89% of the combined loan portfolio
(excluding home improvement loans) will reprice at the rate in effect on the
existing loan at the time the loan is repriced or the then applicable rate for
new or refinanced loans.
The initial interest rate on variable rate loans is set as of the date of
origination of each loan based upon the then prevailing reference rate
established by Bank of America, which initial rate may increase by not less than
.125% in any three-month period, but may not increase by more than five (10 in
some cases) percentage points in the aggregate. Such increases (or decreases, as
the case may be) occur at three-month intervals as the result of changes in the
Bank of America reference rate. Although the interest rate may decrease, it
cannot decrease below the original interest rate set for each loan.
CLASSIFIED ASSETS AND LOAN LOSSES
The general policy of Pacific Thrift is to discontinue accrual of
interest and make a provision for anticipated loss on a loan when: (i) it is
more than two payments contractually past due and the current estimated
loan-to-value ratio is 90% or more; or (ii) the loan exhibits the
characteristics of an in-substance foreclosure, generally including any loan as
to which the borrower does not have the ability, willingness or motivation to
repay the loan. The current estimated loan-to-value ratio of substantially all
delinquent loans are determined by a new independent appraisal, unless an
independent appraisal was obtained no more than twelve months prior to review,
in which case the current estimated loan-to-value ratio is determined by
in-house review. When a loan is reclassified from accrual to nonaccrual status,
all previously accrued interest is reversed at Pacific Thrift in accordance with
regulatory requirements. During 1995, Presidential's policy for determination of
nonaccrual status was the same as Pacific Thrift's. Interest income on
nonaccrual loans is subsequently recognized when the loan resumes payment or
becomes contractually current as appropriate. Accounts which are deemed fully
or partially uncollectible by management are generally fully reserved or
charged off for the amount that exceeds the estimated net realizable value
(net of selling costs) of the underlying real estate collateral. Gains on the
sale of OREO are not recognized until the close of escrow upon sale. Home
improvement loans are classified nonaccrual when they are two or more payments
past due, and are charged off when they become five payments delinquent.
Unless an extension, modification or rewritten loan is obtained, Pacific
Thrift's policy is to commence procedures for a non-judicial trustee's sale
within 30 to 60 days of a payment delinquency on a loan under the power of sale
provisions of the trust deed securing such loan, as regulated by applicable law.
Pacific Thrift's policy is to extend or rewrite a delinquent loan only if it can
be determined that the borrower has the ability to repay the loan on the
modified terms.
The determination of the adequacy of the allowance for loan losses is
based on a variety of factors, including loan classifications and underlying
loan collateral values, and the level of nonaccrual loans. See "BUSINESS
- -Classified Assets and Nonperforming Assets -- Allowance for Loan Losses."
Therefore, changes in the amount of nonaccrual loans will not necessarily result
in increases in the allowance for loan losses. The ratio of nonaccrual loans
past due 90 days or more to total loans was 1.62% at December 31, 1995 and 5.35%
and 5.94% at December 31, 1994 and 1993, respectively. The ratio of the
allowance for loan losses to nonaccrual loans past due 90 days or more was
533.29% at December 31, 1995 and 136.94% and 58.74% at December 31, 1994 and
1993, respectively.
-12-
<PAGE> 13
The following table sets forth the number and remaining gross balances of
all loans in the combined loan portfolio (net of specific reserves for loan
losses) that were more than 30 days delinquent at December 31, 1995 and 1994.
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRESIDENTIAL PACIFIC COMBINED
Loan Principal Amount Principal Amount Principal Amount Percent of
Delinquencies Loans Delinquent Loans Delinquent Loans Delinquent Total Loans
<S> <C> <C> <C> <C>
30 to 59 days $180,216 $29,673 $209,979 .43%
60 to 89 days 525,674 1,586 527,260 1.08%
90 days or more 718,182 1,391,318 2,110,500 4.30%
------- --------- --------- -----
TOTAL $1,425,072 $1,422,667 $2,847,739 5.81%
========== ========== ========== =====
</TABLE>
AT DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRESIDENTIAL PACIFIC COMBINED
Loan Principal Amount Principal Amount Principal Amount Percent of
Delinquencies Loans Delinquent Loans Delinquent Loans Delinquent Total Loans
<S> <C> <C> <C> <C>
30 to 59 days $ 0 $ 513,191 $ 513,191 .87%
60 to 89 days 342,239 790,677 1,132,916 1.93%
90 days or more 3,053,613 2,695,109 5,748,722 9.78%
--------- --------- --------- -----
TOTAL $3,395,852 $3,998,977 $7,394,829 12.58%
========== ========== ========== ======
</TABLE>
NONACCRUAL AND RESTRUCTURED LOANS. The following table sets forth the
aggregate amount of loans at December 31, 1995 and 1994 which were
(i) accounted for on a nonaccrual basis; (ii) accruing loans which are
contractually past due 90 days or more as to principal and interest payments;
and (iii) troubled debt restructurings. Presidential and Pacific Thrift
follow a practice of extending or modifying loans in certain circumstances.
Loans modified to reduce interest rates below market rates, to reduce amounts
due at maturity to reduce accrued interest or to loan additional funds are
considered "troubled debt restructurings" as defined in SFAS 15.
<TABLE>
<CAPTION>
Accruing Loans Nonaccruing Loans
Past Due Past Due 90 Days Troubled Debt
90 Days or More or More Restructurings Total
------------------- --------------------- ------------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
At December 31, 1995
Presidential $331 $388 $360 $1,079
Pacific 986 405 588 1,979
------ ---- ---- ------
Combined $1,317 $793 $948 $3,058
====== ==== ==== ======
At December 31, 1994
Presidential $1,612 $1,442 $ 0 $3,054
Pacific 991 1,709 0 2,695
------ ------ --- ------
Combined $2,603 $3,146 $ 0 $5,749
====== ====== === ======
</TABLE>
The following table sets forth information concerning interest accruals
and interest on nonaccrual loans past due 90 days as of December 31, 1995
and 1994.
-13-
<PAGE> 14
<TABLE>
<CAPTION>
Interest Interest Not
Contractually Recognized on
Due on Loans Interest Accrued Nonaccrual
Past Due on Loans Past Due Loans Past Due
90 Days or More 90 Days or More 90 Days or More
------------------- ---------------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
At December 31, 1995
Presidential $96 $22 $74
Pacific 577 103 474
------ ---- ------
Combined $673 $125 $548
====== ==== ======
At December 31, 1994
Presidential $962 $187 $775
Pacific 562 75 487
------ ---- ------
Combined $1,524 $262 $1,262
====== ==== ======
</TABLE>
Upon request of a borrower, Presidential or Pacific Thrift has
generally granted one to two months extensions of payments during the term of a
loan. In 1995, Presidential and Pacific extended 14 loans with an aggregate
principal balance of $1.6 million. In 1994, Presidential and Pacific Thrift
extended 37 loans with an aggregate principal balance of $5.5 million. No loan
was extended for a term of more than six months. In addition, Presidential or
Pacific Thrift may modify a loan by allowing temporary reductions in the amount
of principal or interest payable on a loan for up to twelve months. In 1995,
Presidential and Pacific modified 10 loans with an aggregate principal balance
of $1.3 million and rewrote four delinquent loans with an aggregate principal
balance of $.4 million. In 1994, Presidential and Pacific Thrift modified 24
loans with aggregate principal balances of $.4 million; and rewrote 22
delinquent loans with an aggregate principal balance of $3.1 million.
Presidential and Pacific Thrift apply the same documentation standards on a
rewritten loan as on an original loan. Presidential and Pacific Thrift make
these accommodations only if it can be determined that the borrower has the
ability to repay the loan on the modified terms. In general, this determination
is made based upon a review of the borrowers current income, current debt to
income ratio, or anticipated sale of the collateral. Management believes that
these accommodations are a reasonable and necessary response to the increased
level of delinquencies experienced during the past three years. Presidential and
Pacific Thrift have had generally favorable experience with repayment of loans
extended, modified or rewritten on this basis.
Procedures upon delinquency of home improvement loans vary from the
foreclosure procedures ordinarily used to collect other loans. Upon 10 days'
delinquency, the borrower is contacted and an attempt to schedule payments is
made; if this is not possible, a determination is made whether the proceeds of a
foreclosure sale would result in a recovery of all or part of the loan amount,
after costs of foreclosure. In almost every case, there is insufficient equity
to foreclose on a home improvement loan, and the loan is charged off if it
becomes five payments delinquent. In addition to losses on its retained interest
in home improvement loans, Pacific Thrift may be required to repurchase
participation interests sold in Title I Loans if Pacific Thrift is found to have
breached its warranties that such loans complied with insurance requirements.
Pacific Thrift has never been required to repurchase any loan participation
interests. However, no assurance can be given that Pacific Thrift will not be
required to repurchase any loan participation interests in the future.
The initiation of foreclosure proceedings against a borrower does not
suggest that the recovery of the loan is dependent solely on the underlying
collateral. In fact, many borrowers will bring payments current or undertake
other remedies so that foreclosure is not required.
-14-
<PAGE> 15
At December 31, 1995, Presidential and Pacific Thrift held OREO (net of
specific reserves) of $3.2 million (inclusive of senior liens of $.6 million).
In accordance with the policy for recognizing losses upon acquisition of OREO,
Presidential and Pacific Thrift charge off or post specific reserves for those
portions of the loans with respect to which OREO has been acquired to the extent
of the difference between the loan amount and the estimated fair value of the
OREO. Included in OREO at December 31, 1995 are nine single family residences
with an aggregate net book value of $1.2 million (inclusive of $.6 million
senior liens); three multi-family units with an aggregate net book value of $.4
million (with no senior liens) 12 commercial properties with an aggregate net
book value of $1.5 million (with no senior liens); and two undeveloped
properties with an aggregate net book value of $.1 million (with no senior
liens). For the year ended December 31, 1995, total expenses on operation,
including valuation allowances, and losses on sale of OREO were $2.3 million and
gains on sale of OREO and OREO income were $1.1 million for a total expense of
$1.2 million. There can be no assurance that net losses on the sale of OREO will
not be experienced in the future.
ALLOWANCE FOR LOAN LOSSES. The following is a summary of the changes in
the consolidated allowance for loan losses of Presidential and Pacific Thrift
for each of the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
(IN THOUSANDS)
--------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 4,307 $ 3,123 $ 2,646
Provision for loan losses .... 3,289 6,096 4,655
Chargeoffs: .................. (3,369) (4,912) (4,179)
Recoveries ................... 2 -- --
------- ------- -------
Balance at end of period ..... $ 4,229 $ 4,307 $ 3,122
======= ======= =======
</TABLE>
Management performed an extensive review and analysis of the entire
combined loan portfolio at year end 1992, including performing and nonperforming
loans. Over 300 new independent or in-house appraisals were performed at that
time, resulting in a significant adjustment to the allowance for loan losses in
the fourth quarter of 1992. In 1993, new management of Pacific Thrift
implemented new policies and procedures for determining the allowance for loan
losses. In connection with the implementation of these new policies and
procedures, new outside appraisals were ordered for almost every loan delinquent
60 days or more with a balance of $75,000 or more as to which an outside
appraisal had not been performed for at least six months. As a result of that
review and analysis, additional charge offs and reserves were taken by Pacific
Thrift during the fourth quarter of 1993.
In December 1993, Pacific Thrift engaged an independent consulting firm
to assist Pacific Thrift in devising a comprehensive asset classification system
for the purpose of analyzing the allowance on a monthly basis. Effective in
March 1994, the Board of Directors adopted an asset classification system
pursuant to which every delinquent loan and every performing loan which exhibits
certain risk characteristics is graded monthly, and a general reserve percentage
is assigned to each classification level. Management also reviews every
delinquent loan on a monthly basis and reviews the current estimated fair market
value of the property securing that loan. To the extent that the amount of the
delinquent loan exceeds the estimated fair market value of the property, an
additional reserve is made for that loan.
At year end 1994, due to the continuing declines in California real
estate values which occurred in 1994, management of the Partnership determined
that additional reserves were necessary. Accordingly, management analyzed the
amount of loans charged off throughout 1993 and 1994, and obtained broker price
opinions on a substantial number of loans. As a result of this analysis, the
Partnership determined to make a significant adjustment to the provision for
loan losses for the fourth quarter of 1994.
-15-
<PAGE> 16
Pacific Thrift's current policy is to maintain an allowance for loan
losses equal to the amount determined necessary based upon Pacific Thrift's
asset classification policy, which is written to conform with generally accepted
accounting principles and FDIC requirements. The Partnership's current policy is
to maintain an allowance for loan losses determined in accordance with generally
accepted accounting principles.
Management utilizes its best judgment in providing for possible loan
losses and establishing the allowance for loan losses. However, the allowance is
an estimate which is inherently uncertain and depends on the outcome of future
events. In addition, regulatory agencies, as an integral part of their
examination process, periodically review Pacific Thrift's allowance for loan
losses. Such agencies may require Pacific Thrift to recognize additions to the
allowance based upon their judgment of the information available to them at the
time of their examination.
Implicit in lending activities is the fact that losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the portfolio. The allowance for loan
losses is increased by the provision for loan losses charged to expense. The
conclusion that a loan may become uncollectible, in whole or in part, is a
matter of judgment.
Adverse economic conditions and a declining real estate market in
California have adversely affected certain borrowers' ability to repay loans. A
continuation of these conditions or a further decline in the California economy
could result in further deterioration in the quality of the loan portfolio and
continuing high levels of nonperforming assets and charge-offs, which would
adversely effect the financial condition and results of operations of the
Partnership and Pacific Thrift.
INVESTMENT ACTIVITIES
Except for Pacific Thrift, neither Presidential nor any of its
operating subsidiaries maintains an investment portfolio. Pacific Thrift's
investment portfolio is used primarily for liquidity purposes and secondarily
for investment income. Effective January 1, 1994, Pacific Thrift's policy is to
invest cash in short-term U.S. government securities or federal funds sold due
in less than 30 days. Overnight federal funds sold are limited to no more than
100% of total capital at any single financial institution that is either
adequately or well capitalized. If the financial institution is neither
adequately nor well capitalized, then the limit is $100,000. As of December 31,
1995 and 1994, Pacific Thrift held investments in federal funds totaling $7.7
million and $12.5 million, respectively. As of December 31, 1993 and 1992,
Pacific Thrift held excess cash in interest-earning bank accounts and there were
no investments.
SOURCES OF FUNDS
DEPOSITS. Pacific Thrift's major source of funds is FDIC-insured
deposits, including passbook savings accounts, money market accounts and
investment certificates (similar to certificates of deposit). Pacific Thrift
attracts customers for its deposits by offering rates that are slightly higher
than rates offered by large commercial banks and savings and loans. Pacific
Thrift has no brokered deposits as of the date hereof. Management believes its
deposits are a stable and reliable funding source. At December 31, 1995, Pacific
Thrift had outstanding 1,486 deposit accounts of approximately $60.2 million.
The following table sets forth the average balances and average rates
paid on each category of Pacific Thrift's deposits for the three years ended
December 31, 1995.
-16-
<PAGE> 17
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
Averages for 1995 Averages for 1994 Averages for 1993
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Passbook/Money Market $13,322 5.39% $23,868 3.79% $ 4,451 3.59%
Investment Certificates $49,931 6.20% $43,828 4.59% $46,609 5.92%
under $100,000
Investment Certificates $ 100 7.02% $ 415 6.68% $ 4,621 6.58%
-------- ---- -------- ---- ------- ----
over $100,000
Total $63,353 6.03% $68,111 4.32% $55,681 5.78%
======= ==== ======= ==== ======= ====
</TABLE>
The following schedule sets forth the time remaining until maturity for
all certificates at December 31, 1995, 1994 and 1993.
DEPOSIT MATURITIES
<TABLE>
<CAPTION>
At At At
December 31, December 31, December 31,
1995 1994 1993
(Dollars in (Dollars in (Dollars in
Thousands) Thousands) Thousands)
<S> <C> <C> <C>
Passbook/Money Market $24,275 $11,443 $21,004
------- ------- -------
Accounts under $100,000
3 months or less $12,723 $25,522 $ 5,886
Over 3 months through 6 months 13,439 17,201 7,663
Over 6 months through 12 months 9,084 10,654 12,634
Over 12 months 635 4,579 13,441
------- ------- ------
Total $35,881 $57,956 $39,624
------- ------- -------
Accounts over $100,000
3 months or less -0- $102 $ 300
Over 3 months through 6 months -0- -0- 100
Over 6 months through 12 months -0- -0- 1,092
Over 12 months -0- -0- 300
---- ---- -------
Total -0- $102 $ 1,792
------- ------- -------
TOTAL DEPOSITS $60,156 $69,501 $62,420
======= ======= =======
</TABLE>
OTHER BORROWINGS. Presidential made use of substantial lines of credit
from major banks to fund its loan portfolio growth from 1984 through 1989. The
original Bank Loan provided by NatWest Bank, N.A. ("NatWest") in 1990 was a
revolving credit line of $105 million, under which Presidential borrowed a
maximum of $82 million during 1990 (the "Bank Loan"). The credit line was
reduced by mutual agreement in 1991 to $48 million with an $18 million interim
loan, which interim loan was fully repaid by
-17-
<PAGE> 18
April 1992. In March 1992, Presidential was informed that NatWest's management
had determined to reduce its exposure to California real estate secured lending
due to the general decline in California real estate values and increasing
delinquency rates. Accordingly, the Bank Loan provided for continuing monthly
pay downs of from $1 million to $1.5 million, which reduced the available credit
line to $30.3 million by March 31, 1993. Further paydowns of $1 million per
month were required from April 30 to June 30, 1993, and $300,000 per month from
July 1, 1993 through June 30, 1994. At December 31, 1995, Presidential owed a
total balance of $6.8 million on the Bank Loan.
Presidential exceeded the scheduled monthly pay down requirements
through December 31, 1994, from a combination of cash flow from operations and
loan sales, including sales of approximately $3.8 million, $6.4 million and
$12.6 million of loans during 1994, 1993 and 1992, respectively. However, due to
an increase in loan delinquencies, management determined that Presidential was
not in compliance with loan eligibility requirements in December 1993. This
required Presidential to make additional prepayments, which it was unable to
make. Presidential informed NatWest of this event of default on December 8,
1993. All events of default identified by Presidential to NatWest, including the
failure to meet certain financial ratios and the failure to make prepayments
required as a result, were automatically waived when Bank Loan was amended and
restated on December 31, 1994.
The Bank Loan was further amended as of November 29, 1995 to extend the
maturity date by one year. Under the current terms of the Bank Loan,
Presidential has until June 30, 1997, to fully repay the outstanding balance
owed to NatWest. Presidential is required to utilize 100% of its net cash flow
to pay down the Bank Loan. Net cash flow is defined as total cash receipts less
collection costs, loan servicing expenses and general and administrative
expenses, subject to certain maximum levels based upon projected expenses
prepared by Presidential. The loan balance bears interest at prime plus 1.5%.
Mandatory pay down levels require reduction of the loan balance by approximately
$1 million per quarter through June 30, 1997. Presidential is further required
to maintain a collateral coverage ratio of performing loans relative to its loan
balance equal to 1.1:1, increasing to 1.2:1 after June 30, 1995 and a total
collateral coverage ratio of total loans receivable and net OREO relative to its
loan balance equal to 1.6:1. As additional consideration for the extension of
the Bank Loan, Presidential agreed to issue to NatWest a warrant (the "Bank
Warrant") in a new entity which has been formed as part of the proposed
restructuring plan of the Partnership. The Bank Warrant would allow NatWest to
purchase up to 2% of the outstanding capital stock of the new entity at a
purchase price equal to 25% of the net book value per share of such entity,
provided that the new entity would have a right to redeem the Bank Warrant for
one year after issuance at a redemption price of $200,000.
As of December 31, 1995, Presidential was in compliance with all
requirements under the Bank Loan, except that it had not met a technical
covenant relating to a limit on monthly cash expenses. Due to expenses in
connection with the Restructuring Plan, cash expenses exceeded the budgeted
expenses by $177,000. NatWest agreed to waive this technical violation of the
Bank Loan on February 12, 1996. In March 1996, Presidential notified NatWest
that it would be unable to make the March 31, 1996 scheduled paydown of the Bank
Loan to $4,993,000. Presidential and NatWest therefore agreed to a new amendment
to the Bank Loan as of March 15, 1996 whereby Presidential received an extension
of time to reduce the Bank Loan balance. The new amendment provides that the
Bank Loan Balance shall be reduced to no more than $4,993,000 upon the first to
occur of (x) the completion of the proposed restructuring plan of Presidential;
(y) 10 days following the date that the FDIC terminates the 1995 Order, thereby
allowing Pacific Thrift to pay dividends to Presidential, provided that in no
event shall any such dividends cause Pacific Thrift's capital ratios to fall
below the ratio required by the FDIC; or May 31, 1996. After March 31, 1996, the
Bank Loan balance is required to be reduced by approximately $1 million per
quarter until June 30, 1997, when the balance must be paid in full.
Cash distributions by Presidential to the General Partner are
restricted to the General Partner's overhead expenses, and all distributions and
withdrawal payments are and will remain restricted for the full term of the Bank
Loan. The General Partner and the three managing officers of Presidential
reaffirmed their personal guarantees of the Bank Loan in connection with the
amendment of the Bank Loan dated as of September 28, 1994. These guarantees have
been reaffirmed in connection with all subsequent amended and restated versions
of the Bank Loan.
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<PAGE> 19
Borrowings under the Bank Loan are secured by Presidential's loans
receivable and other assets. As additional security for the Bank Loan, the
General Partner has pledged its Class A, B, D and E Units in Presidential.
Further, the General Partner made an unsecured loan to Presidential of
$600,000 on May 15, 1992, which accrues interest at the Bank's prime rate
(8.25% as of February 1, 1996), but which will not be repaid as to principal
or interest without consent of the Bank.
COMPETITION
Pacific Thrift has significant competition in California for the
origination of mortgage loans from banks, savings and loans, other thrift and
loans and mortgage companies. Some of the these companies are headquartered in
California, and have extensive branch systems and advertising programs which
Pacific Thrift does not have. Pacific Thrift compensates for these competitive
disadvantages by seeking niche lending markets underserved by other lenders and
by providing a higher level of personal service to borrowers.
Pacific Thrift faces competition for depositors' funds from other
thrift and loans, banks, savings and loans, credit unions and, increasingly,
from mutual funds and life insurance annuity products. Pacific Thrift does not
offer checking accounts, travelers' checks or safe deposit boxes and thus has a
competitive disadvantage to commercial banks and savings associations in
attracting depositors. Pacific Thrift compensates for the lack of a full array
of services by offering slightly higher interest rates for deposits than most
large banks and savings and loans, while remaining interest rate competitive
with smaller banks, savings and loan associations and thrift and loans.
EMPLOYEES
As of December 31, 1995, Presidential had no employees, but received
full time services from four full-time employees of the General Partner. CRC and
LPPC received the services of 37 full time and 1 part time employees on the
payroll of the General Partner. As of the same date, Pacific Thrift had 171 of
its own full time employees, including 60 commission-based loan representatives
and 2 part-time employees.
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<PAGE> 20
SUPERVISION AND REGULATION
Financial and lending institutions are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
which relate to the regulation of Presidential and Pacific Thrift. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
CONSUMER PROTECTION LAWS
Presidential and Pacific Thrift are subject to numerous federal and
state consumer protection laws, including the Federal Truth-In-Lending Act, the
Federal Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Federal
Fair Debt Collection Practices Act and the Federal Reserve Board's Regulations B
and Z. These laws and regulations, among other things, limit the finance
charges, fees and other charges on loans, require certain disclosures be made to
borrowers, regulate the credit application and evaluation process and regulate
certain servicing and collection practices. These laws and regulations impose
specific liability upon lenders who fail to comply with their provisions, and
may give rise to defense to payment of a borrower's obligation in the event of a
failure to comply with certain applicable laws. Presidential and Pacific Thrift
believe they are currently in compliance in all material respects with
applicable laws, but there can be no assurance that they will be able to
maintain such compliance. The failure to comply with such laws, or a
determination by a court that their interpretation of law was erroneous, could
have a material adverse effect on Presidential or Pacific Thrift.
STATE LAW
PRESIDENTIAL
Presidential is subject to regulation, supervision and examination by
the DOC under its California Finance Lender Licenses. The California Finance
Lender Law and regulations of the DOC promulgated thereunder provide maximum
charges and fees (although most limitations apply only to loans under $5,000 or
$10,000), provide certain maximum repayment terms for loans under $5,000,
provide certain required disclosure documents to borrowers, limit sales of loans
to certain purchasers, and provide certain penalties for violations of
applicable laws and regulations. Presidential does not accept deposits or issue
investment certificates and are not, under current law and applicable
regulations, directly regulated or supervised by the FDIC, the Federal Reserve
Board or any other bank regulatory authority. However, Presidential is subject
to the general regulatory and enforcement authority of the DOC and the FDIC over
transactions and dealings between Pacific Thrift and its affiliates, and except
with respect to both the specific limitations regarding ownership of the capital
stock of the parent corporation of any thrift and loan, and the specific
limitations regarding the payment of dividends from Pacific Thrift.
PACIFIC THRIFT
Pacific Thrift is subject to regulation, supervision and examination by
the DOC under its California Thrift and Loan License. The thrift and loan
business conducted by Pacific Thrift is governed by the California Industrial
Loan Law and the rules and regulations of the DOC which, among other things,
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<PAGE> 21
regulate collateral requirements and maximum maturities of the various types of
loans that are permitted to be made by California-licensed industrial loan
companies, better known as thrift and loan companies.
Subject to restrictions imposed by applicable California law, Pacific
Thrift is permitted to make secured and unsecured consumer and non-consumer
loans. The maximum term of repayment of loans made by thrift and loan companies
ranges up to 40 years and 30 days depending upon collateral and priority of the
secured position, except that loans with repayment terms in excess of 30 years
and 30 days may not in the aggregate exceed 5% of the total outstanding loans
and obligations of the company. Although secured loans may generally be
repayable in unequal periodic payments during their respective terms, consumer
loans secured by real property with terms in excess of three years must be
repayable in substantially equal periodic payments unless such loans are covered
under the Garn-St. Germain Depository Institutions Act of 1982 (primarily
one-to-four family residential mortgage loans).
California law limits loans by thrift and loan companies to persons who
do not reside in California to no more than 20% of total assets, or up to 30% of
total assets with approval of the DOC. California law contains extensive
requirements for the diversification of the loan portfolio of thrift and loan
companies. A thrift and loan with outstanding investment certificates may not,
among other things, have more than 25% of its loans or other obligations in
loans or obligations which are secured only partially, but not primarily, by
real property; may not make any one loan secured primarily by improved property
which exceeds 20% of its paid-up and unimpaired capital stock and surplus not
available for dividends; may not lend an amount in excess of 5% of its paid-up
and unimpaired capital stock and surplus not available for dividends upon the
security of the stock of any one corporation; may not make loans to, or hold the
obligations of, any one person or control group as primary obligor in an
aggregate principal amount exceeding 20% of its paid-up and unimpaired capital
stock and surplus not available for dividends; and may have no more than 70% of
its total assets in loans which have remaining terms to maturity in excess of
seven years and are secured solely or primarily by real property.
A thrift and loan generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the DOC. A thrift and loan may not make any loan to, or hold an
obligation of, any of its shareholders or any shareholder or its holding company
or affiliates, except that this prohibition does not apply to persons who own
less than 10% of the stock of a holding company or affiliate which is listed on
a national securities exchange. There are currently no outstanding loans made by
either the Partnership or Pacific Thrift to any officers or directors of the
Partnership or any of its affiliates. Any person who wishes to acquire 10% or
more of the capital stock of a California thrift and loan company or 10% or more
of the voting capital stock or other securities giving control over management
of its parent company must obtain the prior written approval of the DOC.
A thrift and loan is subject to certain leverage limitations which are
not generally applicable to commercial banks or savings and loan associations.
In particular, thrift and loans may not have outstanding at any time investment
certificates that exceed 20 times paid-up and unimpaired capital and surplus.
Under California law, thrift and loans that desire to increase their leverage
must meet specified minimum standards for liquidity reserves in cash, loan loss
reserves, minimum capital stock levels and minimum unimpaired paid-in surplus
levels. As approved by the DOC, Pacific Thrift can currently operate with a
ratio of deposits to unimpaired capital and unimpaired surplus of 15:1.
At December 31, 1994, Pacific Thrift's total deposits were 22.3 times
its paid-up and unimpaired capital and unimpaired surplus not available for
dividends, which was in violation of its authorized thrift ratio, due to a
reduction in capital. Pacific Thrift returned to compliance with the 15:1 thrift
ratio as of April 30, 1995. As of December 31, 1995, Pacific Thrift had a 9.8:1
thrift ratio.
Under provisions of the FDIC Improvement Act and regulations issued by
the FDIC, additional limitations have been imposed with respect to depository
institutions' authority to accept, renew or rollover brokered deposits. Pacific
Thrift does not have any brokered deposits as of the date hereof.
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<PAGE> 22
Thrift and loan companies are not permitted to borrow, except by the
sale of investment or thrift certificates, in an amount exceeding 300% of
tangible net worth, surplus and undivided profits, without the DOC's prior
consent. All sums borrowed in excess of 150% of tangible net worth, surplus and
undivided profits must be unsecured borrowings or, if secured, approved in
advance by the DOC, and be included as investment or thrift certificates for
purposes of computing the maximum amount of certificates a thrift and loan may
issue. However, collateralized Federal Home Loan Bank advances are excluded for
this test of secured borrowings and are not specifically limited by California
law. Pacific Thrift had no borrowed funds other than deposits at December 31,
1995.
Under California law, thrift and loan companies are generally limited
to investments, other than loans, that are legal investments for commercial
banks. California commercial banks are prohibited from investing an amount
exceeding 15% of shareholders' equity in the securities of any one issuer,
except for specified obligations of the United States, California and local
governments and agencies. A thrift and loan company may acquire real property
only in satisfaction of debts previously contracted, pursuant to certain
foreclosure transactions or as may be necessary for the transaction of its
business, in which case such investment, combined with all investments in
personal property, is limited to one-third of a thrift and loan's paid-in
capital stock and surplus not available for dividends. For the period between
December 31, 1994 and February 28, 1995, Pacific Thrift was not in compliance
with these restrictions due to the reduction in its capital. However, by March
31, 1995 Pacific Thrift had returned to compliance with the restrictions.
Although investment authority and other activities that may be engaged
in by Pacific Thrift generally are prescribed under the California Industrial
Loan Law, certain provisions of FDIC Improvement Act may limit Pacific Thrift's
ability to engage in certain activities that otherwise are authorized under the
California Industrial Loan Law.
FEDERAL LAW
Pacific Thrift's deposits are insured by the FDIC to the full extent
permissible by law. As an insurer of deposits, the FDIC issues regulations,
conducts examinations, requires the filing of reports and generally supervises
the operations of institutions for which it provides deposit insurance. Among
the numerous applicable regulations are those issued under the Community
Reinvestment Act of 1977 ("CRA") to encourage insured state nonmember banks,
such as Pacific Thrift, to meet the credit needs of local communities, including
low and moderate income neighborhoods consistent with safety and soundness, and
a rating system to measure performance. Inadequacies of performance may result
in regulatory action by the FDIC. Pacific Thrift received a satisfactory rating
with respect to its CRA compliance in its most recent FDIC compliance
examination completed in January 1996.
Pacific Thrift is subject to the rules and regulations of the FDIC to
the same extent as all other state banks that are not members of the Federal
Reserve System. The approval of the FDIC is required prior to any merger,
consolidation or change in control, or the establishment or relocation of any
branch office of Pacific Thrift. This supervision and regulation is intended
primarily for the protection of the deposit insurance funds.
Pacific Thrift is subject to certain capital adequacy guidelines issued
by the FDIC. See "Federal Law -- Capital Adequacy Guidelines" under this
heading.
REGULATORY ACTIONS
As a result of an FDIC examination conducted as of June 15, 1993, the
FDIC and the DOC requested Pacific Thrift to enter into a stipulated Cease and
Desist Order (the "1993 Order") issued November 10, 1993. The Order primarily
required Pacific Thrift to (i) adopt a written policy acceptable to the FDIC and
the DOC governing Pacific Thrift's relationships with its affiliates; (ii)
reduce its volatile liability deposits to specified maximum levels; (iii)
increase its liquidity to specified minimum levels; and (iv) develop a
comprehensive asset/liability management policy. The Order did not require any
increase in capital or loan loss reserves, or a decrease in adversely classified
assets. In order to comply with the
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<PAGE> 23
Order, Pacific Thrift terminated its personnel services and facilities
arrangements with the Partnership. Substantially all of the requirements of the
Order were met by January 31, 1994, well in advance of the required dates for
compliance specified in the Order.
At the end of August 1994, the FDIC requested Pacific Thrift to enter
into a supplemental stipulated Cease and Desist Order (the "Supplemental Order")
issued October 13, 1994. The Supplemental Order required Pacific Thrift to
obtain the prior consent of the FDIC before opening any new offices and to
design, file and implement plans to increase its net earnings. The Supplemental
Order did not require any increase in capital or loan loss reserves. The
Supplemental Order also required that detailed budgets and comparisons of
budgets with actual results of operations be filed with the FDIC and DOC.
In December 1994, the FDIC notified Pacific Thrift that it was
classified as "critically undercapitalized" as of October 31, 1994. Pacific
Thrift had sufficiently restored its regulatory capital ratios from net
operating profits and capital contributions as of April 30, 1995 to be
classified as "adequately capitalized" under FDIC regulations. The FDIC
confirmed Pacific Thrift's adequate capitalization by letter dated May 8, 1995.
On May 18, 1995, the FDIC issued a new cease and desist order (the
"1995 Order") replacing the 1993 Order and Supplemental Order. The terms of the
1995 Order require Pacific Thrift to: have and retain qualified management; by
December 31, 1995, increase and maintain Tier 1 capital (consisting of
shareholders' equity) at 8% of its total assets; eliminate assets classified
"loss" as of September 26, 1994; reduce the level of adversely classified
assets; in certain instances, refrain from extending additional credit to
borrowers whose prior credits have been adversely classified; maintain a fully
funded allowance for loan losses; implement Pacific Thrift's capital restoration
and business/profitability plans; correct a past violation of the thrift ratio
requirement and comply with all applicable laws and regulations; file reports of
condition and income which accurately reflect its financial condition; obtain
FDIC approval prior to payment of any cash dividends; continue to comply with
its Policy for Transactions and Relationships Between Affiliates; obtain FDIC
approval before opening additional offices; and furnish written quarterly
progress reports to the FDIC detailing actions taken to comply with the 1995
Order.
As of December 31, 1995, Pacific Thrift has increased its capital
ratios to the levels which meet the regulatory definition of "well capitalized."
However, since the 1995 Order contains a provision requiring the maintenance of
a certain capital level (which it currently meets), Pacific Thrift would be
classified as "adequately capitalized" under the regulations.
In March 1996, as a result of its improved capital ratios and
operations, the FDIC proposed that Pacific Thrift enter into a Memorandum of
Understanding ("MOU") with the FDIC that would replace the 1995 Order.
Management anticipates that the MOU will become effective in April 1996. The MOU
will provide that Pacific Thrift shall: (i) maintain Tier I capital of 8% or
more of its total assets; (ii) maintain an adequate reserve for loan losses,
which shall be reviewed quarterly by its board of directors; (iii) eliminate
assets classified "loss" as of September 30, 1995, reduce assets classified
"substandard" as of September 30, 1995 to not more than $4,000,000 within 180
days, and reduce all assets classified substandard, doubtful and loss to no
more than 50% of capital and reserves; (iv) obtain FDIC approval before opening
additional offices; (v) develop strategies to stabilize its net interest margin
on portfolio loans and develop procedures to implement these strategies; and
(vi) furnish written quarterly progress reports to the FDIC detailing actions
taken to comply with the MOU. Management believes that Pacific Thrift has the
ability to meet the requirements of the MOU within the time specified therein.
RESTRICTIONS ON TRANSFERS OF FUNDS TO AFFILIATES BY PACIFIC THRIFT
There are statutory and regulatory limitations on the amount of
dividends which may be paid to Presidential by Pacific Thrift. Under California
law, a thrift and loan is not permitted to declare dividends on its capital
stock unless it has at least $750,000 of unimpaired capital plus additional
capital of $50,000 for each branch office maintained. In addition, no
distribution of dividends is permitted unless: (i) such distribution would not
exceed a thrift's retained earnings; or, (ii) in the alternative, after giving
effect to
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<PAGE> 24
the distribution, (a) the sum of a thrift's assets (net of goodwill, capitalized
research and development expenses and deferred charges) would be not less than
125% of its liabilities (net of deferred taxes, income and other credits), or
(b) current assets would be not less than current liabilities (except that if a
thrift's average earnings before taxes for the last two years had been less than
average interest expenses, current assets must not be less than 125% of current
liabilities).
In addition, a thrift and loan is prohibited from paying dividends from
that portion of capital which its board of directors has declared restricted for
dividend payment purposes. The amount of restricted capital maintained by a
thrift and loan provides the basis of establishing the maximum amount that a
thrift may lend to a single borrower and determines the amount of capital that
may be counted by the thrift for purposes of calculating the thrift to capital
ratio. Pacific Thrift has, in the past, restricted as much capital as necessary
to achieve its maximum thrift ratio limit. The board of directors of Pacific
Thrift may unrestrict all or any portion of its equity in the future for
dividends to the Partnership, provided that Pacific Thrift remains adequately
capitalized.
The FDIC also has authority to prohibit Pacific Thrift from engaging in
what, in the FDIC's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the FDIC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the FDIC has established guidelines with
respect to the maintenance of appropriate levels of capital by banks under their
jurisdiction. Compliance with the standards set forth in such guidelines and the
restrictions that are or may be imposed under the prompt corrective action
provisions of the FDIC Improvement Act could limit the amount of dividends which
Pacific Thrift may pay to the Partnership. See "Capital Standards" under this
heading for a discussion of these additional restrictions on capital
distributions.
Pacific Thrift is subject to certain restrictions imposed by federal
law on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, the Partnership or other affiliates, the purchase of or
investments in stock or other securities thereof, the taking of such securities
as collateral for loans and the purchase of assets of the Partnership or other
affiliates. Such restrictions prevent the Partnership and other affiliates from
borrowing from Pacific Thrift unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by Pacific Thrift to or in the Partnership or to or in any other affiliate is
limited to 10% of Pacific Thrift's capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of Pacific Thrift's capital and surplus (as defined by federal
regulations). In addition, any transaction with an affiliate of Pacific Thrift
must be on terms and under circumstances that are substantially the same as a
comparable transaction with a non-affiliate. Additional restrictions on
transactions with affiliates may be imposed on Pacific Thrift under the prompt
corrective action provisions of the FDIC Improvement Act.
CAPITAL STANDARDS
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a depository institution's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A depository institution's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings,
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<PAGE> 25
noncumulative perpetual preferred stock (cumulative perpetual preferred stock
for bank holding companies) and minority interests in certain subsidiaries, less
most intangible assets. Tier 2 capital may consist of a limited amount of the
allowance for possible loan and lease losses, cumulative preferred stock, long
term preferred stock, eligible term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. The federal banking agencies require a minimum ratio
of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of
Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require depository institutions to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a depository institution
rated in the highest of the five categories used by regulators to rate
depository institutions, the minimum leverage ratio of Tier 1 capital to total
assets is 3%. For all depository institutions not rated in the highest category,
the minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines
and leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a depository
institution's capital adequacy, an assessment of the exposure to declines in the
economic value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a depository institution's exposure to interest rate risk, which is the
subject of a proposed policy statement issued by the federal banking agencies
concurrently with the final regulations. The proposal would measure interest
rate risk in relation to the effect of a 200 basis point change in market
interest rates on the economic value of a depository institution. Banks with
high levels of measured exposure or weak management systems generally will be
required to hold additional capital for interest rate risk. The specific amount
of capital that may be needed would be determined on a case-by-case basis by the
examiner and the appropriate federal banking agency. Because this proposal has
only recently been issued, Pacific Thrift currently is unable to predict the
impact of the proposal on Pacific Thrift if the policy statement is adopted as
proposed.
In January 1995, the federal banking agencies issued a final rule
relating to capital standards and the risks arising from the concentration of
credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums. The federal
banking agencies have not imposed any quantitative assessment for determining
when these risks are significant, but have identified these issues as important
factors they will review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by such policy statement is the sum of (a)
assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15
percent of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. The
federal banking agencies recently issued final rules, effective April 1, 1995,
which limit the amount of deferred tax assets that are allowable in computing an
institution's regulatory capital. The standard has been in effect on an interim
basis since March 1993. Deferred tax assets that can be realized for taxes paid
in prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year of
the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any
deferred tax in excess of this limit would be excluded from Tier 1 Capital and
total assets and regulatory capital calculations.
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<PAGE> 26
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of Pacific Thrift to grow and could restrict the amount
of profits, if any, available for the payment of dividends.
The following table presents the amounts of regulatory capital and the
capital ratios for Pacific Thrift, compared to the regulatory capital
requirements for well capitalized institutions as of December 31, 1995.
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------
Actual Well
Capitalized
Ratio Requirement
----- -----------
<S> <C> <C> <C>
Leverage ratio............................ 9.09% 5.0%(1)
Tier 1 risk-based ratio................... 11.17% 6.0%
Total risk-based ratio.................... 12.42% 10.0%
</TABLE>
(1) Pacific Thrift is required under the 1995 Order, and will be required under
the MOU, to maintain a minimum leverage ratio of 8%.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
<TABLE>
<CAPTION>
"Well capitalized" "Adequately capitalized"
------------------ ------------------------
<S> <C>
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4% (3% if the institution receives the
highest rating from its primary regulator)
<CAPTION>
"Undercapitalized" "Significantly undercapitalized"
------------------ --------------------------------
<S> <C>
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4% (3% if the Leverage ratio less than 3%.
institution receives the highest rating
from its primary regulator)
<CAPTION>
"Critically undercapitalized"
-----------------------------
<S> <C>
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
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<PAGE> 27
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized,
or is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced sale
of voting shares to raise capital or, if grounds exist for appointment of a
receiver or conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial depository institutions may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be
-27-
<PAGE> 28
judicially enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that the
agency would be harmed if such equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may not
be less than the amount that would be raised if the assessment rate for all BIF
members were .023% of deposits. On August 8, 1995, the FDIC announced that the
designated reserve ratio had been achieved and, accordingly, issued final
regulations adopting an assessment rate schedule for BIF members of 4 to 31
basis points effective on June 1, 1995. On November 14, 1995, the FDIC further
-28-
<PAGE> 29
reduced deposit insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such as
Pacific Thrift is categorized into one of three capital categories (well
capitalized, adequately capitalized, and undercapitalized) and one of three
categories based on supervisory evaluations by its primary federal regulator (in
Pacific Thrift's case, the FDIC). The three supervisory categories are:
financially sound with only a few minor weaknesses (Group A), demonstrates
weaknesses that could result in significant deterioration (Group B), and poses a
substantial probability of loss (Group C). The capital ratios used by the FDIC
to define well-capitalized, adequately capitalized and undercapitalized are the
same in the FDIC's prompt corrective action regulations. The BIF assessment
rates are summarized below; assessment figures are expressed in terms of cents
per $100 in deposits.
<TABLE>
<CAPTION>
Assessment Rates Effective Through the First Half of 1995
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized............................ 23 26 29
Adequately Capitalized...................... 26 29 30
Undercapitalized............................ 29 30 31
<CAPTION>
Assessment Rates Effective through the Second Half of 1995
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized............................. 4 7 21
Adequately Capitalized....................... 7 14 28
Undercapitalized............................. 14 28 31
<CAPTION>
Assessment Rates Effective January 1, 1996
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized............................ 0* 3 17
Adequately Capitalized...................... 3 10 24
Undercapitalized............................ 10 24 27
</TABLE>
*Subject to a statutory minimum assessment of $1,000 per semi-annual period
(which also applies to all other assessment risk classifications).
At December 31, 1995, Pacific Thrift paid $.24 per $100 in deposits.
Supervisory subgroups are set once every six months, based upon a depository
institution's last supervisory and capital classification.
A number of proposals have recently been introduced in Congress to address
the disparity in bank and thrift deposit insurance premiums. On September 19,
1995, legislation was introduced and referred to the House Banking Committee
that would, among other things: (i) impose a requirement on all SAIF member
institutions to fully recapitalize the SAIF by paying a one-time special
assessment of approximately 85 basis points on all assessable deposits as of
March 31, 1995, which assessment would be due as of January 1, 1996; (ii) spread
the responsibility for FICO interest payments across all FDIC-insured
institutions on a pro-rata basis, subject to certain exceptions; (iii) require
that deposit insurance premium assessment rates applicable to SAIF member
institutions be no less than deposit insurance premium assessment rates
applicable to BIF member institutions; (iv) provide for a merger of the BIF and
the SAIF as of January 1, 1998; (v) require savings associations to convert to
state or national bank charters by January 1, 1998; (vi) require savings
associations to divest any activities not permissible for commercial banks
within five years; (vii) eliminate the bad-debt reserve deduction for savings
associations, although savings associations would not be required to recapture
into income their accumulated bad-debt reserves; (viii) provide for the
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<PAGE> 30
conversion of savings and loan holding companies into bank holding companies as
of January 1, 1998, although unitary savings and loan holding companies
authorized to engage in activities as of September 13, 1995 would have such
authority grandfathered (subject to certain limitations); and (ix) abolish the
Office of Thrift Supervision ("OTS") and transfer the OTS' regulatory authority
to the other federal banking agencies. The legislation would also provide that
any savings association that would become undercapitalized under the prompt
corrective action regulations as a result of the special deposit premium
assessment could be exempted from payment of the assessment, provided that the
institution would continue to be subject to the payment of semiannual
assessments under the current rate schedule following the recapitalization of
the SAIF. The legislation was considered and passed by the House Banking
Committee's Subcommittee on Financial Institutions on September 27, 1995, and
has not yet been acted on by the full House Banking Committee.
On September 20, 1995, similar legislation was introduced in the Senate,
although the Senate bill does not include a comprehensive approach for merging
the savings association and commercial bank charters. The Senate bill remains
pending before the Senate Banking Committee.
The future of both these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill,
which was passed by both the House and Senate on November 17, 1995 and vetoed by
the President on December 6, 1995, would: (i) recapitalize the SAIF through a
special assessment of between 70 and 80 basis points on deposits held by all
SAIF institutions as of March 31, 1995; (ii) provide an exemption to this rule
for weak institutions, and a 20% reduction in the SAIF-assessable deposits of
so-called "Oakar banks;" (iii) expand the assessment base for FICO payments
to include all FDIC-insured institutions; (iv) merge the BIF and SAIF on
January 1, 1998, only if no insured depository institution is a
savings association on that date; (v) establish a special reserve for the
SAIF on January 1, 1998; and (vi) prohibit the FDIC from setting semiannual
assessments in excess of the amount needed to maintain the reserve ratio of
any fund at the designated reserve ratio. The bill does not include a
provision to merge the charters of savings associations and commercial banks.
In light of ongoing debate over the content and fate of the budget bill,
the different proposals currently under consideration and the uncertainty of the
Congressional budget and legislative processes in general, management cannot
predict whether any or all of the proposed legislation will be passed, or in
what form. Accordingly, the effect of any such legislation on Pacific Thrift
cannot be determined.
INTERSTATE BANKING AND BRANCHING
In September 1994, the Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate
Act, beginning one year after the date of enactment, a bank holding company that
is adequately capitalized and managed may obtain approval under the BHCA to
acquire an existing bank located in another state without regard to state law. A
bank holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
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<PAGE> 31
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which Pacific Thrift operates, although it is difficult
to assess the impact that such increased competition may have on Pacific
Thrift's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Pacific Thrift is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. The FDIC has rated Pacific Thrift
"satisfactory" in complying with its CRA obligations.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a depository institution's compliance
with its CRA obligations. The final regulations adopt a performance-based
evaluation system which bases CRA ratings on an institution's actual lending
service and investment performance rather than the extent to which the
institution conducts needs assessments, documents community outreach or complies
with other procedural requirements. In March 1994, the Federal Interagency Task
Force on Fair Lending issued a policy statement on discrimination in lending.
The policy statement describes the three methods that federal agencies will use
to prove discrimination: (i) overt evidence of discrimination; (ii) evidence of
disparate treatment and (iii) evidence of disparate impact.
POTENTIAL ENFORCEMENT ACTIONS
Insured depository institutions, such as Pacific Thrift, and their
institution-affiliated parties, which includes the Partnership, may be subject
to potential enforcement actions by the FDIC and the DOC for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits and with respect
to Pacific Thrift and the Partnership, could also include the imposition of
civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the PCA provisions of the FDIC Improvement Act.
Management knows of no pending or threatened enforcement actions against Pacific
Thrift; however, Pacific Thrift is currently operating under the 1995 Order,
which it expects to be replaced in April 1996 with the MOU. See "Supervision and
Regulation -- Regulatory Actions" above.
ITEM 2. PROPERTIES
Presidential, Pacific Thrift, Unified, CRC and LPPC do business at
their main office in Woodland Hills, California. Pacific Thrift also does
business at five loan production offices in Costa Mesa, West Covina, Walnut
Creek and San Jose, California and, as of June 27, 1994, Bellevue, Washington.
CRC Washington leases office space from Pacific Thrift at its Bellevue,
Washington office.
All of the offices at which Presidential and its subsidiaries conduct
business are leased. Information with respect to each of the offices as of
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Floor Space Annual Expiration
Location in Square Ft. Rental(1) Date
- -------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Woodland Hills, CA(2) 19,600 $487,570 07/31/03
Costa Mesa, CA 6,331 150,728 11/14/96
West Covina, CA 3,877 67,460 05/30/99
Walnut Creek, CA(3) 9,037 132,956 03/14/00
San Jose, CA 1,483 24,914 02/28/97
Bellevue, WA 2,224 36,696 08/31/98
</TABLE>
(1) Subject to annual adjustment in accordance with customary escalation
clauses, except as provided in footnote 2 below with respect to the
Woodland Hills lease, which only provides for escalation of expense
sharing obligations.
(2) Pursuant to a lease entered January 11, 1993, annual rental increases
to $505,680 from March 1, 1996 to July 31, 1998, to $517,440 from
August 1, 1998 through January 31, 2001, and to $529,200 from
February 1, 2001 through July 31, 2003. The lease is accounted for
on the straight line average method of accounting, in accordance
with generally accepted accounting principles.
(3) Includes three separate leases for 4,682 square feet entered in March
1995, 2,418 square feet entered in October 1995 and 1,937 square feet
entered in December 1995 at rental rates between $1.85 and $2.00 per
square foot. The lease entered in March 1995 provides for annualized
rent set at $101,131 through September 1995, increasing to $103,944
through September 1997, and to $106,752 through March 2000. The other
two leases provide for annual rent of $58,032 and $45,325,
respectively.
ITEM 3. LEGAL PROCEEDINGS
Presidential and its subsidiaries are parties to certain legal proceedings
incidental to its lending and trust deed foreclosure service businesses, some of
which seek unspecified damages or substantial monetary damages in the form of
punitive damages. The ultimate outcome of such litigation cannot presently be
determined. Management, after review and consultation with counsel, and based
upon historical experience with prior collection actions, believes that
the outcome of such proceedings would not have a material adverse impact on the
Partnership's business, financial condition or results of operations.
In addition to actions incidental to its lending business, Presidential
and/or its subsidiaries are parties to the following actions.
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<PAGE> 32
ENVIRONMENTAL ACTIONS. Presidential and Pacific Thrift acquired two
properties (the "Whittier" and "San Bernardino" properties) in foreclosure
which were used by borrowers unaffiliated with the Partnership for metal
plating operations involving hazardous materials. After acquisition of the two
properties, the Partnership and Pacific Thrift each received notices from
local government authorities requiring removal of hazardous materials left by
the prior owners of each of the properties and remediation of soil
contamination.
Presidential and Pacific Thrift engaged an independent environmental
consulting firm to determine the extent of soil contamination of each of the
properties, and to prepare proposed remediation plans for each site. The
proposed remediation plans, which were completed in September 1994, had an
estimated cost of $674,000 to Presidential and $820,000 to Pacific Thrift,
including consulting and special counsel fees. These amounts were accrued at
December 31, 1993 and reserved for payment as expenses were incurred.
In April 1995, Pacific Thrift obtained a revised estimate for the cost of
environmental remediation of the Whittier property it acquired in foreclosure.
The new estimated cost is significantly lower than the original estimate.
Therefore, in 1995, Pacific Thrift reversed $378,000 of the reserve which had
been set aside to pay for remediation. Remediation was completed as of July
1995, and the property is now listed for sale.
Presidential obtained a revised bid of $500,000 to complete environmental
remediation of the San Bernardino property it acquired in foreclosure.
Remediation was completed in December 1995, and Presidential is now awaiting
approval of the closure plan from the government agency overseeing the
remediation process. When this approval is obtained, the property will be listed
for sale.
On January 2, 1994, Presidential and Pacific Thrift implemented a
comprehensive environmental policy which requires environmental risk assessment
by appraisers of every new loan made by Presidential or Pacific Thrift and a
full environmental risk report on any commercial or industrial property used as
collateral for a loan of $250,000 or more. The policy provides that no loan will
be made in the event an environmental risk assessment or report indicates the
possible presence of environmental contamination. In addition, the policy
provides that no property will be acquired in foreclosure if facts are
discovered indicating the existence of significant environmental contamination.
If Presidential or Pacific Thrift determines not to foreclose on a secured
property due to environmental contamination, the collectability of a loan could
be substantially reduced.
FORECLOSURE PUBLICATION FEES ACTION. On June 6, 1995, CRC and LPPC were
served with a complaint by Consumer Action and two consumers suing both
individually and on behalf of the general public in a purported class action
filed in the Superior Court of Contra Costa County, California. The complaint
named CRC and LPPC, along with thirteen other foreclosure service and
foreclosure publishing companies, and alleges that all named defendants charge
fees in excess of the statutorily permitted amount for publication of notices of
trustee sales. The complaint seeks restitution of all excess charges, an
injunction against the charging of excessive fees in the future and attorneys
fees. In January 1996, LPPC and two other posting and publishing companies were
dismissed from the action without prejudice. The case is still in the pleading
stage, discovery has not yet commenced and the purported class of plaintiffs has
not yet been certified.
Management believes that CRC has charged foreclosure and publication fees
in compliance with applicable law. However, if the above described action was
decided against CRC, management estimates that CRC's aggregate potential
liability would not exceed $1 million, which would have a material adverse
effect on annual earnings of the Partnership, but would not have a material
adverse effect on the financial condition or longer term earnings of the
Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of limited partners during the fourth
quarter of 1995.
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<PAGE> 33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION.
There is no public trading market for the Limited Partnership Units of the
Partnership and there are restrictions on the transferability of such interests.
For the year ended December 31, 1995, management has knowledge of five sales of
Limited Partnership Units. Management has no information concerning the sale
price with respect to three of the five sales. Management is informed that Class
C Units originally purchased for $30,000 sold for $4,500 and that Class E Units
originally purchased for $9,500 sold for $3,800. Management has no information
concerning the circumstances of each sale or the basis used to establish the
purchase price of any of the Units sold and management does not believe that
these sales are representative of the market value of Limited Partnership Units.
(b) HOLDERS.
As of December 31, 1995, the Partnership's total Capital Contributions,
based on the original investment of each Partner less capital withdrawn, were
$41,087,723, consisting of $1,748,125 held by seven Class A Limited Partners,
including $1,469,375 invested by the General Partner in Class A Units,
$2,892,000 held by 205 Class B Limited Partners, including $311,000 invested by
the General Partner in Class B Units, $13,234,375 held by 1,258 Class C Limited
Partners, $12,030,500 held by 814 Class D Limited Partners, including $50,000
invested by the General Partner in Class D Units; $10,527,000 held by 623 Class
E Limited partners, including $30,000 invested by the General Partner in Class E
Units; $255,723 held by 98 Limited Partners in DRP Units and $400,000 invested
by the General partner for its General Partner's Interest. During 1995 and 1994,
limited partners holding approximately $.3 million and $.9 million,
respectively, of capital requested withdrawal of capital, which requests were
denied in accordance with the terms of the Partnership Agreement and the
requirements of the Partnership's loan agreement with NatWest. The Partnership
does not anticipate that it will be possible to approve any capital withdrawal
requests for the foreseeable future due to the restrictions under the loan
agreement and the Partnership's current financial condition.
(c) DIVIDENDS.
The Partnership paid regularly quarterly distributions to the Partners in
accordance with the provisions of the Partnership Agreement until June 1993. The
total amount of distributions was based upon the Partnership Agreement, which
provided for distributions based upon the Net Profits of the Partnership,
defined as net profits calculated in accordance with generally accepted
accounting principles, except that loan origination fees are allowed to be
treated as income in the year in which loans are originated, whereas generally
accepted accounting principles require that such income be deferred over the
life of the loan.
For the year ended December 31, 1993, the Partnership distributed $916,309,
all of which was determined at year end to be in excess of Net Profits as
determined under the Partnership Agreement.
No distributions were made by the Partnership in 1994 or 1995.
Information on the payment of distributions (unaudited) to the
Limited Partners of the Partnership for the past five years is as follows:
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<PAGE> 34
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
-----------------------------------------------------------------------------------------------------
Class of Quarterly Quarterly Quarterly Quarterly
Limited Distribu- Quarterly Distribu- Quarterly Distribu- Quarterly Distribu- Quarterly
Partners tions Returns tions Returns tions Returns tions Returns
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
Class A -- -- -- -- -- -- -- --
Class B -- -- -- -- -- -- -- --
Class C -- -- -- -- -- -- -- --
Class D -- -- -- -- -- -- -- --
Class E -- -- -- -- -- -- -- --
DRP Units -- -- -- -- -- -- -- --
1994
Class A -- -- -- -- -- -- -- --
Class B -- -- -- -- -- -- -- --
Class C -- -- -- -- -- -- -- --
Class D -- -- -- -- -- -- -- --
Class E -- -- -- -- -- -- -- --
DRP Units -- -- -- -- -- -- -- --
1993
Class A $51,725 2.959% -- -- -- -- -- --
Class B 73,603 2.517% -- -- -- -- -- --
Class C 298,289 2.244% -- -- -- -- -- --
Class D 279,867 2.244% -- -- -- -- -- --
Class E 197,583 1.866% -- -- -- -- -- --
DRP Units 3,404 1.376% -- -- -- -- -- --
1992
Class A $54,330 3.125% $ 54,330 3.125% $ 54,927 3.125% $ 54,927 3.125%
Class B 82,447 2.625% 80,571 2.625% 80,539 2.625% 78,784 2.625%
Class C 352,009 2.500% 348,356 2.500% 344,269 2.500% 329,694 2.375%
Class D 337,460 2.500% 330,490 2.500% 325,920 2.500% 310,862 2.375%
Class E 222,171 2.020% 209,099 1.916% 210,119 1.937% 209,003 1.937%
DRP Units 2,536 1.625% 2,886 1.625% 3,199 1.625% 3,481 1.625%
1991
Class A $ 64,657 3.750% $ 65,375 3.750% $ 66,094 3.750% $ 66,094 3.750%
Class B 107,556 3.250% 106,204 3.250% 105,987 3.250% 105,044 3.250%
Class C 473,573 3.000% 469,951 3.000% 466,953 3.000% 456,281 3.000%
Class D 448,578 3.000% 448,211 3.000% 447,982 3.000% 439,004 3.000%
Class E 245,602 2.708% 264,268 2.708% 287,387 2.636% 273,833 2.466%
DRP Units 1,496 2.250% 2,024 2.250% 2,547 2.250% 3,027 2.250%
1990
Class A $ 75,497 4.000% $ 74,556 4.000% $ 72,214 4.000% $ 71,040 4.000%
Class B 121,298 3.500% 121,660 3.500% 122,512 3.500% 120,479 3.500%
Class C 561,713 3.250% 559,802 3.250% 551,322 3.250% 537,064 3.250%
Class D 524,226 3.250% 519,480 3.250% 509,832 3.250% 500,933 3.250%
Class E 99,456 3.120% 173,168 3.120% 230,747 3.120% 268,688 3.120%
DRP Units 59 2.500% 320 2.500% 729 2.500% 1,186 2.500%
Initial Return (1)
</TABLE>
<TABLE>
<CAPTION>
Fifth Total
Class of Level Fifth Annual
Limited Distri- Level Distribu- Annual
Partners butions Returns tions Returns
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Class A -- -- -- --
Class B -- -- -- --
Class C -- -- -- --
Class D -- -- -- --
Class E -- -- -- --
DRP Units -- -- -- --
1994
Class A -- -- -- --
Class B -- -- -- --
Class C -- -- -- --
Class D -- -- -- --
Class E -- -- -- --
DRP Units -- -- -- --
1993
Class A -- -- $ 51,725 2.959%
Class B -- -- 73,603 2.517%
Class C -- -- 298,289 2.244%
Class D -- -- 279,867 2.244%
Class E -- -- 197,583 1.866%
DRP Units -- -- 3,404 1.376%
1992
Class A $ 1,092 0.063% $ 219,606 12.5625%
Class B 1,919 0.063% 324,260 10.5625%
Class C 9,043 0.063% 1,383,371 9.5625%
Class D 9,491 0.063% 1,314,223 9.5625%
Class E 6,691 0.063% 857,083 7.8113%
DRP Units 116 0.063% 12,218 6.5625%
1991
Class A $ 2,185 .125% $ 264,406 15.125%
Class B 4,088 .125% 428,879 13.125%
Class C 19,960 .125% 1,886,718 12.125%
Class D 18,596 .125% 1,802,371 12.125%
Class E 15,175 .125% 1,086,265 10.643%
DRP Units 127 .125% 9,220 9.125%
1990
Class A $ 2,289 .125% $ 295,595 16.125%
Class B 4,332 .125% 490,281 14.125%
Class C 21,218 .125% 2,231,119 13.125%
Class D 19,726 .125% 2,074,196 13.125%
Class E 8,007 .125% 780,066 12.635%
DRP Units 27 .125% 2,320
Initial Return
</TABLE>
(1) Represents the lower initial investment return on Class E Units paid on new
subscriptions for Class E Units monthly in excess of $2 million per month, at a
rate equal to 0.125% above the Merrill Lynch Ready Asset Trust annualized
average rate of return after expenses for the past 30 days.
-34-
<PAGE> 35
ITEM 6. SELECTED FINANCIAL DATA
The following unaudited tables present selected consolidated
financial and other data of the Partnership as of and for each of the years
in the five years ended December 31, 1995. The information below should be
read in conjunction with, and is qualified in its entirety by, the more
detailed information included elsewhere in this Prospectus, including the
Consolidated Financial Statements of the Partnership and notes thereto and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total interest income .............................. $ 9,577 $ 11,404 $ 14,212 $ 16,827 $ 18,668
Total interest expense ............................. 5,199 4,927 5,718 6,725 8,683
--------- --------- --------- -------- --------
Net interest income .............................. 4,378 6,477 8,494 10,102 9,985
Total noninterest income ........................... 13,265 6,002 5,305 5,316 4,865
Provision for loan losses .......................... 3,289 6,096 4,655 3,888 2,617
Other real estate owned expense .................... 1,212 732 3,307 1,014 881
General and administrative expense ................. 16,062 15,164 11,705 10,367 7,517
Provision (benefit) for income taxes ............... (1,222) 1 1 1 -0-
--------- --------- --------- -------- --------
Net income (loss) .................................. $ (1,698) $ (9,514) $ (5,869) $ 148 $ 3,835
========= ========= ========= ======== ========
Distributions paid ................................. -0- -0- 1,943 4,610 5,747
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets ....................................... $ 82,557 $ 103,747 $ 114,324 $120,216 $138,405
Net loans(1) ....................................... 56,485 65,056 84,755 101,405 122,628
Total deposits ..................................... 60,156 69,501 62,421 50,561 39,555
Mortgage notes and notes payable ................... 7,982 17,691 25,578 36,507 59,412
Partners' equity ................................... 8,727 10,425 19,939 28,830 36,706
PARTNERSHIP:
SELECTED RATIOS (%)
Return on average assets ........................... (1.82)% (8.73)% (5.00)% .11% 2.77%
Return on average partners' equity ................. (17.73)% (62.67)% (24.07)% .45% 10.13%
Net interest margin(2) ............................. 5.79 % 6.82 % 8.65 % 8.71% 7.57%
Noninterest expense to average assets .............. 18.54 % 14.58 % 12.80 % 8.80% 6.07%
Efficiency ratio(3) ................................ 97.91 % 127.38 % 108.79 % 73.82% 56.55%
Efficiency ratio excluding REO expense(3) .......... 91.04 % 121.52 % 84.82 % 67.24% 50.62%
General and administrative expense to average assets 17.24 % 13.91 % 9.98 % 8.02% 5.43%
Average partners' equity to average assets ......... 10.28 % 13.92 % 20.79 % 25.34% 27.35%
Loan originations .................................. $ 170,861 $ 76,838 $ 48,612 $ 53,207 $ 60,278
ASSET QUALITY DATA:
Nonaccrual loans ................................... $ 793 $ 3,146 $ 5,316 $ 3,253 $ 3,942
REO (net of senior liens) .......................... 2,545 5,308 4,225 6,973 4,199
Total nonperforming assets ......................... 3,338 8,454 9,541 10,226 8,141
Troubled debt restructurings ....................... 948 -0- -0- -0- -0-
Allowance for credit losses ........................ 4,229 4,307 3,122 2,646 1,821
Net loan charge offs ............................... 3,367 4,912 4,178 3,063 1,907
ASSET QUALITY RATIOS:
Nonperforming assets to total assets ............... 4.04% 8.15% 8.35% 8.51% 5.88%
Allowance for credit losses to net loans ........... 7.49% 6.62% 3.68% 2.61% 1.48%
Allowance for credit losses to nonaccrual loans .... 533.29% 136.94% 58.74% 81.34% 46.19%
Net loan charge offs to average loans .............. 5.28% 5.79% 4.12% 2.67% 1.32%
</TABLE>
(1) Net of allowances for loan loss and deferred loan fees and costs, including
loans held for sale.
(2) Net interest margin represents net interest income divided by total average
earning assets.
-35-
<PAGE> 36
(3) Efficiency ratio represents noninterest expense divided by noninterest
income and net interest income.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Partnership operates two business segments: (i) the real estate
lending business, which is conducted through Presidential and Pacific Thrift and
(ii) the trust deed foreclosure services business, which is conducted through
CRC and LPPC. Presidential reports its financial condition and results of
operations on a consolidated basis with Pacific Thrift, CRC and LPPC. (See
Note 18 of Notes to Consolidated Financial Statements.)
Since 1994 the primary source of operating income of the Partnership's
lending business has been fee income from origination and sale of residential
loans. This reflects a change from prior years in which the primary source of
operating income was net interest income, which is the difference between the
interest income earned on its real estate secured loan portfolio and investment
portfolio and the cost of funds, consisting primarily of interest and fees on
the Bank Loan, and interest paid on deposits issued by Pacific Thrift.
Over the past two years, Pacific Thrift's ability to originate portfolio
loans has been limited by its capital levels. In 1994, Pacific Thrift's capital
was reduced by loan losses and expenses associated with the changes in its
lending business operations. In addition, certain differences between regulatory
accounting principles and generally accepted accounting principles in connection
with sales of senior loan participation interests resulted in a reduction of
Pacific Thrift's regulatory capital levels. As a result of these factors,
Pacific Thrift's regulatory capital declined to levels which substantially
restricted new portfolio lending. However, between November 1994 and December
1995, Pacific Thrift restored its capital with fee income from its loan sale
programs, capital contributions from the Partnership and savings from staff
reductions and changes in compensation structure for loan representatives.
Management anticipates that Pacific Thrift will gradually increase portfolio
lending in 1996.
For the years ended December 31, 1995, 1994 and 1993, the Partnership
experienced consolidated net operating losses due to high loan losses caused by
substantial declines in California real estate values between 1990 and 1995. In
addition, Presidential experienced a decline in net interest income over the
past four years as a result of the steady reduction of its loan portfolio, which
has been necessary to pay down the Bank Loan. Over the past five years, the Bank
Loan had been reduced from a high of $82 million in 1990 to $6.8 million as of
December 31, 1995. The Bank Loan is required to be fully repaid by June 1997.
Management of Presidential anticipates that the Bank Loan will be paid off with
a combination of interest income and principal reductions on the Presidential
loan portfolio, (which had an aggregate gross principal balance of $9.2 million,
net of specific reserves of $.9 million but including loans held for sale of
$3.0 million as of December 31, 1995), sales of OREO ($.8 million at December
31, 1995, net of senior liens) and sales of portfolio loans as necessary to
augment interest and fee income.
Management's goals for Pacific Thrift's lending business are to (i)
continue to emphasize fee income from loans originated for sale; (ii) increase
the volume of loans originated for sale in states in which Pacific Thrift has
recently commenced lending operations; (iii) expand loan operations into new
states; (iv) minimize overhead costs by operating without offices in most areas;
(v) continue to evaluate possible securitization programs; and (vi) gradually
rebuild Pacific Thrift's loan portfolio balance.
The primary source of operating income of the trust deed foreclosure
services business is fee income for services performed by CRC, LPPC, and CRC
Washington on behalf of other lenders, including the Partnership and Pacific
Thrift. CRC currently provides foreclosure services nationwide for over 300
banks, thrifts, mortgage companies, life insurance companies and federal
regulatory agencies. None of CRC, CRC Washington or LPPC own substantial
tangible assets or have substantial operating expenses other than general and
administrative and personnel expenses.
The Partnership's basic goal for its trust deed foreclosure services
business is to increase fee income through growth of CRC's and LPPC's customer
bases. Trust deed foreclosure services fees are limited by statute in
substantially all cases, and therefore the primary means of increasing fee
income is by increasing the volume of services provided and reducing the costs
of providing the services. CRC doubled its customer base between 1991 and 1993,
from approximately 150 to 300 customers. However, during the past two years,
some customers have been lost as a result of mergers and
-36-
<PAGE> 37
acquisitions. While many of these customers were replaced with new accounts
during the year, they were not replaced soon enough to fully offset declines in
revenues from accounts lost. Less than 5% of the revenues of each of CRC and
LPPC were provided by Presidential and Pacific Thrift for the three years ended
December 31, 1995.
At December 31, 1995 Pacific Thrift had a deferred income tax asset of
$1,225,000 net of a $857,000 valuation allowance. During 1995 $1,225,000 of the
valuation allowance was reversed to reflect expected utilization of the federal
and state net operating loss carryforward over the next twelve months. The
federal net operating loss carryforwards expire between 2007 and 2009 while
the state net operating loss carryforwards expire in 1999. In 1995 Pacific
Thrift utilized $1,135,000 of the net operating loss carryforwards existing
at December 31, 1994. While the deferred tax asset was fully reserved for
December 31, 1994, given the results of operations in 1995 and the continued
improvements in January and February of 1996, Management believes it is more
likely than not that the $1,225,000 of net operating loss carryforwards will
be realized in 1996. (See Note 8 of Notes to Consolidated Financial Statements
for additional details.)
FINANCIAL CONDITION
GENERAL
Total consolidated assets decreased $37.6 million to $82.6 million at
December 31, 1995 from $120.2 million at December 31, 1992, a decrease of 31.3%.
The decrease in consolidated assets during this period was due primarily to a
decrease of $46.7 million in net loans of Presidential and a $10.8 million
decrease in net loans of Pacific Thrift, for a total decrease of $57.5 million
in net loans receivable (excluding loans held for sale) to $43.9 million at
December 31, 1995 from $101.4 million at December 31, 1992.
A substantial amount of the proceeds from loan payoffs and loan sales of
Presidential have been used to pay down the Bank Loan over the past five years.
The Bank Loan has been reduced $26.6 million to $6.8 million at December 31,
1995 from $33.4 million at December 31, 1992.
Total deposits of Pacific Thrift have increased $9.6 million to $60.2
million at December 31, 1995 from $50.6 million at December 31, 1992, an
increase of 19%. Over the past 12 months, management undertook to reduce Pacific
Thrift's total deposits by $9.3 million, from a high of $69.5 million at
December 31, 1994, in order to reduce assets and reduce interest expense. Based
upon historical experience, management believes that Pacific Thrift has the
ability to further increase deposits if necessary to fund lending activities.
Total Partnership capital decreased by $20.1 million to $8.7 million at
December 31, 1995 from $28.8 million at December 31, 1992. Reductions in capital
were due to capital withdrawals of $1.4 million paid in 1993 to withdrawing
Limited Partners in accordance with the terms of the Partnership Agreement, $1.9
million in distributions paid in 1993 and net losses on operations of $1.7
million, $9.5 million and $5.9 million for the years ended December 31, 1995,
1994 and 1993, respectively, partially offset by $.3 million in capital
contributions in 1993. During the years ended December 31, 1995, 1994 and 1993,
the Partnership received additional requests to withdraw capital of
approximately $.3 million, $.9 million and $8.2 million, respectively, which
were not approved, in accordance with the restrictions provided in the
Partnership Agreement and the Bank Loan.
AT DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1994
Total consolidated assets of the Partnership decreased $21.1 million
(20.3%) to $82.6 million at December 31, 1995 from $103.7 million at December
31, 1994. The decrease resulted primarily from declines in cash and cash
equivalents, loans receivable, accounts receivable, real estate acquired in
settlement of loans ("OREO") and interest receivable, offset by increases in
excess yield receivable. Loans receivable decreased by $9.1 million (17.2%), to
$43.9 million from $53.0 million, as a result of loan pay offs and loan sales.
Cash and cash equivalents decreased by $9.1 million (46.4%), to $10.5 million
from $19.6 million. Accounts receivable declined by $1.8 million (35.3%) to $3.3
million at December 31, 1995 from $5.1 million at December 31, 1994. Excess
yield receivable increased $1.8 million, (200.0%) to $2.7 million from $.9
million due to sales of loans for which Pacific Thrift receives a servicing
release fee over the life of the loans sold. See "BUSINESS -- Lending Activities
- -- Loans Originated for Sale." OREO declined by $4.5 million (59.2%), to $3.1
million at December 31, 1995 from $7.6 million at December 31, 1994, reflecting
sales of OREO. Interest receivable declined by $.2 million (18.2%), to $.9
million from $1.1 million, primarily due to the reduction of the loan portfolio.
Total liabilities decreased $19.5 million (20.9%) to $73.8 million at
December 31, 1995 from $93.3 million at December 31, 1994. The decrease resulted
from declines in notes payable, thrift certificates payable, accounts payable,
accrued expenses and interest payable and mortgages payable on OREO. Notes
payable decreased by $8 million (54.1%), to $6.8 million from $14.8 million, due
to pay down of the Bank Loan. Thrift certificates payable decreased by $9.3
million (13.4%) to $60.2 million from $69.5 million, reflecting the reduction in
total assets of Pacific Thrift. Accounts payable, accrued expenses and interest
payable decreased by $.4 million (7.1%), to $5.2 million from $5.6 million,
primarily due to a $.4 million reduction in accrued expenses for the
environmental remediation of an OREO acquired by
-37-
<PAGE> 38
Pacific Thrift after receiving a lower bid for completion of the work. Mortgages
payable on OREO decreased by $1.7 million (73.9%), to $.6 million from $2.3
million, due to sale of OREO.
Total Partnership capital decreased by $1.7 million (16.3%) to $8.7
million from $10.4 million, due to consolidated net losses of $1.7 million
incurred during the year ended December 31, 1995. The consolidated net loss was
comprised of a $5.8 million net loss of Presidential, partially offset by $3.2
million net income of Pacific Thrift, $.6 million net income of CRC and
$.3 million net income of LPPC.
AT DECEMBER 31, 1994 COMPARED WITH DECEMBER 31, 1993
Total consolidated assets decreased $10.6 million to $103.7 million at
December 31, 1994 from $114.3 million at December 31, 1993, a decrease of 9.3%.
The decrease in assets during the year was primarily due to reductions in the
Partnership's loans receivable and OREO, offset by an increase in cash and cash
equivalents held to maintain Pacific Thrift's required liquidity ratio.
Presidential's loans receivable declined by $21.6 million, and Pacific Thrift's
loans receivable by $9.6 million, resulting in a total decline of $31.2 million
in 1994, to $53.0 million at December 31, 1994 from $84.2 million at December
31, 1993, a net decline of 37.0%. OREO increased by $1.6 million in 1994 to $7.6
million at December 31, 1994 from $6.0 million at December 31, 1993, an increase
of 26.7%. Offsetting these declines was an increase in cash and cash
equivalents, which increased by $6.4 million in 1994, to $19.6 million at
December 31, 1994 from $13.2 million at December 31, 1993.
Total deposits of Pacific Thrift increased $7.1 million to $69.5 million
at December 31, 1994 from $62.4 million at December 31, 1993, an increase of
11.4%.
Total Partners' capital decreased $9.5 million to $10.4 million at
December 31, 1994 from $19.9 million at December 31, 1993, a decline of 47.7%.
Reductions in capital were due to a $9.5 million net operating loss for 1994.
During 1994, the Partnership received additional requests to withdraw capital of
approximately $0.9 million which were not approved, in accordance with the
restrictions provided in the Partnership Agreement and the Bank Loan.
RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS
The following table sets forth certain information concerning average
interest-earning assets and interest bearing liabilities and the yields and
rates thereon. Average balances are calculated on a quarterly basis and
nonaccrual loans have
-38-
<PAGE> 39
been included in interest earning assets for the computations. Fee income on
loans included in interest income and in the calculation of average yields was
$.7 million and $1.7 million for the years ended December 31, 1995 and 1994,
respectively.
-39-
<PAGE> 40
YIELDS AND RATES ON INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
Average Yield Average Yield
Balance Interest Rate Balance Interest Rate
Assets (Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $63,711 $8,885 13.95% $84,776 $11,003 12.98%
Interest-bearing deposits in
other financial institutions
and securities purchased under
agreements to sell 11,852 692 5.84% 10,138 401 3.96%
------ ------ ------ ------- ------ -----
Total interest-earning assets 75,563 9,577 12.67% 94,914 11,404 12.02%
====== ====== ====== ====== ====== =====
Noninterest-earning assets:
Cash and due from banks 5,536 3,782
Premises & equipment, net 1,483 1,452
Real estate acquired in settlement 5,322 6,276
of loans
Other Assets 5,290 6,734
------ ------
Total noninterest-earning assets 17,631 18,244
------ ------
Less allowance for loan losses 3,911 3,085
------ ------
Total Assets 89,283 9,577 110,073 11,404
====== ====== ======= ======
Liabilities & Partners' Capital
Interest-bearing liabilities:
Notes payable 12,601 1,379 10.94% 18,734 1,982 10.58%
Savings deposi 13,322 718 5.39% 23,867 904 3.79%
Time CDs 50,031 3,102 6.20% 44,241 2,041 4.61%
. ------ ----- ----- ------ ----- -----
Total interest-bearing liabilities 75,954 5,199 6.84% 86,842 4,927 5.67%
====== ===== ===== ====== ===== =====
Noninterest-bearing liabilities:
Accounts payable & accrued
expenses 3,123 8,047
------ ------
Total Liabilities 79,077 94,889
Partners' Capital 10,206 15,184
------ ----- ------ -----
Total liabilities and
partners' capital $89,283 5,199 $110,073 4,927
====== ===== ---- ====== ===== -----
Net interest income/spread 4,378 5.83% 6,477 6.34%
===== ==== ===== =====
Net interest margin 5.79% 6.82%
Net Income (loss) $(1,698) $(9,514)
====== ======
Average interest earning assets to 0.995% 1.093%
average interest bearing liabilities
</TABLE>
-40-
<PAGE> 41
Interest income and interest expense can fluctuate widely based on
changes in the level of interest rates in the economy. Pacific Thrift attempts
to minimize the effect of interest rate fluctuations on net interest margins by
matching as nearly as possible interest sensitive assets and interest sensitive
liabilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -Asset/Liability Management."
Net interest income can also be affected by a change in the composition
of assets and liabilities, such as when higher yielding loans replace lower
yielding loans. Net interest income is affected by changes in volume and changes
in rates. Volume changes are caused by differences in the level of earning
assets and interest-bearing liabilities. Rate changes result from differences in
yields earned on assets and rates paid on liabilities.
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities due to changes in volume and interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume; (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume which cannot be segregated, have been
allocated proportionately to changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
Rate Volume Analysis
(Dollars in Thousands)
1995 compared to 1994 1994 compared to 1993
Increase (decrease) Increase (decrease)
due to change in due to change in
----------------------------------- --------------------------------
Volume Yield/ Net Volume Yield/ Net
Rate Change Rate Change
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2,891) 773 (2,118) (1,821) (1,385) (3,206)
Interest-bearing deposits in
other financial institutions and
securities purchased under
agreements to sell 76 215 291 399 (1) 398
------ ----- ------ -------- -------- --------
Total interest-earning assets (2,815) 988 (1,827) (1,422) (1,386) (2,808)
======= ===== ======= ======== ========== =========
Liabilities & Partners' Capital
Interest-bearing liabilities:
Notes payable (669) 66 (603) (1,243) 728 (515)
Savings deposits (485) 299 (186) 734 10 744
Time CDs 293 768 1,061 (382) (638) (1,020)
----- ----- ----- ---------- ------- ------------
Total interest-bearing
liabilities (861) 1,133 272 (891) 100 (791)
====== ===== ===== ========= ====== ======
Change in net interest income (1,954) (145) (2,099) (531) (1,486) (2,017)
======= ===== ======= ========= ======= ========
</TABLE>
-41-
<PAGE> 42
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL
The Partnership incurred a net loss of $1.7 million for the year ended
December 31, 1995, compared with a net loss of $9.5 million for the year ended
December 31, 1994. For 1995 the net loss before income tax benefit was $2.9
million and the net loss was $1.7 million, reflecting a tax benefit of $1.2
million due to Pacific Thrift's use of net operating loss carryforwards.
Pacific Thrift has a remaining net operating loss carryforwards of
approximately $4.0 million as of December 31, 1995, which may be used to
offset a tax liability on future taxable income of Pacific Thrift. The
reduction in the net operating loss carryforward in 1995 compared to 1994
was due primarily to increases in noninterest income and decreases in
noninterest expenses from 1994.
NET INTEREST INCOME
Net interest income before provision for loan losses decreased by $2.1
million (32.3%), to $4.4 million for the year ended December 31, 1995 compared
to $6.5 million for the year ended December 31, 1994, as a result of the
reduction in total interest income and increase in total interest expense.
TOTAL INTEREST INCOME
Total interest income decreased by $1.8 million (15.8%), to $9.6
million for 1995 compared to $11.4 million for 1994, due to reductions in the
loan portfolio as assets were reduced to improve capital ratios in Pacific
Thrift and pay down the Bank Loan at Presidential.
TOTAL INTEREST EXPENSE
Total interest expense increased by $.3 million (6.1%), to $5.2 million
for 1995 compared to $4.9 million for 1994, due to higher market interest rates
paid on thrift certificates by Pacific Thrift, which offset lower levels of
deposits and a reduction in the Bank Loan.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $3.3 million for the year ended
December 31, 1995, compared to $6.1 million for the year ended December 31,
1994. The total allowance for loan losses was $4.2 million at December 31, 1995,
compared with $4.3 million at December 31, 1994, reflecting sales and payoffs of
loans on which reserves were previously taken and status improvements in some
portfolio loans.
The calculation of the adequacy of the allowance for loan losses is
based on a variety of factors, including loan classifications and underlying
loan collateral values, and is not directly proportional to the level of
nonperforming loans. See "BUSINESS -- Classified Assets and Nonperforming Loans
- -- Allowance for Loan Losses." The ratio of nonaccrual loans past due 90 days or
more to total loans was 1.62% at December 31, 1995, compared to 5.35% at
December 31, 1994. The ratio of the allowance for loan losses to nonaccrual
loans past due 90 days or more was 533.29% at December 31, 1995, compared to
136.94% at December 31, 1994.
NONINTEREST INCOME
Total noninterest income increased by $7.3 million (121.7%), to $13.3
million for the year ended December 31, 1995 compared to $6.0 million for the
year ended December 31, 1994, due to increases in gains on sale of loans by
Pacific Thrift. Gains on sale of loans increased by $8.0 million (888.9%), to
$8.9 million for 1995 compared to $.9 million for 1994. Pacific Thrift sold a
total of $155.4 million of loans during 1995, for a total gain on sale of $8.4
million. These sales included $145 million of securitizable loans, for a gain
on sale of $8.6 million, $8.4 million of portfolio loans, for a gain on sale of
$.2 million and $2.0 million of home improvement loans, sold at a gain of $.1
million. Other income decreased by $.6 million (35.3%), to $1.1 million for 1995
compared to $1.7 million for 1994, due to lower revenues of CRC and LPPC.
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NONINTEREST EXPENSE
Noninterest expense increased by $1.4 million (8.8%), to $17.3 million
for 1995 compared to $15.9 million for 1994. Increases in noninterest expense
were primarily due to increases in salaries, employee benefits and personnel
services and operations of OREO, partially offset by declines in general and
administrative expenses. General and administrative expenses decreased by $.8
million (11.3%) to $6.3 million for 1995 compared to $7.1 million for 1994.
Salaries, employee benefits and personnel services increased by $1.4 million
(21.0%) to $7.9 million for 1995 compared to $6.5 million for 1994. Expenses on
OREO decreased by $.7 million (58.3%) to $.5 million for 1995 compared to $1.2
million for 1994. The Partnership recognized net losses on sales of OREO of $.7
million for 1995 and net gains of $.4 million for 1994.
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
GENERAL
The Partnership incurred a net loss of $9.5 million for the year ended
December 31, 1994, compared with a net loss of $5.9 million for the year ended
December 31, 1993. The increase in net loss in 1994 from 1993 was due primarily
to a $3.4 million decline in net interest income after provision for loan losses
to $.4 million in 1994 from $3.8 million in 1993, and a $.9 million increase in
non-interest expense to $15.9 million in 1994 from $15.0 million in 1993,
partially offset by a $.7 million increase in non-interest income.
NET INTEREST INCOME
Net interest income before provision for loan losses for the year ended
December 31, 1994 was $6.5 million, a decrease of $2.0 million from the year
ended December 31, 1993. This decrease resulted primarily from the decrease in
average interest earning assets, which declined by $3.3 million, or 3.4%, to
$94.9 million in 1994 from $98.2 million in average interest earning assets in
1993.
TOTAL INTEREST INCOME
Total interest income decreased $2.8 million, or 19.7%, to $11.4
million in 1994 from $14.2 million in 1993 due to the reduction of $3.3 million
in average interest earning assets.
TOTAL INTEREST EXPENSE
Total interest expense decreased $0.8 million to $4.9 million in 1994
from $5.7 million in 1993. The decline in interest expense was due primarily to
a substantial reduction in the Bank Loan balance, which was partially offset by
an increase in deposits, principally time certificates of deposit, issued by
Pacific Thrift at lower rates of interest than the rate payable on the Bank
Loan.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $6.1 million in 1994 compared with
$4.6 million in 1993. The provision for loan losses remained high in 1994 and
1993 due to the continuing high levels of loan delinquencies and declines in
California real estate values over the past five years. The total allowance for
loan losses has increased as a percentage of the total loan portfolio to 7.33%
of the combined portfolio at December 31, 1994 compared with 3.49% of the
combined portfolio at December 31, 1993. New policies and procedures were
initiated by Pacific Thrift in 1993, which included obtaining new outside
appraisals for most delinquent loans when the most recent outside appraisal was
over six months old. In the last quarter of 1993, new management was hired for
Pacific Thrift, and it determined to make changes in the method of determining
the allowance for loan losses, which resulted in significant adjustments to the
provision for loan loss in the fourth quarter of 1993. In 1994, management of
the Partnership conducted a further review of its portfolio, which included
review appraisals of many properties. As a result, a substantial adjustment to
the provision for loan losses of the Partnership was made in the fourth quarter
of 1994. See "BUSINESS -- Classified Assets and Loan Losses."
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The ratio of nonaccrual loans past due 90 days or more to total loans
was 5.35% at December 31, 1994 and 5.94% at December 31, 1993. The ratio of the
allowance for loan losses to nonaccrual loans past due 90 days or more was
136.94% at December 31, 1994 and 58.74% at December 31, 1993.
NONINTEREST INCOME
Noninterest income increased by $0.7 million to $6.0 million in 1994
compared to $5.3 million in 1993. Noninterest income was primarily provided by
trustee and reconveyance fees earned by CRC and LPPC. Trustee and reconveyance
fees decreased by $0.5 million in 1994 to $3.3 million in 1994 compared to $3.8
million in 1993, due to a reduction in loan default levels in 1994.
Gain on sale of loans increased by $0.8 million (800%) in 1994, to $0.9
million in 1994 from $0.1 million in 1993. The increase is the result of an
increase in originations of loans for sale in 1994. A total of $58 million in
loans were sold in 1994, including $29.6 million of loans originated for sale by
Pacific Thrift.
NONINTEREST EXPENSE
Noninterest expense increased by $0.9 million to $15.9 million in 1994
from $15.0 million in 1993. The major components of this increase included a
$1.4 million increase in salaries and employee benefits, a $1.6 million increase
in general and administrative expenses and a $.5 million increase in
depreciation and amortization, offset by a decrease of $2.6 million in operation
of OREO. The increase in salaries and benefits was due to increased staffing at
Pacific Thrift in 1994 and reduced deferred loan origination costs pursuant to
FASB 91. The increase in general and administrative expenses was due to
increased professional fees.
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LIQUIDITY AND CAPITAL RESOURCES
Neither Presidential nor any of its subsidiaries other than Pacific
Thrift maintains significant cash and cash equivalent assets. The primary source
of Pacific Thrift's liquidity is the cash and cash equivalents maintained by
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Pacific Thrift in connection with its deposit-taking and lending activities. At
December 31, 1995, cash and cash equivalent assets totalled $10.5 million,
compared with $19.6 million at December 31, 1994.
At December 31, 1995, neither Presidential nor Pacific Thrift had
material outstanding commitments to fund loans. Certificates of deposit which
are scheduled to mature in one year or less from December 31, 1995 totalled
$35.2 million. Based upon historical experience, management believes that a
significant portion of such deposits may be renewed to the extent deemed
desirable by management. In general, depositors have historically tended to
renew deposits when the rates paid on such deposits remain competitive with
rates offered by comparable financial institutions. However, from time to time
during 1994 and 1995, management of Pacific Thrift has intentionally taken steps
to reduce deposit renewals in order to reduce the total amount of deposits.
These steps include reducing the interest rates offered on maturing deposits and
declining to renew certain large deposits.
Presidential's primary sources of funds are principal and interest
payments on loans, substantially all of which have been used to pay down the
Bank Loan and pay expenses since July 1993. Pacific Thrift's primary sources of
funds are deposits, principal and interest payments on loans and gains on sales
of loans. Gains on sales of loans cannot be predicted with certainty, because
they depend on new loan originations, which are subject to fluctuation. While
scheduled principal amortization on loans and deposit flows are a reasonably
predictable source of funds, mortgage loan prepayments are greatly influenced by
the level of interest rates, economic conditions and competition.
The primary lending and investment activities of Presidential and
Pacific Thrift are the origination of fixed and adjustable rate real estate
loans. Since November 1991, substantially all new loans (other than loan
rewrites of existing loans) have been originated by Pacific Thrift. Effective
January 1, 1994, Pacific Thrift began to invest in short-term investment
securities, primarily federal funds sold and U.S. Treasury Notes, which provides
income from those assets required for liquidity. The levels of these assets
depend on Pacific Thrift's operating, financing, lending and investing
activities during any given period.
For the past four years, Presidential has reduced its lending
activities as a result of the need to reduce its borrowings under the Bank Loan.
Beginning in 1991, Presidential began to pay down the Bank Loan, which has been
reduced by $26.6 million to $6.8 million at December 31, 1995 from $33.4 million
at December 31, 1992. Pacific Thrift has increased its lending activities over
the same period, including primarily loans originated for sale in 1994 and 1995,
which are funded with loan sale proceeds.
Pacific Thrift maintains minimum levels of liquid assets as required
under the liquidity policy adopted by the board of directors of Pacific Thrift.
The relationship between short-term liquid assets and total deposits at December
31, 1995 was 31.7%, which exceeded the 10% minimum established by the board. At
December 31, 1994 and 1993, the liquidity ratio was 26.9% and 20.5%,
respectively.
On December 1, 1995, Pacific Thrift obtained from First Interstate Bank
of California a federal funds credit line, bearing interest at the federal funds
rate as announced from time to time by the Federal Reserve Board, in the amount
of $2.5 million. The amount of the line was increased to $3.5 million on January
3, 1996. The line is intended to support short term liquidity, and is not
expected to be used for more than ten consecutive days or more than 12 times
during any 30 day period.
Pacific Thrift is subject to certain leverage and risk-based capital
adequacy standards applicable to FDIC-insured institutions. At December 31,
1994, Pacific Thrift was classified by the FDIC as "undercapitalized."
However, by March 31, 1995, Pacific Thrift was reclassified by the FDIC as
"adequately capitalized." As of December 31, 1995, Pacific Thrift's regulatory
capital levels have increased to levels meeting the FDIC's definition of "well
capitalized;" however, due to the existence of the 1995 Order requiring Pacific
Thrift to maintain certain capital levels, it is classified as "adequately
capitalized." See "SUPERVISION AND REGULATION -- Federal Law -- Capital Adequacy
Guidelines."
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ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that same time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would generally tend to adversely affect net
interest income while a positive gap would generally tend to result in an
increase in net interest income. During a period of declining interest rates, a
negative gap would generally tend to result in increased net interest income
while a positive gap would generally tend to adversely affect net interest
income. At December 31, 1995, total interest-earning assets maturing or
repricing during each period exceeded total interest-bearing liabilities
maturing or repricing in the same periods by $1.7 million, representing a
cumulative interest rate sensitivity gap ratio of 3.0%. However, because
interest rates for different asset and liability products offered by depository
institutions respond differently to changes in the interest rate environment,
the gap is only a general indicator of interest rate sensitivity.
Presidential does not actively originate new loans, and has not done so
in approximately four years. Therefore, Presidential does not actively monitor
its interest rate risk at this time.
Pacific Thrift actively monitors its interest rate risk. Pacific Thrift
has an asset/liability committee which includes its President, Chief Financial
Officer and Deposit Operations Manager. The committee meets regularly to review
Pacific Thrift's interest rate risk position and make whatever adjustments are
necessary. In addition, the board of directors of Pacific Thrift reviews its
asset/liability position on a quarterly basis.
To the extent consistent with its interest rate spread objectives,
Pacific Thrift attempts to reduce its interest rate risk and has taken a number
of steps to match its interest sensitive assets and liabilities to minimize the
potential negative impact of changing interest rates. Pacific Thrift has focused
on making adjustable rate loans, virtually all of which adjust quarterly, and
focuses its investment activity on short-term obligations of banks and U.S.
government securities.
The following table sets forth the interest rate sensitivity of Pacific
Thrift's assets and liabilities at December 31, 1995 on the basis of certain
assumptions. Except as stated below, the amounts of assets and liabilities shown
which reprice or mature during a particular period were determined in accordance
with the earlier of the repricing timing or contractual term of the asset or
liability. Pacific Thrift has assumed that its savings accounts, which totalled
$24.3 million at December 31, 1995 reprice immediately. Certificates of deposit
are included in the table below at their dates of maturity.
Certain shortcomings are inherent in the method of analysis presented
in the following table. For example, interest rate floors on some adjustable
rate loans can have the effect of increasing the net interest income as interest
rates decline or, conversely, limiting net interest income as interest rates
rise. Also, loan prepayments and early withdrawal of certificates of deposit
could cause the interest sensitivities to vary from what appears in the table.
Finally, the ability of many borrowers to service their adjustable rate debt may
be adversely affected by an interest rate increase.
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INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION> After
Assets or Liabilities Which 1 Day 3 Months Six Months 1-5 5
Mature or Reprice to 3 Months to 6 Months to 1 Year Years Years Total
--------------------------- ----------- ----------- --------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Cash and Investments........... $9,506,287 0 0 0 0 $9,506,287
Loans Receivable............... 36,479,178 942,408 192,872 901,850 4,264,215 42,780,523
Loans Held for Sale (1)........ 9,577,341 0 0 0 0 9,577,341
--------- ----- ----- ----- ----- ---------
Interest-earning assets........ $55,562,806 $942,408 $192,872 $901,850 $4,264,215 $61,864,151
========== ======= ======= ======= ========= ==========
Certificates of deposit........ 12,722,796 13,439,390 9,084,164 635,000 0 35,881,350
Savings accounts............... 24,274,630 0 0 0 0 24,274,630
---------- ----- ----- ----- ----- ----------
Interest-bearing liabilities... $36,997,426 $13,439,390 $9,084,164 $635,000 $ 0 $60,155,980
========== ========== ========= ======= ===== ==========
Interest rate sensitivity gap.. 18,565,380 (12,496,982) (8,891,292) 266,850 4,264,215 1,708,171
Cumulative interest rate
sensitivity gap ............... $18,565,380 $6,068,398 $(2,822,894) $(2,556,044) $1,708,171 $1,708,171
Interest rate sensitivity
ratio (2)...................... 1.50 0.07 0.02 1.42 0.00 1.03
Cumulative interest rate
sensitivity gap ratio (3)...... 0.33 0.11 -0.05 -0.04 0.03 0.03
</TABLE>
(1) Includes pre-approved loans sold at each month end, for which cash has
not yet been received.
(2) The interest rate sensitivity gap ratio represents total
interest-earning assets divided by total interest-bearing liabilities.
(3) The cumulative interest rate sensitivity gap ratio represents the
cumulative interest rate sensitivity gap divided by total
interest-earning assets.
EFFECT OF FEDERAL LAWS AND REGULATIONS
Pacific Thrift's operating results are impacted by Federal laws and
regulations. See "SUPERVISION AND REGULATION."
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of operations of the Partnership and its subsidiaries.
Like most mortgage companies and industrial loan companies, nearly all the
assets and liabilities of the Partnership and Pacific Thrift are monetary. As a
result, interest rates have a greater impact on the Partnership's consolidated
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
EFFECT OF NEW ACCOUNTING STANDARDS
In December 1991, the Financial Accounting Standards Board (FASB)
issued its Statement of Financial Accounting Standards No. 107 ("SFAS 107")
"Disclosures About Fair Value of Financial Instruments." SFAS 107 requires all
entities to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the statement of financial
condition, for which it is practicable to estimate fair value. SFAS 107 is
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effective for fiscal years ending after December 15, 1995, for entities with
less than $150 million in total assets, as of its December 1991 issuance date.
The adoption of SFAS 107 did not have a material impact on the Partnership's
financial statements for the year ended December 31, 1995, and is not expected
to have a material impact on the Partnership's financial statements. (See
Note 2 of the Notes to Consolidated Financial Statements.)
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." SFAS No. 114 applies to all loans except large groups
of smaller balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or a lower of cost or fair value,
leases, and debt securities as defined in SFAS No. 115. SFAS No. 114 requires
that impaired loans be valued at the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair market value of the collateral
if the loan is collateral dependent. SFAS No. 114 is effective for fiscal years
beginning after December 15, 1994, with earlier adoption encouraged. SFAS No.
114 applies primarily to the Partnership's combined mortgage loan portfolio.
Presidential and Pacific Thrift actively monitor this portfolio and evaluate the
net realizable value of any loan which is deemed to be impaired. Net realizable
value is assessed based upon current appraised value of the underlying
collateral. If carrying value exceeds this estimated realizable value, carrying
value is reduced to the estimated realizable value by a charge to earnings. As
such, SFAS No. 114 does not represent a material change from the Partnership's
and Pacific Thrift's current accounting practices and adoption of SFAS No. 114
did not have a material impact on the reported financial results of the
Partnership.
In October, 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS
No. 118 amends Statement No. 114 to allow a creditor to use existing methods for
recognizing interest income on impaired loans and also amends the disclosure
requirements of Statement No. 114 to require information about the recorded
investment in certain impaired loans and about how a creditor recognizes
interest income related to these impaired loans. SFAS No. 118 is effective
concurrent with the effective date of Statement 114, that is, for financial
statements for fiscal years beginning after December 15, 1994. As with Statement
No. 114, management believes it is following the requirements of SFAS No. 118.
In March, 1995, the FASB used SFAS No. 121 "Accounting for the
impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of."
SFAS 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset.
This Statement is effective for financial statements for fiscal years
beginning after December 15, 1995. Earlier application is encouraged.
Restatement of previously issued financial statements is not permitted.
Impairment losses resulting from the application of this Statement should be
reported in the period in which the recognition criteria are first applied and
met. The initial application of this Statement to assets that are being held for
disposal at the date of adoption should be reported as the cumulative effect of
a change in accounting principle. Management does not believe that the adoption
of SFAS 121 will have a material impact on the Partnership's financial
statements.
In May, 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65." SFAS No. 122 requires
that a mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights are acquired.
A mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable to estimate
the fair values of the mortgage servicing rights and the mortgage loans (without
the mortgage servicing rights), the entire cost of purchasing or
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originating the loans should be allocated to the mortgage loans (without the
mortgage servicing rights) and no cost should be allocated to the mortgage
servicing rights.
This Statement requires that a mortgage banking enterprise assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. A mortgage banking enterprise should stratify its mortgage
servicing rights that are capitalized after the adoption of this Statement based
on one or more of the predominant risk characteristics of the underlying loans.
Impairment should be recognized through a valuation allowance for each impaired
stratum.
This Statement applies prospectively in fiscal years beginning after
December 15, 1995, to transactions in which a mortgage banking enterprise sells
or securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of this Statement. Earlier application is
encouraged. Retroactive capitalization of mortgage servicing rights retained in
transactions in which a mortgage banking enterprise originates mortgage loans
and sells or securitizes those loans before the adoption of this Statement is
prohibited. Based on management's belief that no material amount of portfolio
loans will be sold for the foreseeable future, management does not believe that
the adoption of SFAS 122 will have a material impact on the Partnership's
financial statements.
In October 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a method of accounting for
stock compensation plans based on fair value of grants made under such plans on
the date of grant using certain option-pricing models. SFAS No. 123 allows
companies to continue to account for their stock option plans in accordance
with APB Opinion 25 "Accounting for Stock Issued to Employees," which provides
for an intrinsic valuation model that recognizes only the difference between
the fair market value of a company's stock and the price paid to acquire the
stock under the stock compensation plan. However, SFAS No. 123 encourages the
adoption of the fair value accounting method. Companies electing not to follow
the new fair value based method are required to provide expanded footnote
disclosures, including pro forma net income and earnings per share, determined
as if the company had applied the new method. SFAS No. 123 is required to be
adopted prospectively beginning January 1, 1996. Since the Partnership has no
stock option plan, SFAS No. 123 does not apply to the Partnership.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a)1-2.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 12, 1995, the Partnership dismissed Ernst & Young LLP
("E&Y") as independent certified public accountants of the Partnership and
its subsidiaries, and engaged BDO Seidman LLP ("BDO") as independent certified
public accountants of the Partnership and its subsidiaries.
The report of E&Y for the years ended December 31, 1994 and 1993 did
not contain an adverse opinion or a disclaimer of an opinion, and was not
qualified or modified as to audit scope or accounting principles. The report for
the year ended December 31, 1994 contained an explanatory paragraph concerning a
substantial doubt about the ability of the Partnership to continue as a going
concern due to losses from nonperforming loans that resulted in significant
recurring losses from operations, substantial debt service and other
requirements of the Bank Loan and the regulatory capital classification of
Pacific Thrift. In addition, the report for 1994 contained an explanatory
paragraph concerning certain securities litigation containing allegations of
securities fraud and aiding and abetting a breach of fiduciary duty relating to
the Partnership and its Chief Executive Officer. The securities litigation
naming the Partnership and the Chief Executive Officer referred to in the
explanatory paragraphs contained in the 1994 reports was dismissed by the
plaintiffs in October 1995. As of the date hereof, Pacific Thrift has been
reclassified as "adequately capitalized" by the FDIC, and its regulatory capital
ratios meet the FDIC's regulatory definition of "well capitalized," although it
is classified as "adequately capitalized" due to the provisions of the 1995
Order requiring the maintenance of a certain capital level (which it currently
meets).
The report of E&Y for the year ended December 31, 1993 contained an
explanatory paragraph concerning the securities litigation referred to in the
report for 1994 and an explanatory paragraph concerning the Partnership's
liability for environmental remediation of two properties acquired in
foreclosure and possible government action if the Partnership did not comply
with a consent agreement regarding one of the properties. The environmental
remediation matter was not referred to in the report for the year ended December
31, 1994, as there was no material uncertainty regarding any further liability
as of that date.
During the Partnership's two most recent fiscal years and subsequent
interim period, there were disagreements between the Partnership and E&Y. The
disagreements were as follows:
There was a disagreement concerning the scope of the work necessary to
be performed by E&Y in connection with a proposed restructuring of the
Partnership, including procedures and issues raised with respect to
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the allowance for loan losses, deferred tax asset and other transactions
recorded by the Partnership in its unaudited financial information as of June
30, 1995. Prior to resolving the disagreement, the client-auditor relationship
was terminated by the Partnership.
There were disagreements regarding the amount of the provision and
allowance for loan losses for the fiscal years ended December 31, 1994 and 1993,
which were resolved by the Partnership recording an additional provision for
each year.
There were disagreements about the scope of audit procedures to be
performed to ascertain the status of certain regulatory matters concerning
Pacific Thrift and the ability of the Partnership to continue as a going concern
for the fiscal year ended December 31, 1994, which were resolved by E&Y
performing the additional procedures.
There was a disagreement about the need to add an explanatory
paragraph to the report of E&Y for the year ended December 31, 1994 concerning
the ability of the Partnership to continue as a going concern, which was
resolved by the Partnership accepting such explanatory paragraph.
There were disagreements regarding the interpretation of regulatory
accounting principles applicable to sales of senior loan participation interests
to third parties by Pacific Thrift which were resolved by Pacific Thrift
requesting an opinion of the FDIC and revising its regulatory reports to conform
to the FDIC's interpretation of such principles.
There was a disagreement regarding the scope of audit procedures
necessary and the necessity of footnote disclosure concerning certain litigation
in which allegations of securities fraud and aiding and abetting in the breach
of fiduciary duty were made against the Partnership and its Chief Executive
Officer by investors in companies affiliated with the Partnership until 1984.
The disagreement was resolved by the Partnership adding footnote disclosure in
its financial statements for the fiscal years ended December 31, 1994 and 1993.
The securities litigation naming the Partnership and the Chief Executive Officer
referred to in the explanatory paragraphs contained in the 1994 and 1993 reports
was dismissed by the plaintiffs in October 1995.
There was a disagreement concerning the disclosure required in
connection with the Partnership's liability for remediation of environmental
contamination of two properties acquired in foreclosure in 1993. At the time the
audit of the Partnership's 1993 financial statements was completed there existed
potential civil or criminal claims against the Partnership, and the Partnership
was engaged in negotiations with governmental authorities to settle any
potential claims. Until the settlement agreement was completed, the
Partnership's counsel was unable to provide an opinion as to whether civil or
criminal liability was probable or remote. The Partnership delayed issuance of
the financial statements until the settlement agreement was entered and an
opinion of counsel was obtained to the effect that the possibility of criminal
liability was remote. The disagreement was resolved by the Partnership
increasing the disclosure in its financial statement footnotes in 1993,
including the disclosure that, in the opinion of its legal counsel, the
likelihood of criminal action was remote if the terms of a settlement agreement
reached with regulatory authorities were complied with. As of the date hereof,
the Partnership is in full compliance with the terms of the Settlement
Agreement.
There was a disagreement regarding the accounting and footnote
disclosure of certain related party transactions, which was resolved by
adjustments to the accounting and by additional disclosures for the related
party transactions.
For the year ended December 31, 1994, E&Y advised the Partnership that
there are certain deficiencies in its lending and credit administration
procedures and its procedures for determination of its allowance for loan losses
that, taken as a whole, constitute a material weakness in its internal controls
and a "reportable event" pursuant to Item 304 of Rule S-K. The Partnership has
taken the necessary steps to improve each of the procedures identified by its
accountants as requiring improvement to the extent deemed appropriate by
management.
The managing officers of the Partnership's general partner discussed
the subject matter of each disagreement with the Partnership's former
accountants. The Partnership has authorized its former accountants to
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<PAGE> 52
respond fully to all inquiries of the Partnership's successor accountants
concerning the subject matter of each disagreement.
Prior to the engagement of BDO as the independent accountants for the
Partnership and its subsidiaries, the Partnership did not consult BDO concerning
the application of accounting principles to any specified transaction or any
matter that was the subject of a disagreement with E&Y or a reportable event.
-52-
<PAGE> 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The managing officers (the "Managing Officers") of the Partnership are
Joel R. Schultz, Norman A. Markiewicz, Richard B. Fremed, Richard D. Young and
Charles J. Siegel. The Partnership is managed, and its investment decisions are
made, by the Managing Officers, who are directly responsible to the General
Partner. The General Partner, as a limited partnership, is controlled and
managed by its general partner, Presidential Services Corporation ("PSC").
The Managing Officers are required to devote only so much of their
time to the Partnership's affairs as is necessary or required for the effective
conduct and operation of the Partnership's business. The Managing Officers
currently devote all of their time to the Partnership and its subsidiaries, but
may participate in other ventures in the future.
Messrs. Schultz and Markiewicz are employed by Presidential under
written employment agreements automatically renewable for successive one year
terms unless terminated by either party. Messrs. Fremed, Young and Siegel
provide services to Presidential, but do not receive any direct compensation
from Presidential. Messrs. Schultz, Fremed and Markiewicz are salaried employees
of the General Partner, and Messrs. Young and Siegel are salaried employees of
Pacific Thrift. Following is a summary of their respective backgrounds and
experience.
Joel R. Schultz, age 59, has had substantial experience in the lending
business over the past 18 years, primarily as a managing officer of a former
affiliate of the Partnership licensed as an industrial loan company from 1974 to
1986, when the affiliate's operations were merged with a third party. In
addition, Mr. Schultz has been Chief Managing Officer of the Partnership since
its formation in 1981. He is an attorney at law licensed to practice by the
State Bar of California, a certified public accountant, and a California
licensed real estate broker. Mr. Schultz has been President and a director of
PSC since 1986. Mr. Schultz has been Chief Executive Officer of the Partnership
since 1981. Mr. Schultz was President and Chief Executive Officer of Pacific
Thrift from 1988 to September 1993, when a new President and Chief Operating
Officer was appointed at Pacific Thrift. He has remained Chief Executive Officer
and a director of Pacific Thrift from 1988 to the present.
Mr. Richard D. Young, age 56, was President and Chief Executive
Officer of Topa Thrift and Loan from 1983 to 1993. He was also President of the
Thrift Guaranty Corporation, the California corporation which guaranteed
accounts issued by all California thrift and loan companies, from 1984 to 1988.
He has also been a director of the Thrift Guaranty Corporation from 1983 to 1988
and from 1989 to the present. Mr. Young was named President of Pacific Thrift in
November 1993 and Chief Operating Officer of the Partnership in May 1994. Mr.
Young is currently the Vice President and Chair of the regulatory and
legislative committees of the California Association of Thrift and Loans
("CATL").
Mr. Charles J. Siegel, age 46, was Chief Financial Officer of Topa
Thrift and Loan from 1983 to 1993. He was named Chief Financial Officer of
Pacific Thrift in December 1993, Assistant Secretary of Pacific Thrift in
October 1994, and Chief Financial Officer of the Partnership in May 1994. Mr.
Siegel has over 22 years' experience in auditing and accounting, including 17
years in financial institutions' accounting, and is a certified public
accountant. He received a B.S. degree in accounting from Syracuse University in
1972.
Mr. Norman A. Markiewicz, age 48 has had substantial experience in the
lending business for the past 21 years and has been a senior officer of the
Partnership since its formation in 1981. He became associated with a former
affiliate of the Partnership in 1974, initially as a branch manager and, after
several promotions, as Executive Vice President/Chief Operating Officer until
1986, when the affiliate's operations were merged with a third party. Mr.
Markiewicz was Chief Operating Officer of the Partnership from 1981 to May 2,
1994. Mr. Markiewicz has been Chief Operating Officer, Executive Vice President
and a director of PSC since 1986. Mr. Markiewicz was Executive Vice President
and Chief Operating Officer of Pacific from 1988 to September 1993. He has
remained Executive Vice President and a director and of Pacific Thrift from 1988
to the present.
-53-
<PAGE> 54
Mr. Richard B. Fremed, age 53, has been employed by financial
institutions for more than 26 years and has been a senior officer of the
Partnership since its formation in 1981. He received a B.S. degree in Accounting
from California State University at Northridge in 1965. He is also a California
licensed real estate salesperson and a qualified securities broker dealer
principal. He began his employment with a former affiliate of the Partnership in
1978, initially as Controller and, after several promotions, as a Senior Vice
President, Chief Financial and Accounting Officer and Corporate Secretary, until
1986 when the affiliate's operations were merged with a third party. Mr. Fremed
was Chief Financial Officer of the Partnership from 1981 to May 2, 1994. Mr.
Fremed has been Senior Vice President, Treasurer, Chief Financial Officer and a
director of PSC since 1986. He was Chief Financial Officer of Pacific Thrift
from 1988 to December 1993. Mr. Fremed is now Secretary and Treasurer of Pacific
Thrift. In addition, Mr. Fremed has been a director of Pacific Thrift from 1988
to the present.
The sole shareholders of PSC, the general partner of the General
Partner of the Partnership, are Joel R. Schultz, who owns 50% of the oustanding
stock, and John and Connie DeRosa, each of whom owns 25% of the outstanding
stock of PSC. Prior to Mrs. DeRosa becoming a shareholder of PSC, Messrs.
Schultz and DeRosa entered into a shareholder's agreement providing that Mr.
Schultz shall have sole voting control over the day-to-day management decisions
of PSC for so long as the General Partner meets certain minimum profit
distribution levels to its limited partners. At any time that the General
Partner fails to meet such minimum profit distribution levels for two or more
consecutive quarters, Mr. DeRosa may elect to assume sole voting control over
the day-to-day management decisions of PSC. However, Mr. Schultz would be
entitled to reclaim sole voting control over the day-to-day management decisions
at any time that the General Partner resumed payment of the minimum profit
distribution levels for at least two consecutive calendar quarters. Upon the
death or disability of either Mr. Schultz or Mr. DeRosa, the remaining
shareholder of PSC would assume sole voting control over all matters concerning
PSC. An amendment to the agreement was entered in August 1993 providing that Mr.
DeRosa will not exercise his proxy for so long as Mr. Schultz was a personal
guarantor of the Partnership's bank debt. The background and experience of Mr.
DeRosa is summarized below.
John A. DeRosa, age 50, has been a Certified Financial Planner and
from 1981 a Vice President of Kidder Peabody & Co., Inc., which in 1994 merged
with Payne Webber & Co. (Mr. DeRosa is not active in the management of the
Partnership or its affiliates; his ownership interest and participation in PSC,
the General Partner and the Partnership are personal business ventures, wholly
independent of his associations with Payne Webber & Co. and Kidder Peabody &
Co., and neither of such firms is in any way associated or involved in the
business or affairs of PSC, the General Partner or the Partnership.) Mr. DeRosa
received a B.S. degree from the University of Southern California. He became an
insurance broker in 1972 and a Certified Financial Planner in 1979. He has
served as an arbitrator with the Board of Arbitrators of the National
Association of Securities Dealers, Inc. ("NASD") for four years. He is a member
of The Founders of the Los Angeles Music Center, life member of The Associates,
Cardinal & Gold, and Spirit of Troy and member of The Committee for the
University of Southern California.
Following are the names of the officers and directors of PSC, all of
whom have held such positions since 1986. The directors of PSC hold office for
terms of one year or until their successors are elected and qualified and the
officers are appointed to serve at the will of the board of directors.
Joel R. Schultz President and a Director
Norman A. Markiewicz Executive Vice President and a Director
Richard B. Fremed Senior Vice President, Chief Financial
Officer, Secretary, and a Director
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table
sets forth certain summary information concerning compensation paid or accrued
by the Partnership, Pacific Thrift, CRC or LPPC to or on behalf of the five most
highly compensated executive officers who earned at least $100,000 in 1995.
These amounts
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<PAGE> 55
do not include compensation paid to certain of these officers by the General
Partner, which is not reimbursed by Presidential or any of its subsidiaries,
and are shown in the footnotes of the table.
<TABLE>
<CAPTION>
Actual Annual Compensation
--------------------------
Name and Principal Position Year Salary($)(1) Bonus($)
- --------------------------- ---- ------------ --------
<S> <C> <C> <C> <C>
Joel R. Schultz,(2) 1995 $168,866 -0-
Chief Executive Officer, 1994 125,654 -0-
Presidential and Pacific Thrift 1993 -0- -0-
Richard D. Young, President and Chief 1995 $214,273
Operating Officer, Pacific Thrift 1994 161,600
1993 51,012(3)
Frank Landini,(4) 1995 $159,600 -0-
Executive Vice President - 1994 109,600 -0-
Wholesale Lending Division, Pacific Thrift 1993 31,194 -0-
Kenneth Carmona,(5) 1995 $150,000 -0-
President, 1994 150,150 -0-
CRC and LPPC 1993 196,745 -0-
Charles J. Siegel,(5) 1995 $144,400 -0-
Chief Financial Officer, 1994 125,967 -0-
Presidential and Pacific Thrift 1993 9,133(6)
</TABLE>
- -----------------------
(1) The amounts specified above include automobile allowances, but do not
include life insurance or medical insurance premiums for benefits in excess of
group benefits provided to employees, the aggregate amount of which do not
exceed the lesser of either $50,000 or 10% of the total annual salary and bonus
reported for each of the above named executives in each reported year.
(2) Includes amounts paid to Mr. Schultz for legal fees of $100 per loan paid by
borrowers in connection with legal services related to loan origination. See,
"CERTAIN TRANSACTIONS - Payments to Managing Officers." Does not include
$231,600, $88,546 and $285,530 paid in 1995, 1994 and 1993, respectively, by the
General Partner and not reimbursed by the Partnership.
(3) Mr. Young commenced employment with Pacific Thrift in September 1993, and he
received compensation for only four months in 1993.
(4) Amount paid for 1995 includes $50,000 paid in January 1996. Mr. Landini
commenced employment with Pacific Thrift in October 1993, and he received
compensation for only three months in 1993.
(5) Includes amounts paid to a wholly owned corporation of Mr. Carmona.
(6) Mr. Siegel commenced employment with Pacific Thrift in December 1993, and he
received compensation for only one month in 1993.
EMPLOYMENT AGREEMENTS
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<PAGE> 56
Two of the Managing Officers of the Partnership, Mr. Schultz and Mr.
Markiewicz, received direct annual salaries from the Partnership of $20,000 and
$10,000, respectively, in 1993 for services rendered in 1992. No salaries were
paid directly by the Partnership in 1995, 1994 or 1993 for services rendered
from 1993 through 1995 under the terms of the employment agreements with Messrs.
Schultz and Markiewicz. With that exception, the Managing Officers received no
compensation directly from the Partnership for the three years ended December
31, 1995. Substantially all of the compensation paid to Messrs. Schultz,
Markiewicz and Fremed was paid by the General Partner. Messrs. Young and Siegel
received all of their compensation from Pacific Thrift.
The Partnership pays the General Partner an annual management fee
determined annually based on a sliding scale formula depending upon the annual
rates of return allocated to each Class of Limited Partners and the General
Partner, but not less than 10% of the total annual net profits of the
Partnership. No management fees were paid in 1994 or 1993. Up to 25% of the
management fee payable to the General Partner is subordinated to the Limited
Partners' receipt of their specified initial returns as provided in the
Partnership Agreement.
The Partnership also pays the General Partner a base fee for the
supervision services of the Managing Officers. In addition, the Partnership
reimburses the General Partner for employee salaries and related expenses for
each employee who devotes a portion of such employee's time to the business of
the Partnership and who does not own more than a 1% interest in the General
Partner. These fees and reimbursements are described in greater detail in "Item
13. Certain Relationships and Related Transactions."
Effective January 1, 1996, Pacific Thrift entered an employment
agreement with Frank Landini, Executive Vice President - Wholesale Lending
Division. Mr. Landini is employed as Executive Vice President of Pacific Thrift
for a term of two years by Pacific Thrift, which will be automatically extended
for additional one year terms thereafter unless either party gives at least six
months written notice of its or his intention not to renew the agreement. Mr.
Landini receives an annual base salary of $150,000, as adjusted annually for
increases in the cost of living index. Mr. Landini will also receive an annual
bonus based upon net profits earned from wholesale loans originated by Pacific
Thrift for sale (the "Securitizable Loan Division"), over which Mr. Landini has
primary responsibility. Net profits from the Securitizable Loan Division
consists of revenues earned from premiums on loan sales, net interest earned on
securitizable loans prior to sale, and net fees charged to borrowers (less fees
paid to brokers and other referral sources) less employee related and overhead
expenses of the Securitizable Loan Division. For the 1996 fiscal year, up to
$100,000 of Mr. Landini's bonus plus one-half of any bonus earned in excess of
$200,000 will be paid in January 1997, and any bonus earned between $100,000 and
$200,000, plus one-half of the bonus earned in excess of $200,000, will be
payable 36 months later unless Mr. Landini's employment is terminated
voluntarily by him or by Pacific Thrift "for cause." For fiscal years after
1996, one-half of the bonus earned for each year is payable in January of the
following year, and the remaining half is payable 36 months later unless Mr.
Landini's employment is terminated voluntarily by him or by Pacific Thrift for
cause. If Mr. Landini's employment agreement continues for a total of ten years
or more, the provision delaying one-half of his bonus for 36 months will
terminate. Events which are deemed termination "for cause" include conviction of
a felony or any crime involving moral turpitude, commission of an act of fraud,
theft or embezzlement against Pacific Thrift or conduct materially injurious to
Pacific Thrift's business or reputation. For the year ended December 31, 1995,
Pacific Thrift paid Mr. Landini $159,600.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The General Partner is the only security holder of the Partnership
known by management to beneficially own, directly or indirectly, Capital
Contributions, based on the original investment of each Partner less capital
withdrawals, in excess of five percent of the total Capital Contributions of
the Class A, Class B, Class C, Class D and Class E Limited Partners, separately
as a class or in the aggregate, as of February 29, 1996. The General Partner
owns no Class C Units and no individual owns in excess of five percent of the
Capital Contributions of the Class C, D or E Limited Partners. The Managing
Officers do not own any direct interest in the Partnership, but each of them
owns an interest in the General Partner. All holders shown below have sole
voting and investment power as to the Units they own. The business address of
the General Partner is 21031 Ventura Boulevard, Woodland Hills, California
91364.
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<PAGE> 57
<TABLE>
<CAPTION>
Amount of
Name of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
- -------------- ---------------- ---------- ---------
<S> <C> <C> <C>
Class A Units The General Partner $1,469,375 84.1%
Class B Units The General Partner 311,000 10.8%
Class D Units The General Partner 50,000 .41%
Class E Units The General Partner 30,000 .28%
--------- -----
Total Units The General Partner $1,860,375 4.57%
========== ======
(All classes)
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AND OTHER FEES AND REIMBURSEMENTS PAID TO THE GENERAL PARTNER
Pursuant to the Partnership Agreement, the General Partner received
various fees and reimbursements from the Partnership. The following paragraphs
describe the various fees and reimbursements paid to the General Partner for the
three years ended December 31, 1995.
In 1993, the General Partner received management fees of $440,530 in
the first and second calendar quarters, which was required to be repaid as a
result of the Partnership's net loss for 1993. As a result, the General Partner
delivered a promissory note to the Partnership for the balance owed, payable in
four equal quarterly principal installments commencing December 20, 1994. As of
December 31, 1995, the General Partner owed $220,000 on this note. No interest
was paid or accrued for 1993. However, interest at the NatWest prime rate plus
1% has been accrued from January 1, 1994. All accrued interest owed on this
amount has been paid through December 31, 1995.
The General Partner received no management fees in 1994 or 1995.
For the years ended December 31, 1995, 1994 and 1993, the General
Partner received supervision fees of $1,012,000, $805,000 and $845,508 from the
Partnership.
The Partnership reimbursed the General Partner for the employee
salaries and related expenses of 135 full time employees and one part time
employee of the General Partner in 1993, for which the Partnership reimbursed
the General Partner a total of $5,183,922. Effective January 1, 1994, in
response to the demand of the FDIC, the General Partner transferred all of its
employees who worked for Pacific Thrift directly to Pacific Thrift's payroll.
The General Partner still provides employees to the Partnership, CRC and LPPC.
For the years ended December 31, 1995 and 1994, Presidential, CRC and LPPC
reimbursed the General Partner $82,000 and $90,000, respectively.
PAYMENTS TO GENERAL PARTNER RELATED TO PURCHASE OF CRC AND LPPC
Effective July 1, 1990, the Partnership purchased CRC and LPPC from the
General Partner, for a total purchase price of $908,000. In addition, the
Partnership agreed to pay to the General Partner an additional amount annually
for five years, to be calculated as 50% of the total annual net profits earned
by CRC in excess of $465,396 (the "Base Profit Amount"). In 1995, 1994 and 1993
the Partnership paid the General Partner $172,000, $224,000 and $465,551
pursuant to this provision. No further payments are payable to the General
Partner under this provision.
-57-
<PAGE> 58
PAYMENTS FOR PURCHASE OF EQUIPMENT
Effective December 31, 1993, Pacific Thrift purchased certain computer
equipment, software and office furniture and equipment from the General Partner
and Presidential. Pacific Thrift paid $547,500 to the General Partner and
$497,000 to the Partnership in connection with these purchases. As a result of a
revaluation and reallocation of the software purchased by Pacific, the purchase
price of the software was reduced by a total of $349,407, of which the General
Partner repaid $176,793 and the Partnership repaid $172,614 to Pacific Thrift.
GENERAL PARTNER CAPITAL NOTE
To make up for an unintended distribution of capital of the Partnership
in 1992, the General Partner voluntarily contributed a note (the "Capital Note")
to the Partnership, dated May 15, 1993, bearing interest at 1% above the NatWest
prime rate. As of December 31, 1995, the General Partner had made payments of
$266,213 plus accrued interest under the Capital Note. Based upon the terms and
conditions of the Capital Note, the General Partner has had no obligation to
make further payments under the Capital Note.
AMOUNTS OWED FROM AND TO THE GENERAL PARTNER
In order to facilitate an extension of the Bank Loan, the General
Partner made an unsecured loan to the Partnership of $600,000 on May 15, 1992,
which accrues interest at the Bank's prime rate. The loan may not be repaid
without the consent of the Bank. As of December 31, 1995, $69,140 had been
accrued in interest on the loan. In addition, the Partnership owed $133,897 in
management fees and $77,801 for profits earned by CRC and LPPC in 1995, for a
total of $880,838 owed by the Partnership to the General Partner at December 31,
1995.
Offsetting these obligations are debts owed by the General Partner to
Presidential for salaries, rent and overhead paid by Presidential and overpaid
management fees in 1994 and 1995, which totalled $316,256 at December 31, 1995,
for a net debt of $564,582 owed to the General Partner.
PAYMENTS TO MANAGING OFFICERS
Two of the Managing Officers, Joel R. Schultz and Norman A. Markiewicz,
have employment agreements providing incentive payments based upon net operating
profits of the Partnership. For the two years ended December 31, 1995 and 1994,
no compensation was paid under these agreements. For the year ended December 31,
1993 Mr. Schultz received $20,000 and Mr. Markiewicz received $10,000 under
these agreements.
Joel R. Schultz also receives payments for providing legal services in
connection with the Partnership's loan accounts (excluding home improvement
loans), for which he receives $100 from the fees paid by each borrower. Total
fees of $175,000, $62,000 and $56,400 were paid to Mr. Schultz for the years
ended December 31, 1995, 1994 and 1993 Upon completion of the Restructuring
Plan, these amounts will no longer be paid.
PERSONAL GUARANTY OF PARTNERSHIP DEBT BY MANAGING OFFICERS
Messrs. Joel R. Schultz, Norman A. Markiewicz and Richard B. Fremed
have personally guaranteed the collectability of the Partnership's bank debt.
CONSULTING AGREEMENT WITH DIRECTOR OF PACIFIC THRIFT
Effective August 31, 1992, Pacific Thrift and Presidential entered into
an advisory agreement with Ermyas Amelga, a director of the Corporation and
Pacific Thrift. Mr. Amelga was retained to provide financial advisory services
in connection with: (i) the establishment of a $75 million securitization
program with Aames Capital Corporation; and (ii) an offering of debt or equity
securities. The agreement terminated on June 30, 1994. Mr. Amelga received
compensation of $125 per hour, provided that monthly billings relating to any
transaction other than the Aames securitization were limited to no more than
$7,500 per month. In addition, Mr. Amelga received incentive fees equal to the
following amounts: for the Aames securitization, .50% of the first $5 million of
loans sold, .25% of the next $10 million loans sold; .30% of the next $35
million loans sold; and .35% of the next $25
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<PAGE> 59
million loans sold. In addition, Mr. Amelga was entitled to reimbursement for
all reasonable out-of-pocket expenses incurred in connection with the
performance of his services under the agreement. Mr. Amelga received $165,130,
$111,000, $84,148 in compensation under the Advisory Agreement in 1995, 1994 and
1993, respectively. No further amounts are payable to Mr. Amelga under the
agreement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1.-2. Financial Statements and Schedules required to be filed
hereunder are indexed on page 61 hereof.
3. The exhibits required to be filed hereunder are indexed on
page S-1 hereof. All such exhibits are incorporated by reference to other
previously filed documents referred to in the index.
(b) The Partnership filed no Reports on Form 8-K during the last
quarter of 1995.
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<PAGE> 60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on March 28, 1996.
PRESIDENTIAL MORTGAGE COMPANY (Registrant)
By: s/JOEL R. SCHULTZ
------------------------------
Joel R. Schultz, President of Presidential Services
Corporation, General Partner of Presidential Manage-
ment Company, a California limited partnership, gen-
eral partner of the Registrant
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
s/JOEL R. SCHULTZ
- ----------------------
Joel R. Schultz Chief Managing Officer March 28, 1996
of Registrant; President
of Presidential Services
Corporation ("PSC"), general
partner of Presidential
Management Company, a
California limited partnership,
general partner of the Registrant
s/RICHARD D. YOUNG Chief Operating Officer
- ---------------------- of the Registrant
Richard D. Young March 28, 1996
s/CHARLES J. SIEGEL Chief Financial Officer
- ---------------------- and Accounting
Charles J. Siegel of the Registrant March 28, 1996
s/RICHARD B. FREMED
- ----------------------
Richard B. Fremed Managing Officer of Registrant March 28, 1996
Vice-President, Secretary,
Chief Financial Officer and
Director of PSC
s/NORMAN A. MARKIEWICZ
- ----------------------
Norman A. Markiewicz Managing Officer March 28, 1996
of the Registrant and
Executive Vice President
and a Director of PSC
-60-
<PAGE> 61
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C>
PRESIDENTIAL MORTGAGE COMPANY AND SUBSIDIARIES
Independent Certified Public Accountants' Reports F-1
Consolidated Balance Sheets as of
December 31, 1995 and 1994 F-5
Consolidated Statements of Operations for the
years ended December 31, 1995, 1994 and 1993 F-7
Consolidated Statements of Changes in Partners'
Capital for the years ended December 31, 1995,
1994 and 1993 F-9
Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1994 and 1993 F-10
Notes to Consolidated Financial Statements
for the years ended December 31, 1995, 1994 and 1993 F-13
Supplemental material
Schedule I - Consolidating Schedule - Financial Position -
December 31, 1994 F-68
Schedule II - Consolidating Schedule - Operations -
year ended December 31, 1994 F-70
Schedule III - Consolidating Schedule - Financial Position -
December 31, 1995 F-71
Schedule IV - Consolidating Schedule - Operations -
year ended December 31, 1995 F-73
</TABLE>
61
<PAGE> 62
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Partners
Presidential Mortgage Company
We have audited the accompanying consolidated balance sheet of Presidential
Mortgage Company (the Partnership) and subsidiaries (collectively, the
Company) as of December 31, 1995, and the related consolidated statements of
operations, changes in partners' capital, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Presidential Mortgage Company and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information in
Schedules III and IV is presented for the purpose of additional analysis of the
consolidated financial statements rather than to present the financial position
and results of operations of the individual companies. The consolidating
information in Schedules III and IV has been subjected to the auditing
procedures applied to the audit of the consolidated financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
F-1
<PAGE> 63
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 7 and
20, the Company is subject to substantial debt service and other requirements
of the note payable to its lender and is restricted from receiving cash
dividends from its primary subsidiary Pacific Thrift and Loan Company. These
factors may require the Company to continue to sell loans, real estate or other
assets to remain in compliance with the loan agreement with its lender.
Failure to comply with the principal reduction provisions under the loan
agreement allows the lender to impose various sanctions including increased
interest charges, declare all advances immediately due, and sell the collateral
assigned as security including the common stock of the Company's wholly-owned
subsidiary Pacific Thrift. These matters raise substantial doubt about the
ability of the Company to continue as a going concern. Management's plan
regarding these matters are discussed in Notes 1 and 21. The accompanying
consolidated financial statements do not include any provisions or adjustments
which might result from the outcome of the uncertainties discussed above.
As discussed in Note 2 to the consolidated financial statements in 1995, the
Company adopted SFAS 114, Accounting by Creditors for Impairment of a Loan.
BDO SEIDMAN, LLP
Los Angeles, California
February 29, 1996
F-2
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
To the Partners
Presidential Mortgage Company
We have audited the accompanying consolidated balance sheets of Presidential
Mortgage Company (the Partnership) and subsidiaries (collectively, the Company)
as of December 31, 1994 and 1993, and the related consolidated statements of
operations, changes in partners' capital, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consoldiated fiancial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1994 and 1993 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Presidential Mortgage Company and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information in
Schedules I and II is presented for the purpose of additional analysis of the
consolidated financial statements rather than to present the financial position
and results of operations of the individual companies. The consolidating
information in Schedules I and II has been subjected to the auditing procedures
applied to the audit of the consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the
consoldiated financial statements taken as a whole.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company has suffered losses from nonperforming loans that, combined with other
factors, resulted in significant recurring losses from operations. As discussed
in Note 7, the Partnership is subject to substantial debt service and other
requirements of the note payable to its lender. As discussed in Notes 19 and
20, at October 31, 1994, the Partnership's wholly owned subsidiary, Pacific
Thrift and Loan Company (Pacific Thrift), was considered to be "critically
undercapitalized" under the Prompt Corrective Action provisions of the Federal
Deposit
F-3
<PAGE> 65
Presidential Mortgage Company
Page 2
Insurance Corporation Improvement Act of 1991 because its tangible and leverage
capital ratios fell below 2%. As a result of such designation, Pacific Thrift
was subject to severe restrictions on its activities. At December 31, 1994,
Pacific Thrift was no longer considered to be "critically undercapitalized,"
but still did not meet the minimum capital requirements to be considered
"adequately capitalized" by the Federal Deposit Insurance Corporation (FDIC).
Also at December 31, 1994, Pacific Thrift had a deficiency in its net worth,
based on requirements of the California Financial Code and the California
Department of Corporations (DOC). As a result of its capital designation,
Pacific Thrift was required to submit a capital restoration plan, including a
guarantee by the Partnership, to the FDIC. In addition, Pacific Thrift
consented to a new comprehensive Order to Cease and Desist (the new C&D) by the
FDIC and DOC. The new C&D requires that Pacific Thrift take various actions,
including significantly increasing its leverage capital ratio to 8% by
September 30, 1995. Failure to implement the capital restoration plan and meet
the capital requirements of the new C&D would expose Pacific Thrift to various
regulatory actions, including the risk of regulatory takeover. These matters
raise substantial doubt about the ability of the Company to continue as a going
concern. Management's plans regarding these matters are discussed in Notes 1
and 20.
ERNST & YOUNG LLP
April 7, 1995,
except as to Note 20 to the
consolidated financial statements,
which is as of May 20, 1995
F-4
<PAGE> 66
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS (Note 2C) $10,489,000 $ 19,628,000
ACCOUNTS RECEIVABLE 3,337,000 5,071,000
ACCRUED INTEREST RECEIVABLE 903,000 1,125,000
LOANS RECEIVABLE (Notes 2D, 2E, 3, and 7) 43,908,000 53,045,000
LOANS HELD FOR SALE (Notes 2F and 3) 12,577,000 12,011,000
RECEIVABLE FROM RELATED PARTY
(Notes 9 and 10) 347,000 478,000
EXCESS YIELD RECEIVABLE
(Notes 2G and 3) 2,725,000 888,000
OTHER REAL ESTATE (Notes 2H and 4) 3,156,000 7,621,000
PROPERTY AND EQUIPMENT (Notes 2I and 5) 1,398,000 1,322,000
GOODWILL (Notes 2J and 11) 1,808,000 1,749,000
OTHER ASSETS (Note 8) 1,909,000 809,000
- ---------------------------------------------------------------------------------------------------
$82,557,000 $103,747,000
===================================================================================================
</TABLE>
F-5
<PAGE> 67
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
THRIFT CERTIFICATES PAYABLE (Note 6)
Full-paid certificates $35,881,000 $ 58,058,000
Installment certificates 24,275,000 11,443,000
- -------------------------------------------------------------------------------------------------------------
Total thrift certificates payable 60,156,000 69,501,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 4,018,000 4,471,000
ACCRUED INTEREST PAYABLE 273,000 405,000
PAYABLE TO RELATED PARTY (Note 10) 281,000 134,000
MORTGAGE NOTES PAYABLE (Note 4) 611,000 2,313,000
NOTE PAYABLE (Note 7) 6,771,000 14,778,000
NOTE PAYABLE TO RELATED PARTY (Note 7) 600,000 600,000
PARTNERSHIP WITHDRAWALS PAYABLE (Note 15) 1,120,000 1,120,000
- -------------------------------------------------------------------------------------------------------------
Total liabilities 73,830,000 93,322,000
- -------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Notes 12, 13, 14, 19, 20 and 21
- -------------------------------------------------------------------------------------------------------------
PARTNERS' CAPITAL 8,727,000 10,425,000
- -------------------------------------------------------------------------------------------------------------
$82,557,000 $103,747,000
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 68
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable (Notes 2D, 2E and 3) $8,885,000 $11,003,000 $14,209,000
Deposits with financial institutions 692,000 401,000 3,000
- ---------------------------------------------------------------------------------------------------------
Total interest income 9,577,000 11,404,000 14,212,000
- ---------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 7,000 28,000 304,000
Other thrift certificates 3,813,000 2,917,000 2,917,000
Notes payable 1,379,000 1,982,000 2,497,000
- ---------------------------------------------------------------------------------------------------------
Total interest expense 5,199,000 4,927,000 5,718,000
- ---------------------------------------------------------------------------------------------------------
Net interest income 4,378,000 6,477,000 8,494,000
PROVISION FOR LOAN LOSSES
(Notes 2D, 2E and 3) 3,289,000 6,096,000 4,655,000
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,089,000 381,000 3,839,000
- ---------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trustee and reconveyance fees 3,248,000 3,344,000 3,781,000
Other income 1,122,000 1,712,000 1,381,000
Gain on sale of loans 8,895,000 946,000 143,000
- ---------------------------------------------------------------------------------------------------------
Total noninterest income 13,265,000 6,002,000 5,305,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE> 69
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits
(Notes 10 and 14)) 7,858,000 6,493,000 5,064,000
General and administrative (Note 10) 6,273,000 7,090,000 5,491,000
Related party fees (Notes 9 and 10) 1,012,000 805,000 847,000
Operations of other real estate (Note 4) 1,212,000 732,000 3,307,000
Depreciation and amortization 919,000 776,000 303,000
- ---------------------------------------------------------------------------------------------------------
Total noninterest expense 17,274,000 15,896,000 15,012,000
- ---------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (benefit) (2,920,000) (9,513,000) (5,868,000)
INCOME TAXES (BENEFIT) (Notes 2K and 8) (1,222,000) 1,000 1,000
- ---------------------------------------------------------------------------------------------------------
Net loss $(1,698,000) $(9,514,000) $(5,869,000)
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 70
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, 1995, 1994 and 1993
<S> <C>
- --------------------------------------------------------------------------------
CAPITAL, JANUARY 1, 1993 $28,830,000
Contributions 301,000
Distributions (1,943,000)
Withdrawals (1,380,000)
Net loss - 1993 (5,869,000)
- --------------------------------------------------------------------------------
CAPITAL, December 31, 1993 19,939,000
Net loss - 1994 (9,514,000)
- --------------------------------------------------------------------------------
CAPITAL, December 31, 1994 10,425,000
Net loss - 1995 (1,698,000)
- --------------------------------------------------------------------------------
CAPITAL, December 31, 1995 $ 8,727,000
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 71
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,698,000) $ (9,514,000) $(5,869,000)
Adjustments to reconcile net loss to
net cash used in operating activities
Provision for loan losses 3,289,000 6,096,000 4,655,000
Provision for losses on other
real estate 1,188,000 202,000 1,069,000
Net gain on sale of other
real estate (469,000) (625,000) (345,000)
Proceeds from sale of loans 145,266,000 29,315,000 4,252,000
Originations of loans held for sale (151,538,000) (41,055,000) (6,320,000)
Depreciation and amortization 919,000 776,000 303,000
Net change in assets and liabilities
Accounts receivable 1,734,000 (1,731,000) (359,000)
Accrued interest receivable 222,000 966,000 122,000
Receivable from related party 131,000 316,000 (411,000)
Excess yield receivable (1,837,000) 7,000 117,000
Goodwill (172,000) (127,000) (309,000)
Other assets (1,500,000) (420,000) (79,000)
Payable to related party 147,000 (442,000) 576,000
Accounts payable, accrued expenses,
and accrued interest payable (584,000) 186,000 2,200,000
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,902,000) (16,050,000) (398,000)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE> 72
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of loans 13,371,000 28,402,000 25,884,000
Increase in loans receivable (12,325,000) (10,249,000) (16,069,000)
Proceeds from sale of other real estate 14,253,000 5,994,000 7,001,000
Mortgage assumed (repaid) in connection
with other real estate (1,702,000) 536,000 (730,000)
Purchase of property and equipment (482,000) (883,000) (853,000)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 13,115,000 23,800,000 15,233,000
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in thrift
certificates (9,345,000) 7,080,000 11,860,000
Paydowns of note payable (8,007,000) (8,422,000) (10,200,000)
Proceeds from issuance of partner-
ship shares - - 35,000
Capital contributions from general
partner - - 266,000
Distributions to partners - - (1,943,000)
Withdrawals of partnership shares - - (2,086,000)
- -------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (17,352,000) (1,342,000) (2,068,000)
- -------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (9,139,000) 6,408,000 12,767,000
CASH AND CASH EQUIVALENTS,
AT BEGINNING 19,628,000 13,220,000 453,000
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, AT END $ 10,489,000 $ 19,628,000 $ 13,220,000
=============================================================================================================
</TABLE>
F-11
<PAGE> 73
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for
Interest $ 5,331,000 $4,704,000 $5,838,000
State franchise taxes 2,000 1,000 1,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Loans transferred to other real estate $10,489,000 $7,542,000 $7,270,000
Mortgage payable assumed in
connection with other real estate 1,545,000 2,499,000 3,289,000
Loans to facilitate sales of other
real estate 895,000 898,000 3,344,000
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 74
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. GENERAL
ORGANIZATION
Presidential Mortgage Company is a California limited partnership whose
principal purpose is to make loans secured by real estate. In these financial
statements, "the Partnership" refers to Presidential Mortgage Company itself
and "the Company" refers to Presidential Mortgage Company and its subsidiaries.
The Partnership's general partner, Presidential Management Company, is a
California limited partnership. Presidential Management Company's general
partner, Presidential Services Corporation, is a California corporation owned
by Joel R. Schultz, John A. DeRosa and Constance DeRosa.
The Partnership's limited partners consist of approximately 2,500 individuals
and entities in classes A, B, C, D, and E. The differences between the various
classes primarily relate to the different offering dates and unit prices as
well as profit priorities and percentages. In addition, certain partners have
elected to reinvest their distributions in Distribution Reinvestment Plan (DRP)
Units.
In 1988, Pacific Thrift and Loan Company (Pacific Thrift), a California
corporation, was formed as a wholly owned subsidiary of the Partnership.
Pacific Thrift conducts business under the California Industrial Loan Law and
originates, purchases and sells loans secured by real estate. In addition,
Pacific Thrift originates loans through loan representatives who reside in
other states, but Pacific Thrift does not maintain any offices for such
representatives, with the exception of Bellevue, Washington.
Pacific Thrift issues certificates to investors that are redeemable at maturity
at the option of investors, although penalties for early withdrawal may be
assessed. The California Industrial Loan Law maintains provisions governing
the amount of thrift certificates that may be issued, the amount of funds that
may be borrowed, and the types of loans that may be made. During 1988, the
Federal Deposit Insurance Corporation approved Pacific Thrift for deposit
insurance coverage. Accordingly, Pacific Thrift is subject to annual
assessments by the FDIC.
F-13
<PAGE> 75
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. GENERAL (CONTINUED)
ORGANIZATION (Continued)
In 1990, the Partnership purchased 100% of the limited partnership interests
(which constitutes 99% of all partnership interests) of Consolidated
Reconveyance Company (CRC) and Lenders Posting and Publishing Company (LPPC).
These entities provide trustee and related foreclosure services to the
Partnership, Pacific Thrift, and unaffiliated lenders. Both CRC and LPPC were
purchased from the Partnership's general partner.
In October 1995, the Partnership incorporated a new wholly-owned subsidiary,
Consolidated Reconveyance Corporation, a Washington corporation ("CRC
Washington"). CRC Washington will provide foreclosure related services on real
estate trust deeds secured by property located in the State of Washington. CRC
Washington will reimburse Pacific Thrift for office space used by CRC
Washington at the office of Pacific Thrift in Bellevue, Washington.
Pacific United Group, Inc. (the Corporation) is a financial institution holding
company that was formed by the Partnership in February 1994, in preparation for
a possible Restructuring Plan. (See Note 21). At December 31, 1995, the
Corporation has no results of operations. A stock option plan has been set up
and is contingent on the completion of the Company's Restructuring Plan. In
addition, the Partnership recently formed Pacific Unified Mortgage, Inc.
(Unified). Unified has no business operations. If the proposed Restructuring
Plan is completed, the Corporation will assign all of the loan receivables
transferred to it by the Partnership to Unified. The loans will continue to be
serviced by Pacific Thrift for a servicing fee of 1.5% per year of the
principal balance of each loan serviced.
F-14
<PAGE> 76
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. GENERAL (CONTINUED)
PARTNERSHIP AGREEMENT
The Partnership is governed by the Fifth Amended and Restated Certificate and
Agreement of Limited Partnership entered into as of September 1989, as amended
by the First Amendment, dated as of May 1993, and the Second Amendment, dated
as of January 1, 1994. The First Amendment provides for a special allocation
of loss to the general partner and income to the limited partners based on
certain capital contributions by the general partner from 1993 through 1996
(the "Capital Plan"). The Second Amendment provides that Pacific Thrift will
directly hire its own employees and directly pay its own overhead and that the
Partnership will continue to pay the general partner for fees in connection
with loans of Pacific Thrift and the Partnership. The agreement and amendments
are collectively referred to as the "Partnership Agreement."
In accordance with the Partnership Agreement, the net profits of the
Partnership (after deduction of the management fee) are allocated to the
partners, based on specified annual percentage rates for each class of partners
and the average daily balance of each partner's capital contributions. Net
losses are allocated to all partners in proportion to their average daily
capital contributions. In addition, there is a special allocation based on the
Capital Plan.
The Partnership Agreement provides certain rights to the partners to withdraw
the balance in their capital accounts. Such withdrawal rights are restricted
by certain percentage limitations and a determination by the general partner
that such withdrawal will not impair the capital or operations of the
Partnership. Since July 1993, no distributions have been made and no
withdrawals have been permitted.
Upon dissolution of the Partnership, the Partnership Agreement provides that
the net assets will be distributed to the partners in proportion to their
capital accounts and that the general partner will fund any deficit balance in
its capital account as defined in the Partnership Agreement.
F-15
<PAGE> 77
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. GENERAL (CONTINUED)
OPERATING RESULTS AND BUSINESS PLAN
The Company has suffered losses from operations of the Partnership and Pacific
Thrift from 1992 through 1994, and the Company continued to sustain operating
losses for the year ended December 31, 1995. These losses have resulted
primarily from significant amounts of nonperforming loans, large provisions for
loan losses, and relatively high levels of overhead and have caused a
substantial reduction in the capital of the Company. While this portion of the
losses attributable to Pacific Thrift had caused it to become
"undercapitalized" and subject to certain regulatory mandates at the end of
1994, Pacific Thrift had net profit of $3,155,000 for the year ended December
31, 1995 and was classified as "adequately capitalized" by the FDIC based on
the examination as of March 31, 1995 and a later examination as of September
30, 1995. See Notes 19 and 20. CRC and LPPC had net profits of $582,000 and
$279,000 for the year ended December 31, 1995.
Management expects that stabilizing real estate values and general economic
conditions will result in reduced loan losses for 1996. In connection with the
Partnership, management is in the process of evaluating alternative business
strategies. In connection with Pacific Thrift, management has taken certain
steps to return the operations to even greater profitability and improved
financial condition through an emphasis on originating residential real estate
loans for sale in order to generate fee and loan sale income, achieving and
maintaining targeted capital ratios, and controlling overhead expenses.
Management expects that Pacific Thrift, CRC, and LPPC will continue to be
profitable for 1996 and believes that Pacific Thrift is in total compliance
with all regulatory mandates. Management also expects that, although the
Partnership incurred a loss, the Company will be profitable in 1996. In
connection with the note payable to its lender (see Note 7), management expects
that the Partnership will be able to generate sufficient cash flow from
operations (including real estate and loan sales), and its proposed
restructuring plan to satisfy its debt service requirements. See Notes 7, 20,
and 21.
F-16
<PAGE> 78
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. GENERAL (CONTINUED)
OPERATING RESULTS AND BUSINESS PLAN (Continued)
There is no assurance that the Company will be successful. These consolidated
financial statements do not include any provisions or adjustments that might
result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles.
B. CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation,
Partnership, Pacific Thrift, CRC, and LPPC. While CRC Washington has been
organized prior to December 31, 1995, it has no operations or accounts to be
included in consolidation. All significant intercompany balances and
transactions have been eliminated. Consolidating information is presented in
Schedules I, II, III and IV.
C. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
D. LOANS RECEIVABLE
Loans receivable are stated at the principal amount outstanding, less
unamortized deferred fees and costs and the allowance for loan losses (ALL).
Loans receivable are primarily secured by first and second trust deeds.
Interest income is accrued as earned and is based on the principal balance
outstanding. The Company's policy is to cease accruing interest on loans that
are more than two monthly payments past due and for which there appears to be
insufficient collateral to support collectibility. In many cases,
F-17
<PAGE> 79
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. LOANS RECEIVABLE (Continued)
interest, late fees, and other charges continue to accrue until the time
management deems that such amounts are not collectible. When a loan is placed
on a nonaccrual status, the Company reverses all accrual income that is
uncollected income.
Nonrefundable loan fees and direct costs associated with the origination of
loans are deferred and netted against outstanding loan balances. The net
deferred fees and costs are recognized in interest income over the loan term as
an adjustment to the yield, using a method that approximates the effective
interest (level yield) method.
E. ALLOWANCE FOR LOAN LOSSES
Loan losses are charged to the ALL; recoveries are credited to the allowance.
The provision for loan losses charged to expense and added to the ALL is based
upon management's judgment and evaluation of the known and inherent risks in
the loan portfolio. Management's judgment takes into consideration such
factors as changes in the nature and volume of the portfolio, continuing review
of delinquent loans, current economic conditions, risk characteristics of the
various categories of loans, and other pertinent factors that may affect the
borrower's ability to repay. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of
a Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures). The effect of adopting this new
accounting standard was immaterial to the operating results of the Company for
the year ended December 31, 1995. Prior financial statements are prohibited
from restatement to apply the new accounting standard.
F-18
<PAGE> 80
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. ALLOWANCE FOR LOAN LOSSES (Continued)
Under the new accounting standard, a loan is considered to be impaired when it
is probable that the Company will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. The
ALL related to loans identified as impaired is primarily based on the excess of
the loan's current outstanding principal balance over the estimated fair market
value of the related collateral. For a loan that is not collateral-dependent,
the allowance is recorded at the amount by which the outstanding principal
balance exceeds the current best estimate of the future cash flows on the loan
discounted at the loan's effective interest rate. Prior to 1995, the ALL for
all loans which would have qualified as impaired under the new accounting
standard was primarily based upon the estimated fair market value of the
related collateral.
For impaired loans that are on non-accrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or
portion of a cash payment received on a non-accrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance of the loan.
A restructuring of a debt is considered a troubled debt restructuring when the
Company, for economic or legal reasons related to the borrower's financial
difficulties, grants a concession to the borrower that it would not otherwise
grant. Troubled debt restructurings may include changing repayment terms,
reducing the stated interest rate and reducing the amounts of principal and/or
interest due or significantly extending the maturity date. The restructuring
of a loan is intended to recover as much of the Company's investment as
possible and to achieve the highest yield possible.
F. LOANS HELD FOR SALE
The Company has designated certain of its loans receivable as being held for
sale. In determining the level of loans held for sale, the Company considers
the extent to which loans will be required to be sold in response to liquidity
needs, asset/liability management requirements, and other factors.
F-19
<PAGE> 81
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. LOANS HELD FOR SALE (Continued)
Loans held for sale are recorded at the lower of cost or market value. Any
unrealized losses are recorded as a reduction in income. Realized gains and
losses from the sale of loans receivable are based on the specific
identification method.
G. EXCESS YIELD RECEIVABLE
Excess yield receivable represents the excess of the estimated present value of
net amounts to be received over normal servicing fees for loan sales for which
the Company continues to service the loans. Excess yield receivable also
represents the estimated present value of the excess interest income to be
received over the yield acquired by the investor for loan sales for which the
Company does not continue to service the loans. The receivable is amortized to
operations based on a method which approximates the effective interest method.
H. OTHER REAL ESTATE
Other real estate is comprised of formally foreclosed property and in-substance
foreclosed property to which the Company does not have legal title. These
assets are recorded at the lower of the net investment in the loan or the fair
value of the property less selling costs. At the time of foreclosure, any
excess of the net investment in the loan over its fair value is charged to the
allowance for loan losses. Any subsequent declines in value are charged to
operations. Prior to 1995, loans were classified as in-substance foreclosures
when they exhibited characteristics more closely associated with the risk of
real estate ownership than with loans. Collateral that has been classified as
an in- substance foreclosure was reported in the same manner as collateral that
has been formally foreclosed. Effective January 1, 1995, with the adoption
date of SFAS No. 114, the category of loan classified as in-substance
foreclosures was eliminated resulting in such loans being reflected as loan
receivable rather than as foreclosed real estate.
I. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation of property and equipment is based on the asset's estimated useful
life, ranging from two to eight years, and is computed using the straight-line
method. Expenditures that improve or extend the service lives of assets are
capitalized. Repairs and maintenance are charged to expense as incurred.
F-20
<PAGE> 82
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. GOODWILL
Goodwill represents the excess of the total purchase price (consisting of the
initial consideration and subsequent consideration) of CRC and LPPC over the
fair value of purchased net assets. Goodwill is being amortized using the
straight-line method over approximately 20 years. The Company routinely
reviews recoverability using estimated future cash flows attributable to the
goodwill.
K. INCOME TAXES
Partnerships are generally not subject to income taxes, accordingly, the
Partnership income or loss is reported in the individual partners' tax returns.
However, Pacific Thrift, the Partnership's wholly owned corporate subsidiary,
is subject to federal income and state franchise taxes.
Pacific Thrift follows the "asset and liability" method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are
recognized for tax consequences of "temporary differences" by applying enacted
statutory tax rates to differences between the financial statement carrying
amount and the tax basis of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. All tax benefits are recorded and then
reduced by a valuation allowance when it is more likely than not that the
benefit is not fully realizable.
L. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (SFAS 107), requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Company's financial
instruments. The estimated fair values of financial instruments are disclosed
as of December 31, 1995. SFAS No. 107 defines fair value as the amount which
the instrument could be exchanged for in a current transaction between willing
parties, other than in a forced sale or liquidation. Where possible, the
Company has utilized quoted market prices to estimate fair value. Since quoted
market prices were not available for a significant portion of the financial
instruments, the fair values were approximated using discounted cash flow
techniques.
F-21
<PAGE> 83
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value estimates are made at a specific point in time, based on judgments
regarding future expected loss experience, current economic conditions, risk
conditions, risk characteristics of various financial instruments and other
factors. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates were based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments.
The following presents the carrying value and estimated fair value of the
various classes of financial instruments held by the Company at December 31,
1995. This information is presented solely for compliance with SFAS No. 107
and is subject to change over time based on a variety of factors. Because no
market exists for a significant portion of the financial instruments presented
below and the inherent imprecision involved in the estimation process,
management does not believe the information presented reflects the amounts that
would be received if the Company's assets and liabilities were sold.
F-22
<PAGE> 84
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------
Carrying Estimated
Value Fair Value
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $10,489,000 $10,489,000
Loans receivable 48,137,000 48,060,000
Allowance for loan losses (4,229,000) (4,229,000)
- ------------------------------------------------------------------------------
Total loans 43,908,000 43,831,000
- ------------------------------------------------------------------------------
Loans held for sale 12,577,000 12,577,000
Excess yield receivable 2,725,000 2,725,000
LIABILITIES
Installment certificates 24,275,000 24,275,000
Fully-paid certificates 35,881,000 35,800,000
Notes payable 6,771,000 6,771,000
</TABLE>
Cash, Short Term-Investments, Trade Receivables, and Trade Payables
The carrying amount approximates fair value because of the short maturity of
these instruments.
Loans
Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type such as commercial, commercial
real estate, residential mortgage, and other consumer. Each loan category was
further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
F-23
<PAGE> 85
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The fair value for performing fixed rate commercial and commercial real estate
loans was estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings. The fair values for performing commercial and commercial real estate
loans indexed to a market lending rate with normal credit risk were assumed to
approximate their carrying value. For residential mortgage loans, fair value
was estimated by using quoted market prices for loans with similar credit and
interest rate risk characteristics.
Fair value for significant nonperforming loans was based on recent external
appraisals or broker opinions adjusted for anticipated credit loss risk,
estimated time for resolution, valuation of the underlying collateral and other
related resolution costs. If appraisals or recent broker opinions are not
available, estimated cash flows are discounted using a rate commensurate with
the risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally determined using
available market information and specific borrower information.
Loans Held for Sale
The fair values were estimated by using current institutional purchaser yield
requirements.
Excess Yield Receivable
The fair value was determined by using estimated discounted future cash flows
taking into consideration current prepayment rates and default experience. The
carrying amount is considered to be a reasonable estimate of fair market value.
Thrift Certificates Payable
Under SFAS 107, the fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, and NOW accounts, and money
market and checking accounts, is equal to the amount payable on demand as of
December 31, 1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining maturities.
F-24
<PAGE> 86
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
At December 31, 1995
-----------------------------------
Carrying Estimated
Value Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Installment certificates $24,275,000 $24,275,000
================================================================================
Fully-paid certificates:
Maturing in six months or
less 26,162,000 26,162,000
Maturing between six months
and one year 9,084,000 9,053,000
Maturing between one and
three years 635,000 635,000
- --------------------------------------------------------------------------------
Total fully-paid certificates $35,881,000 $35,850,000
================================================================================
</TABLE>
Notes Payable
The fair values for long-term debt are based on quoted market prices where
available. If quoted market prices are not available, fair values are
estimated using discounted cash flow analyses based on the Company's borrowing
rates at December 31, 1995 for comparable types of borrowing arrangements.
The remaining assets and liabilities of Presidential are not considered
financial instruments and have not been valued differently than is customary
under historical cost accounting. Since assets and liabilities that are not
financial instruments are excluded, the difference between total financial
assets and financial liabilities does not, nor is it intended to, represent the
market value of Presidential. Furthermore, the estimated fair value
information may not be comparable between financial institutions due to the
wide range of valuation techniques permitted, and assumptions necessitated, in
the absence of an available trading market.
F-25
<PAGE> 87
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
M. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
N. RECLASSIFICATIONS
Certain reclassifications of balances from prior years have been made to
conform to the current year's reporting format.
O. NEW ACCOUNTING STANDARDS
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
LOANS RECEIVABLE
Loans receivable at December 31, 1995 and December 31, 1994 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate loans $ 48,545,000 $ 55,235,000
Participations sold (21,783,000) (16,129,000)
- -------------------------------------------------------------------------------
Residential real estate
loans - net 26,762,000 39,106,000
- -------------------------------------------------------------------------------
Commercial real estate loans 34,270,000 30,153,000
Participations sold (12,009,000) (10,479,000)
- -------------------------------------------------------------------------------
Commercial real estate
loans - net 22,261,000 19,674,000
- -------------------------------------------------------------------------------
Total loans receivable $ 49,023,000 $ 58,780,000
===============================================================================
Loans receivable held for investment $ 49,023,000 $ 58,780,000
Net deferred loan fees and costs (886,000) (1,428,000)
Allowance for loan losses (4,229,000) (4,307,000)
- -------------------------------------------------------------------------------
$ 43,908,000 $ 53,045,000
===============================================================================
</TABLE>
F-26
<PAGE> 88
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
LOANS RECEIVABLE (Continued)
The components of the loan portfolio at December 31, 1995 and December 31, 1994
were as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
One-to-four family residential $14,672,000 $20,088,000
Five-or-more family residential 10,347,000 16,720,000
Home improvement 1,743,000 2,298,000
Commercial 20,387,000 17,869,000
Land and other 1,874,000 1,805,000
- -------------------------------------------------------------------------------
$49,023,000 $58,780,000
===============================================================================
</TABLE>
During 1995 and 1994, the Company sold, without recourse to the Company,
approximately $13,371,000 and $25,632,000, respectively, of real estate loans
to various outside parties.
SIGNIFICANT CONCENTRATIONS OF RISK
The Company makes mortgage loans primarily secured by first or second trust
deeds on Southern California real estate. The loans are secured by
single-family residential and other types of real estate and collateralized by
the equity in the borrowers' real estate. Prior to the fourth quarter of 1993,
these borrowers generally had a credit standing such that the Company relied
heavily on the value of the underlying collateral in its lending practices. In
the fourth quarter of 1993, however, the Company began implementing a revised
policy to place more emphasis on the creditworthiness of the borrower. Loans
are expected to be repaid either by cash from the borrower at maturity or by
borrower refinancing.
F-27
<PAGE> 89
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at beginning $ 4,307,000 $ 3,123,000 $ 2,646,000
Provision charged
to expense 3,289,000 6,096,000 4,655,000
Loan charge-offs (3,367,000) (4,912,000) (4,178,000)
- ------------------------------------------------------------------------------
Balance at end $ 4,229,000 $ 4,307,000 $ 3,123,000
==============================================================================
</TABLE>
At December 31, 1995 and 1994, loans with more than two monthly payments past
due and on nonaccrual status totaled $1,128,000 and $3,408,000, respectively.
If interest on these loans had been accrued, interest income would have
increased by approximately $151,000 and $955,000 in 1995 and 1994,
respectively. At December 31, 1995 and 1994, loans with more than two monthly
payments past due and on accrual status totaled $1,508,000 and $3,474,000,
respectively. Interest income recognized on these loans totaled approximately
$130,000 and $298,000 in 1995 and 1994, respectively.
F-28
<PAGE> 90
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (Continued)
The following information relates to the Company's impaired loans which
includes troubled debt restructurings that meet the definition of impaired
loans as of and for the year ended December 31, 1995:
<TABLE>
<CAPTION>
December 31,
1995
- ------------------------------------------------------------------------------
<S> <C>
Impaired loans with a specific allowance $2,175,000
Impaired loans with no specific allowance 619,000
- ------------------------------------------------------------------------------
Total impaired loans $2,794,000
Total allowance related to impaired loans $ 430,000
Average balance of impaired loans for
the period $3,579,000
Interest income on impaired loans for
the period recorded on a cash basis $ 163,000
</TABLE>
PLEDGING OF PARTNERSHIP LOANS RECEIVABLE
In connection with the origination of the line of credit, the Partnership
pledged all of its loans receivable as security to its lender.
LOANS HELD FOR SALE
Loans held for sale at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans $12,577,000 $10,885,000
Title I loans - 1,126,000
- ------------------------------------------------------------------------------
$12,577,000 $12,011,000
==============================================================================
</TABLE>
Accounts receivable of $1,713,000 at December 31, 1994 consisted of proceeds
from loan sales. These proceeds were received in early January, 1995.
F-29
<PAGE> 91
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
LOANS HELD FOR SALE (Continued)
In December 1993, management developed a loan securitization program under
which the Partnership or Pacific Thrift could sell certain loans receivable to
a primary buyer (the Purchaser). The securitization agreements provided that
the Partnership or Pacific Thrift offer to sell all newly originated qualifying
loans, up to $75,000,000, to the Purchaser through June 1995.
Pacific Thrift had sold $75 million of loans under that agreement as of May 26,
1995. All loans sold by Pacific Thrift were included in pools of loans
securitized by the Purchaser who also acts as loan servicer for each of the
pools. All loans were sold nonrecourse except for the obligation to repurchase
any loan which does not meet certain customary representations and warranties
or to repurchase loans adversely affected by any breach of general
representations and warranties. As of December 31, 1995, three loans ($57,000
aggregate principal amount) from the original sale of $3.9 million to the
Purchaser have been repurchased by Pacific Thrift and no additional loans
related to this sale have been requested to be repurchased. Pacific Thrift
does not expect to incur a loss on the three loans repurchased. Except for an
initial sale of approximately $3.9 million in loans, all loans sold by Pacific
Thrift to the Purchaser were sold for a premium above face value. Pacific
Thrift received a servicing released fee payable quarterly on the principal
amount of each loan sold from September 19, 1994 to January 1995. Effective
February 1, 1995, the servicing released fee was increased on the principal
amount of each loan sold, including the loans sold from September 1994 to May
26, 1995, until each loan is paid off. Pacific Thrift retains an interest in
the net spread (i.e. all interest and fees paid on the loans less servicing and
other costs) in the $3.9 million of loans sold to Purchaser in December 1993,
which management estimates will represent an additional return of approximately
3.3% on the principal amount of the $3.9 million of loans sold.
F-30
<PAGE> 92
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
LOANS HELD FOR SALE (Continued)
Pacific Thrift entered into a new agreement with the Purchaser effective June
21, 1995, pursuant to which it will continue to sell pre-approved residential
loans to the Purchaser. As of December 31, 1995 two loans under the new
agreement ($218,000 aggregate principal amount) have been repurchased by
Pacific Thrift and no additional loans have been requested to be repurchased.
Pacific Thrift does not expect to incur a loss on these two loans repurchased.
The new agreement provides for Pacific Thrift to receive a higher premium on
the face amount of each loan sold which meets preset interest rate requirements
upon date of sale. An additional premium will be paid for all loans sold
during any quarter if at least $22.5 million of loans are sold during that
quarter. The premium for all loans sold in excess of $25 million per calendar
quarter will be further increased. In addition, Pacific Thrift will receive a
servicing released fee on the principal amount of each loan sold, payable on a
quarterly basis, until the loan is paid off. At January 1, 1996, the Agreement
was revised to eliminate, for all new loans sold, the servicing released fee
and replace it with a higher premium on sale.
As a result of changes in the lending market, Pacific Thrift's primary source
of revenues has changed from interest income on portfolio loans to fee and
premium income from the origination and sale of real estate loans. During the
year ended December 31, 1995, Pacific Thrift has sold an aggregate of $132.5
million of pre-approved securitizable loans to the Purchaser and $12.5 million
pre-approved securitizable loans to other purchasers. Pacific Thrift has no
commitment to offer or sell any specified amount of loans to any purchaser, but
has entered arrangements whereby other purchasers may pre-approve loans to be
made by Pacific Thrift prior to funding, which are sold within approximately
one month from origination.
To the extent that Pacific Thrift originates loans for sale, it bears an
interest rate risk between the date of origination of each loan and the time
that each loan is sold. However, loans are generally sold on a monthly basis,
which reduces the risk of interest rate fluctuations between the date of
origination and date of sale.
F-31
<PAGE> 93
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
LOANS HELD FOR SALE (Continued)
Prior to March 31, 1993, Pacific Thrift originated Title I home improvement
loans that were 90% insured by the Federal Housing Administration, provided
that the total amount of claims did not exceed 10% of the amount of all Title I
loans. During 1995 and 1994, Pacific Thrift sold $1,126,000 and $2,770,000,
respectively, of these loans and recorded losses totaling $-0- and $39,000,
respectively. As of March 31, 1993, Pacific Thrift discontinued the
origination and sale of Title I and other similar loans.
In August 1995 Pacific Thrift resumed a Title I Loan origination program, in
which Pacific Thrift acts exclusively as a correspondent lender for one or more
larger mortgage lenders who securitize Title I Loans. Pacific Thrift
anticipates that these loans would be sold without recourse within 30 days of
origination.
During 1995, Pacific Thrift sold $1,126,000 of seasoned home improvement loans
originated prior to March 1993 at par value and $850,000 in new Title I loans
at a premium.
4. OTHER REAL ESTATE
Other real estate consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Foreclosed real estate $ 5,590,000 $7,478,000
In-substance foreclosures - 545,000
Allowance for losses on
other real estate (2,434,000) (402,000)
- ------------------------------------------------------------------------------
$ 3,156,000 $7,621,000
==============================================================================
</TABLE>
F-32
<PAGE> 94
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. OTHER REAL ESTATE (CONTINUED)
Changes in the allowance for losses on other real estate for the years ended
December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning $ 402,000 $ 783,000 $ 867,000
Provisions for losses 1,188,000 202,000 1,069,000
Net (charge-offs)
recoveries 844,000 (583,000) (1,153,000)
- --------------------------------------------------------------------------------
Balance at end $2,434,000 $ 402,000 $ 783,000
================================================================================
</TABLE>
Operations of other real estate for the years ended December 31, 1995, 1994 and
1993 consisted of the following:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for losses $1,188,000 $ 202,000 $1,069,000
Net (gain) on sales (469,000) (625,000) (345,000)
Other expenses 493,000 1,155,000 2,583,000
- --------------------------------------------------------------------------------
$1,212,000 $ 732,000 $3,307,000
================================================================================
</TABLE>
Other expenses in 1993 included $1,494,000 of estimated costs for remediation
of toxic substances on other real estate. See Note 13.
Upon foreclosure of a junior lien, the Company takes title to the real estate,
subject to existing senior liens. These mortgage notes payable totaled
$611,000 and $2,313,000 at December 31, 1995 and 1994, respectively.
F-33
<PAGE> 95
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995 1994:
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment and software $ 1,211,000 $1,078,000
Furniture and fixtures 745,000 583,000
Leasehold improvements 519,000 455,000
- --------------------------------------------------------------------------------
2,475,000 2,116,000
Accumulated depreciation and
amortization (1,077,000) (794,000)
- -------------------------------------------------------------------------------
$ 1,398,000 $1,322,000
===============================================================================
</TABLE>
6. THRIFT CERTIFICATES PAYABLE
Thrift certificates are comprised of full-paid certificates and installment
certificates. The approximate weighted average interest rate of full-paid and
installment certificate accounts at December 31, 1995 was 6.08% and 5.66%,
respectively. The interest payable on the thrift certificates totaled $104,000
and $171,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, full-paid thrift certificates consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Certificates greater than
$100,000 $ - $ 102,000
Certificates less than
$100,000 35,881,000 57,956,000
- --------------------------------------------------------------------------------
$35,881,000 $58,058,000
================================================================================
</TABLE>
F-34
<PAGE> 96
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. THRIFT CERTIFICATES PAYABLE (CONTINUED)
At December 31, 1995, scheduled maturities of full-paid thrift certificates
were as follows:
<TABLE>
<CAPTION>
Amount
- ------------------------------------------------------------------------------
<S> <C>
Less than 3 months $12,723,000
3 to 6 months 13,439,000
6 to 12 months 9,084,000
1 to 5 years 635,000
- ------------------------------------------------------------------------------
$35,881,000
==============================================================================
</TABLE>
7. NOTE PAYABLE
In 1990, the Partnership obtained financing under a $105,000,000 line of credit
agreement with National Westminster Bank (NatWest), as agent for a group of
banks, which was modified on September 30, 1991 to $56,000,000 and subsequently
modified further. The amounts advanced under the agreement were based upon a
specified percentage of the amount of eligible loans assigned as security.
Under the agreement that existed at December 31, 1991, the Partnership could
elect any of three interest rates: (i) 0.50% above NatWest's prime rate, (ii)
2.0% above the certificate of deposit rate, or (iii) 1.875% above LIBOR. At
December 31, 1991, the Partnership had $56,250,000 outstanding on the line of
credit.
In April 1992, NatWest delivered a commitment letter to the Partnership,
followed by a formal amendment of the loan agreement, to continue to provide a
revolving loan of $48,000,000, decreasing to $44,000,000 by May 15, 1992, and
decreasing by $1,500,000 each month to a new maximum of $36,500,000 by
September 30, 1992.
In connection with the amendment, the general partner loaned the Partnership
$600,000 in subordinated debt, which bears interest at the prime rate and may
only be repaid upon consent by NatWest or at such time as the Partnership
repays all of its outstanding indebtedness to NatWest. In addition, the
general partner and the three managing officers of the general partner
personally guaranteed the performance by the Partnership of all terms of the
line of credit agreement.
F-35
<PAGE> 97
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. NOTE PAYABLE (Continued)
On September 30, 1992, NatWest amended and extended the term of the revolving
loan through March 31, 1993, requiring further paydowns of $1,000,000 per month
for four of the months and $1,100,000 for two of the months during the
six-month extension period.
Under the terms of the September 30, 1992 amendment, the Partnership could
borrow, on a revolving credit basis, up to the lesser of (i) a specified
borrowing base equal to 93.75% of the aggregate principal balance of all
eligible mortgage loans secured by first or second trust deeds on single-family
residences, and 85% of the aggregate principal balance of all eligible mortgage
loans secured by first or second trust deeds on multifamily residences or
commercial properties; or (ii) $36,500,000 as of September 30, 1992, reduced by
required reductions through March 31, 1993. Total loans secured by trust deeds
on multifamily residences and commercial properties that could be included as
eligible loans could not exceed 35% of all eligible loans.
Under the September 30, 1992 amendment, the interest rate charged on new
advances was based on (i) 1% above NatWest's prime rate; (ii) 3.125% over
NatWest's certificate of deposit rate; or (iii) 3% over the LIBOR rate. In
addition, the Partnership paid a commitment fee equal to 0.50% per annum of the
average daily unused portion of the aggregate commitment. During 1993, the
Partnership elected an interest rate of 1% above the NatWest prime rate.
On April 1, 1993, the line of credit agreement was further amended and extended
to June 30, 1993. The amendment required paydowns of $1,000,000 per month to a
new maximum of $27,300,000 as of June 30, 1993.
In June 1993, the line of credit was further amended and extended until June
30, 1994. Under the terms of the extension, the Partnership was required to
make monthly payments of $300,000, plus the amount by which 80% of the
Partnership's monthly net operating cash flow (after payment of rent, salaries
and employee benefits, interest under the line of credit agreement, senior
liens on mortgage loans and other real estate, and up to $50,000 per month of
office expenses) exceeded $300,000. In addition, the Partnership was not
allowed to make distribution or withdrawal payments to the partners.
F-36
<PAGE> 98
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. NOTE PAYABLE (Continued)
The line of credit agreement, as amended in June 1993, could terminate upon
certain customary events of default. Events of default included failure to
meet the following financial standards: (i) minimum excess tangible financial
assets not less than $15,000,000; (ii) a maximum ratio of total liabilities to
excess tangible financial assets not greater than 3.25-to-1; and (iii) a
minimum interest coverage ratio of net income plus interest expense to interest
expense of 1.5-to-1. Upon the occurrence of an event of default under the
agreement, NatWest had the right, among other remedies, to declare all advances
due immediately, cease making any further advances, and sell the collateral
assigned as security. NatWest also had the right to charge a higher interest
rate (3% above prime) on amounts due and unpaid.
In December 1993, the Partnership notified NatWest that certain loans in the
borrowing base had become ineligible loans. Such reduction in the eligible
loans caused a payment of approximately $2,100,000 to become immediately due.
Subsequently, the Partnership notified NatWest that other loans had become
ineligible loans, resulting in a total payment in excess of $6,000,000 being
immediately due.
In May 1994, the Partnership notified NatWest of additional defaults on the
line of credit, including those pertaining to the financial standards for
excess tangible financial assets and interest coverage as well as material
litigation, environmental liabilities, and defaults under other provisions.
During the period April 1994 through September 1994, the Partnership and
NatWest negotiated to restructure and renew the line of credit. In September
1994, the line of credit was amended and extended through June 30, 1996 under
the following primary terms:
(1) the Partnership is required to make mandatory quarterly principal
payments sufficient to reduce the outstanding balance to $15,410,000 by
December 31, 1994; $13,222,000 by March 31, 1995; $10,978,000 by June
30, 1995; $8,878,000 by September 30, 1995; $6,883,000 by December 31,
1995, $4,993,000 by March 31, 1996; and $0 by June 30, 1996;
F-37
<PAGE> 99
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. NOTE PAYABLE (Continued)
(2) the Partnership will incur interest on the line of credit at the rate of
prime plus 1%;
(3) the Partnership is required to pay 100% of its net cash flow to NatWest;
(4) the Partnership is required to maintain a ratio, based on the
outstanding principal balance of performing loans compared to the
outstanding principal balance of the line of credit, greater than or
equal to 1.10 to June 30, 1995 and 1.20 from July 1, 1995 to June 30,
1996;
(5) the Partnership is required to maintain a ratio, based on the
outstanding principal balance of all loans and the estimated fair value
of other real estate compared to the outstanding principal balance of
the line of credit, greater than or equal to 1.60 to June 30, 1995 and
1.80 from July 1, 1995 to June 30, 1996;
(6) the Partnership is allowed to make actual cash disbursements equal to
110% of budgeted cash disbursements for general and administrative
expenses;
(7) the Partnership is allowed to make actual cash disbursements equal to
120% of budgeted cash disbursements for loan and real estate expenses,
other than specified environmental remediation costs;
(8) the Partnership is allowed to pay specified environmental remediation
costs up to $1,465,000;
(9) CRC and LPPC are required to pay cash balances in excess of $250,000 as
of January 31, 1995 and January 31, 1996 to the Partnership;
(10) the Partnership is not allowed to pay any amounts to the general
partner, including fees, reimbursements, or distributions, except to the
extent of 110% of the budgeted overhead of the general partner;
(11) the Partnership is not allowed to pay any distributions or withdrawals
to the limited partners;
F-38
<PAGE> 100
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. NOTE PAYABLE (Continued)
(12) the Partnership is not allowed to make capital contributions to Pacific
Thrift, except for specified environmental remediation costs of Pacific
Thrift and other limited purposes; and
(13) in the event that the Partnership does not reduce the outstanding
principal balance of the line of credit to $10,455,000 by June 30, 1995,
$8,455,000 by September 30, 1995, $6,555,000 by December 31, 1995,
$4,755,000 by March 31, 1996, and $0 by June 30, 1996, the Partnership
will incur a nonperformance fee of $1,000,000 for each target, up to a
maximum of $5,000,000, payable on June 30, 1996; however, if the
partnership incurs one or more nonperformance fees and subsequently
repays the entire line of credit by June 30, 1996, the nonperformance
fees are reduced to the greater of 25% of the nonperformance fees or
$500,000.
In addition, the general partner and three managing officers reaffirmed their
guarantees.
As consideration for the September 1994 amended and restated loan agreement,
NatWest waived the defaults which existed under the previous agreement. In
addition, certain financial standards under the previous agreement are no
longer required, including the borrowing base and eligible loan restrictions, a
minimum amount of excess tangible financial assets, a maximum ratio of total
liabilities to excess tangible financial assets, and a minimum interest
coverage ratio.
Upon the occurrence of an event of default under the line of credit, NatWest
has the right, among other remedies, to charge prime plus 3% on amounts due and
unpaid. In addition, NatWest has the right to declare all advances due
immediately and sell the collateral assigned as security.
As of December 31, 1994, the Partnership reduced the outstanding balance of the
note payable to $14,778,000 and was in compliance with the principal reduction
requirement of the new agreement. However, the Partnership was not in
compliance with certain technical conditions of such agreement.
F-39
<PAGE> 101
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. NOTE PAYABLE (CONTINUED)
At December 31, 1995, the Partnership owed a total balance of $6,771,000 under
the Loan Agreement. As of December 31, 1995, the Partnership was in compliance
with all paydown requirements under the amended and restated Loan Agreement but
certain technical conditions relating to expenses had not been met. The Bank
agreed to waive this technical violation of the Loan Agreement in February,
1996.
On December 22, 1995 the line of credit was further amended, effective November
29, 1995 to allow Presidential until June 30, 1997, to fully repay the
outstanding balance owed to the Bank. The Loan Agreement requires the
Partnership to utilize 100% of its net cash flow to pay down the loan. Net
cash flow is defined as total cash receipts less collection costs, loan
servicing expenses and general and administrative expenses, subject to certain
maximum levels based upon projected expenses prepared by the Partnership. The
loan balance would bear interest at prime plus 1.5%. Mandatory pay down levels
require that the principal balance be paid down to: $4,993,000 by March 31,
1996; $3,755,000 by June 30, 1996; $2,755,000 by September 30, 1996; $1,755,000
by December 31, 1996; $755,000 by March 31, 1997; and to zero by June 30, 1997.
The Partnership is further required to maintain a collateral coverage ratio of
performing loans relative to its loan balance equal to 1.2:1 and a total
collateral coverage ratio of total loans receivable and net OREO relative to
its loan balance equal to 1.6:1. In addition, under the modifications,
commencing December 31, 1995 the non-performance fee note penalties are
eliminated.
8. INCOME TAXES
The Partnership is not subject to income taxes. However, the Partnership is
still required to file partnership returns in order to report its income or
loss in total as well as the distributable share of income or loss of each of
the partners. These partnership returns, as all tax returns, are potentially
subject to examination by the taxing authorities.
F-40
<PAGE> 102
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. INCOME TAXES (CONTINUED)
The cumulative differences between the total capital of the Partnership for
financial reporting purposes and the total capital reported for federal income
tax purposes at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Total partners' capital for
financial reporting purposes $ 8,780,000 $10,614,000
Investment in Pacific Thrift,
syndication costs, bad debt and
real estate reserves, and various
other differences 14,030,000 17,336,000
- -----------------------------------------------------------------------------
Total partners' capital for
federal income tax purposes $22,810,000 $27,950,000
=============================================================================
</TABLE>
Pacific Thrift is subject to federal income and California franchise taxes but
has incurred net operating losses. Accordingly, the provision for income taxes
(benefit) consists of the minimum California franchise taxes for 1994 and 1993.
Significant components of the provision for income taxes (benefits) included in
the consolidated statements of operations are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 1,135,000 $1,000 $1,000
Utilization of net
operating loss (1,135,000) - -
Deferred (1,222,000) - -
- ------------------------------------------------------------------------------
$(1,222,000) $1,000 $1,000
==============================================================================
</TABLE>
Pacific Thrift adopted Financial Accounting Standards Board Statement No. 109
"Accounting for Income Taxes" as of January 1, 1993. The adoption of the
statement had no significant effect on the financial position or results of
operations.
F-41
<PAGE> 103
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities on Pacific Thrift's books at December 31, 1995 and 1994,
which is included with other assets on the consolidated balance sheets, are as
follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward $1,361,000 $2,457,000
Loan loss reserves 179,000 477,000
Interest reserves 233,000 226,000
Write-down of other real estate 365,000 39,000
Loans held for sale 220,000 78,000
Deferred rent 106,000 59,000
Environmental remediation - 270,000
Other 5,000 3,000
- ------------------------------------------------------------------------------
Total deferred tax assets 2,469,000 3,609,000
- ------------------------------------------------------------------------------
Less valuation allowance 857,000 2,946,000
- ------------------------------------------------------------------------------
1,612,000 663,000
- ------------------------------------------------------------------------------
Deferred tax liabilities
Depreciation 34,000 28,000
Deferred loan costs 225,000 433,000
Excess yield 128,000 202,000
- ------------------------------------------------------------------------------
Total deferred tax liabilities 387,000 663,000
- ------------------------------------------------------------------------------
Total net deferred tax asset $1,225,000 $ -
==============================================================================
</TABLE>
F-42
<PAGE> 104
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. INCOME TAXES (CONTINUED)
A valuation allowance has been established to reduce the deferred tax assets to
the amount considered realizable at December 31, 1995 and 1994. The valuation
allowance reserves the amount of income tax benefit recognized that is
dependent on future taxable income to be realizable. During 1995, $1,225,000
of the valuation allowance was reversed to reflect the expected utilization of
the net operating loss over the next twelve months. However should there occur
a 50% ownership change of the Company as defined under Section 382 of the
Internal Revenue Code of 1986, the Company's ability to use the net operating
losses would be restricted to a prescribed annual amount.
At December 31, 1995, Pacific Thrift has net operating loss carryforwards for
federal income tax purposes of approximately $3,979,000 that are available to
offset future federal taxable income. These federal net operating losses
expire in the years 2007 through 2009. Pacific Thrift has net operating loss
carryforwards for California franchise tax purposes of approximately $142,000.
These California carryforwards expire in the year 1999.
The following summarizes the difference between the 1995, 1994 and 1993
provision for income taxes (benefit) and the federal statutory tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory
tax rate 34% (34)% (34)%
Nonrecognition of
net operating
loss carryforward - 34 34
Utilization of net
operating loss (34) - -
Reversal of valuation
allowance (42) - -
- -----------------------------------------------------------------------------
Effective tax rate
(benefit) (42)% 0% 0%
=============================================================================
</TABLE>
F-43
<PAGE> 105
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. ANNUAL MANAGEMENT FEE
The general partner receives an annual management fee based on the proportion
that net profits, before the effects of the management fee, bear to the total
capital contributions as defined in the Partnership Agreement.
The Partnership Agreement permits the general partner to calculate the
management fee based on annual net income that includes loan origination fees
generated. During 1992, the annual management fee was calculated on such
basis. During 1995, 1994 and 1993, there was no management fee because the
Partnership incurred net losses in excess of loan origination fees generated.
During 1993, the general partner received payments of $441,000 on the
anticipated annual management fees. Since the general partner ultimately did
not earn such fees, the general partner agreed to repay these amounts to the
Partnership under a promissory note. No interest was paid or accrued for 1993.
However, quarterly principal payments of approximately $110,000 commenced in
December 1994 and interest at prime plus 1% will be accrued from January 1994
through December 1995 (Note 10).
10. RELATED PARTIES AND AFFILIATES
Accounts receivable from the general partner consisted of the following at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Unearned annual management fees $220,000 $330,000
Amounts due for salaries, rent and
overhead 127,000 148,000
- ------------------------------------------------------------------------------
$347,000 $478,000
==============================================================================
</TABLE>
Accounts payable to the general partner consisted of the following at December
31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Base fee and loan servicing fees $203,000 $ 86,000
Contingent consideration in connection
with the purchase of CRC and LPPC 78,000 48,000
- ------------------------------------------------------------------------------
$281,000 $134,000
==============================================================================
</TABLE>
F-44
<PAGE> 106
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. RELATED PARTIES AND AFFILIATES (CONTINUED)
The Partnership had various related party transactions with the following
entities:
- - PRESIDENTIAL MANAGEMENT COMPANY - The general partner received specified
fees for services performed and reimbursements of certain expenses. Under
the Partnership Agreement, the general partner receives a base fee of up to
35% of the loan origination fees paid by borrowers to the Company. The base
fee was 35% of loan origination fees for the Company in 1995 and 35% in
1994. The general partner also received a loan servicing fee of 3/8 of 1%
per annum on loans with terms over three years.
Amounts charged by the general partner for services performed and
overhead-related expenses for the years ended December 31, 1995, 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Base fee $ 767,000 $ 589,000 $ 669,000
Loan servicing fee 245,000 216,000 178,000
Total fees $1,012,000 $ 805,000 $ 847,000
==============================================================================
Salaries and overhead
reimbursements $ 82,000 $ 90,000 $5,184,000
==============================================================================
</TABLE>
During 1992, the general partner absorbed certain expenses (data processing,
legal, and business promotion) related to the Company. During 1995, 1994
and 1993, however, the general partner did not absorb any such expenses for
the Company.
Under the Capital Plan, the general partner agreed to contribute, over a
three-year period, additional capital up to $1,730,000 if the Company
generated certain levels of loan origination fees. Pursuant to the
agreement, the general partner contributed $266,000 of the $1,730,000 in
late 1993 and early 1994, but has not contributed any additional amounts
based on continued operating losses and the level of loan origination fees.
F-45
<PAGE> 107
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. RELATED PARTIES AND AFFILIATES (CONTINUED)
Effective January 1, 1994, in order for Pacific Thrift to comply with a
section of a regulatory agreement covering payments to affiliates, Pacific
Thrift commenced directly employing personnel for loan origination,
processing, and servicing. In addition, Pacific Thrift revised its policies
for payment of rent and other overhead expenses. As a result, Pacific
Thrift terminated reimbursements to the Partnership and general partner for
such services and expenses. However, the Partnership is continuing to pay
the general partner for base fees and loan servicing fees of Pacific Thrift
and the Partnership in accordance with the Partnership Agreement.
During 1994, Pacific Thrift paid and allocated certain salaries and overhead
for the Partnership, CRC, and general partner totaling $495,000, $220,000
and $356,000, respectively, and was reimbursed on a monthly basis.
During 1995, Pacific Thrift paid and allocated certain salaries and overhead
for the Partnership, CRC, LPPC and the general partner totaling $386,000,
$251,000, $8,000 and $597,000, respectively, and was reimbursed on a monthly
basis.
The Company incurs salary and employee-related expenses for individuals who
perform services for the Partnership and Pacific Thrift and do not own more
than a 1% interest in the general partner. The Company also incurs these
expenses for all individuals who perform services for CRC and LPPC,
regardless of their ownership interest in the general partner. The general
partner, however, incurs salary and employee-related expenses for three
managing officers who perform services for the Partnership and Pacific
Thrift and own more than a 1% interest in the general partner.
- - CONSOLIDATED RECONVEYANCE COMPANY - (CRC) serves as a trustee on all trust
deeds obtained by the Company as security for portfolio loans originated or
purchased by the Company. Fees paid to CRC are paid by the borrowers.
F-46
<PAGE> 108
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. RELATED PARTIES AND AFFILIATES (CONTINUED)
A managing officer of the Partnership and general partner provides legal
services in connection with the Company's loan accounts, for which he receives
$100 from the fees paid by each borrower for legal services related to each
loan origination. Total fees of $175,000, $62,000 and $56,000 were paid by the
Partnership to the managing officer for the years ended December 31, 1995, 1994
and 1993, respectively.
A limited partner of the Partnership and of the general partner is a partner
with a law firm that provides legal services to the Company. Total fees for
the services provided to the Company by the law firm were approximately
$689,000, $716,000 and $432,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
A member of the Board of Directors of Pacific Thrift was paid hourly and
contingent fees for services related to the sale of loans under the loan
securitization agreement entered into in December 1993. Total fees for the
services provided by the board member were approximately $165,000, $111,000 and
$84,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Former officers of the Partnership have loans payable to the Partnership,
secured by real estate, totaling approximately $269,000 and $271,000 as of
December 31, 1995 and 1994, respectively. These loans are included in loans
receivable.
Thrift certificates purchased by members of management totaled approximately
$63,000 and $236,000 at December 31, 1995 and 1994, respectively, on terms
slightly more favorable than the terms for unrelated parties. Interest expense
on these certificates totaled approximately $2,000, $11,000 and $8,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
F-47
<PAGE> 109
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. RELATED PARTIES AND AFFILIATES (CONTINUED)
As of December 31, 1993, Pacific Thrift purchased various furniture and office
equipment from the Partnership. The replacement value was determined by an
experienced interior design consultant (a related party) who obtained
information from used furniture dealers, and the purchase price of $223,000,
10% under the replacement value, was approved by the Board of Directors of
Pacific Thrift. The Partnership realized a gain, including depreciation
recapture, of $135,000 on the sale of the furniture and office equipment;
however, such gain was eliminated upon consolidation.
The Partnership and general partner sold computer equipment and software to
Pacific Thrift as of December 31, 1993. Subsequently, management obtained
additional information about the value of the software and the need to
reallocate the price. As a result of the additional information, management
determined that Pacific Thrift had overpaid for the software. To correct the
situation, the general partner repaid $177,000. In addition, the Partnership
agreed to repay $173,000 by causing CRC to issue an interest-bearing promissory
note, secured by CRC's accounts receivable, payable in monthly installments
through June 1995. As of December 31, 1993, the Partnership and the general
partner realized gains on the sale of $54,000 and $333,000 respectively,
including depreciation recapture and adjustment for the subsequent refunds.
During 1995 and 1994, the Partnership paid to Pacific Thrift a loan servicing
fee at the rate of 1.5% of the outstanding balances of the Partnership's loans
and other real estate. Such fees totaled $351,000 and $545,000 in 1995 and
1994 and were eliminated in the consolidation.
Also, during 1994, the Partnership had loans receivable, with balances totaling
$464,000, that were refinanced into two loans: one a Pacific Thrift loan in
first position and the remainder a Partnership loan in second position. In
order to satisfy regulatory requirements applicable to affiliate transactions,
such refinances were subject to certain underwriting and performance
requirements.
F-48
<PAGE> 110
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. PURCHASE OF CRC AND LPPC
Effective, July 1, 1990, the Partnership purchased 100% of the limited
partnership interests in CRC and LPPC from the general partner for their
combined estimated fair market value of $908,000 as determined by an
independent appraiser. CRC serves as trustee on all trust deeds obtained by
the Company as security for portfolio loans originated or purchased by the
Company, as well as trust deeds for many unaffiliated lenders. LPPC publishes
information regarding sales of foreclosed properties. The transaction was
treated as a purchase and resulted in goodwill of approximately $651,000.
The Partnership also agreed to pay the general partner an additional amount
(contingent consideration) annually for five years beginning January 1, 1991.
The contingent consideration, based on an amended agreement, is calculated as
50% of the total annual net profits earned by CRC and LPPC in excess of a base
profit amount of $465,000. The contingent consideration totaled $172,000,
$224,000 and $466,000 for the years ended December 31, 1995, 1994 and 1993,
respectively, and was treated as an addition to goodwill. Accumulated
amortization relating to the goodwill totaled $400,000 and $253,000 December
31, 1995 and 1994, respectively.
2. LITIGATION AND UNASSERTED CLAIMS
Although they were never been served, the Partnership and its Chief Executive
Officer (CEO) received a complaint in October 1993 that named them as
defendants, along with four other unaffiliated defendants. The complaint
contained allegations of securities fraud and breach of fiduciary duty in
connection with companies affiliated with Alexander Spitzer (who, until
approximately twelve years ago but not thereafter, was an affiliate of the
Partnership and CEO). The complaint was filed by two long-time business
associates of Spitzer, including one individual who was a general partner of a
Spitzer-affiliated entity and one individual who owned another
Spitzer-affiliated entity.
F-49
<PAGE> 111
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. LITIGATION AND UNASSERTED CLAIMS (CONTINUED)
The complaint charges all defendants with participation in securities fraud in
connection with the sale of securities of the Spitzer entities (although there
are no allegations that either the Partnership or CEO participated in the sale
of such securities) and charges the Partnership and CEO with aiding and
abetting other defendants in a violation of their fiduciary duties to the
Spitzer-affiliated entities. The primary facts alleged against the Partnership
and CEO are alleged to have occurred in 1984. The Partnership and CEO denied
the merits of all allegations stated against them in the complaint.
Counsel for both the Partnership and CEO, in a letter dated October 20, 1993,
advised counsel for the plaintiffs that the complaint appeared to state no
claim on the merits against the Partnership or CEO and that no claims could be
stated because of statute of limitations problems. The only response of
plaintiffs' counsel, by letter dated November 16, 1993, was to notify all
defendants that they had an open extension of time to answer.
An earlier class action involving Spitzer-affiliated entities was filed in
March 1990 by investors and certain lenders in the bankrupt Spitzer-affiliated
entities. Although the Partnership and CEO are discussed in the complaint,
neither the Partnership nor CEO has ever been named as a defendant in that
class action.
The allegations involving the Partnership and CEO in both complaints concern
the May 1984 sales of the general partnership interests in the Partnership
(which were owned at that time by entities owned by the CEO and a relative of
Spitzer) and of the stock of a former affiliated thrift and loan company to a
large, unaffiliated mortgage banking group headquartered in the state of New
York (the Buyer). The complaints allege that, in connection with the sales to
the Buyer, the CEO and Spitzer agreed for the former affiliated thrift and loan
company to sell certain allegedly poor-quality loans to other
Spitzer-affiliated entities. The complaints further allege that Spitzer and
his affiliates engaged in a continuing scheme, both before and after the sales
to the Buyer, to lend money and sell real estate to nominees (which did not
include the Partnership or CEO), who assertedly purchased the real estate at
inflated prices and were guaranteed against loss.
F-50
<PAGE> 112
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. LITIGATION AND UNASSERTED CLAIMS (CONTINUED)
Although not mentioned in either of the two complaints, but based on hearsay
contained in a document prepared in 1985, Spitzer allegedly stated that in 1984
the CEO reimbursed Spitzer for the CEO's share of funding such guarantees
involving one Spitzer-affiliated entity in 1982 through 1984. The CEO
acknowledges that he made payments to Spitzer but has stated that they were for
proper purposes.
Neither the Partnership nor CEO had any ownership interest in any
Spitzer-affiliated entity after the sales to the Buyer in May 1984. However,
as a result of loans made to Spitzer-affiliated entities prior to the sales to
the Buyer, the Partnership continued to be a creditor to these entities. These
loans were substantially performing in accordance with their terms and were
considered by management to be well secured until 1989, shortly before certain
Spitzer-affiliated entities declared bankruptcy in November 1989. Ultimately,
as previously reported, the Partnership wrote off the loans not secured by real
estate, disposed of real estate collateral securing one of the loans to the
Spitzer-affiliated entities, and recorded losses on these loans in 1990 and
1991 in excess of $3.7 million.
The Partnership and CEO denied the merits of the allegations stated against
them in the complaints. Management does not believe that any of these matters
will result in any material additional losses to the Partnership or any
material adjustments to these financial statements.
On October 31, 1995 plaintiff's counsel, in the October 1993 complaint which
had named the Partnership and its CEO alleging securities fraud and breach of
fiduciary duty, as discussed above, filed a request for dismissal without
prejudice. The clerk of the Court entered the dismissal as requested on
November 2, 1995.
3. COMMITMENTS AND CONTINGENCIES
In January and February 1993, the Partnership and Pacific Thrift foreclosed on
two loans secured by real estate that contained toxic substances. The real
estate was used by the former owners for metal-plating purposes. Management
commenced the process of obtaining environmental studies.
F-51
<PAGE> 113
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with the activities of the former owner of the Partnerships
property, the District Attorney's office filed a civil complaint against the
Partnership alleging violations of hazardous waste control laws. In September
1994, the Partnership entered into a consent agreement requiring the
Partnership to pay a civil compromise of $115,000 and to develop and implement
a remedial action plan. Legal counsel has stated that the likelihood of
further civil or any criminal action is remote if the Partnership complies with
the terms of the consent agreement. Management states that the Partnership
intends to comply with the consent agreement.
In July and September 1994, management obtained soil investigation studies for
the foreclosed properties to determine the extent of the toxic substances.
Management was completing proposed remediation plans for approval by local
government agencies. Based on the proposed remediation plans, management
estimated that the cost of remediation, including consulting and legal
expenses, would be approximately $1,494,000. Accordingly, the Company recorded
a provision for the liability of $1,494,000 in the financial statements for
1993.
Management does not expect the extent of the liability to exceed $1,494,000;
however, such estimate is based on the assumption that the appropriate
authorities will approve the remediation plans and that no additional toxic
substances will be discovered during the remediation. For one of the
properties the accrued remediation liability was reduced by $378,000 during the
year ended December 31, 1995 based on a lower bid. The remediation work was
completed in 1995 for this property and in early 1996 the property was listed
as available for sale. Remediation work on the second property, subject to
formal approval by the appropriate authorities, was completed in early 1996.
F-52
<PAGE> 114
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company conducts its operations from leased facilities. Rental expenses of
approximately $905,000, $926,000 and $908,000 have been charged to general and
administrative expenses in the consolidated statements of operations for the
years ended December 31, 1995, 1994 and 1993, respectively. At December 31,
1995, the approximate minimum rental commitments under all noncancelable
operating leases (which are subject to annual escalations based on the consumer
price index) are as follows:
<TABLE>
<CAPTION>
Year Amount
- ------------------------------------------------------------------------------
<S> <C>
1996 $ 969,000
1997 807,000
1998 736,000
1999 701,000
2000 701,000
Thereafter 1,393,000
- ------------------------------------------------------------------------------
$5,307,000
==============================================================================
</TABLE>
At December 31, 1995 and 1994, the Company was servicing Title I loans for
others totaling approximately $10,744,000 and $12,545,000, respectively. In
addition, the Company has filed claims with the Federal Housing Administration
that depleted the insurance on these loans during 1994.
In connection with certain real estate loan sales by Pacific Thrift in 1995 and
1994, the Partnership guaranteed one buyer against losses up to $2,365,000 and
$1,800,000, respectively. As security for the guarantee, the Partnership
deposited $237,000 in 1995 and $180,000 in 1994 with the buyer.
F-53
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PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The California Franchise Tax Board examined the California corporate tax
returns for Pacific Thrift for 1990, 1991, and 1992 and did not result in a
significant adjustment.
On June 6, 1995, Consolidated and Lenders were served with a complaint by
Consumer Action and two consumers suing both individually and on behalf of the
general public in a purported class action filed in the Superior Court of
Contra Costa County, California. The complaint names Consolidated and Lenders,
along with thirteen other foreclosure service and foreclosure publishing
companies, and alleges that all named defendants charge fees in excess of the
statutorily permitted amount for publication of notices of trustee sales. The
complaint seeks restitution of all excess charges, an injunction against the
charging of excessive fees in the future and attorneys fees. In January 1996,
Lenders and two other posting and publishing companies were dismissed from the
action without prejudice. The case is still in the pleading stage, discovery
has not yet commenced and the purported class of plaintiffs has not yet been
certified. Management believes that Consolidated had charged publication fees
in compliance with applicable law. Consolidated denies the merits of the
allegations stated against it in the complaint. Management does not believe
that any of these matters will result in any material additional losses to the
Partnership or any material adjustments to these financial statements.
The Partnership, Pacific Thrift, CRC, and LPPC are involved in certain lawsuits
and there are claims pending against these entities which management considers
incidental to normal operations. The legal responsibility and financial impact
with respect to such litigation and claims cannot presently be determined.
However, management considers that any ultimate liability which would likely
arise from these lawsuits and claims would not materially affect the financial
position or results of operations of the Company.
F-54
<PAGE> 116
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. RETIREMENT SAVINGS PLAN
The Company implemented a retirement savings plan (defined contribution plan)
in 1994. All full-time employees who have completed six months of service and
reached age 21 are eligible to participate in the plan. Contributions are made
from employee-elected salary deferrals. The Company matched the first 6% of
employee contributions to the plan at the rate of $.50 on the dollar. During
the years ended December 31, 1995 and December 31, 1994, the Company's
contribution to the plan totaled $118,000 and $111,000, respectively.
15. WITHDRAWALS
Partnership withdrawals payable of $1,120,000 at December 31, 1995 and December
31, 1994 represent the capital withdrawals by limited partners that were
approved by the general partner but not paid by the Partnership. At December
31, 1995 and December 31, 1994, respectively, other limited partners with
original capital contributions totaling $9,400,000 and $9,103,000 have
requested withdrawals; however, these requests have not been approved.
Withdrawals were not paid or approved after July 1993 due to limitations on
withdrawals in the Partnership Agreement and the restriction on such
withdrawals in the amendments to the line of credit agreement with NatWest.
16. CHANGES IN GENERAL AND LIMITED PARTNER'S CAPITAL
The changes in general and limited partnership interests for 1994 and 1993 are
as follows:
<TABLE>
<CAPTION>
General Limited
Partnership Partnership
Interest Interests Total
- ------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Capital (deficit) -
December 31, 1992 $ 63,000 $28,767,000 $28,830,000
Contributions 266,000 35,000 301,000
Distributions (25,000) (1,918,000) (1,943,000)
Withdrawals - (1,380,000) (1,380,000)
Net loss - 1993 (42,000) (5,827,000) (5,869,000)
Special allocation - 1993
(Note 10) (266,000) 266,000 -
- ------------------------------------------------------------------------------
</TABLE>
F-55
<PAGE> 117
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. CHANGES IN GENERAL AND LIMITED PARTNER'S CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
General Limited
Partnership Partnership
Interest Interests Total
- ------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Capital (deficit) -
December 31, 1993 (4,000) 19,943,000 19,939,000
Contributions - - -
Distributions - - -
Withdrawals - - -
Net loss - 1994 (68,000) (9,446,000) (9,514,000)
- ------------------------------------------------------------------------------
Capital (deficit) -
December 31, 1994 (72,000) 10,497,000 10,425,000
==============================================================================
</TABLE>
The changes in general and limited partnership interests for 1995 are as
follows:
<TABLE>
<CAPTION>
General Limited
Partnership Partnership
Interest Interests Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital (deficit) -
January 1, 1995 $(72,000) $10,497,000 $10,425,000
Net loss - 1995 (12,000) (1,686,000) (1,698,000)
- ----------------------------------------------------------------------------
Capital (deficit) -
December 31, 1995 $(84,000) $ 8,811,000 $ 8,727,000
============================================================================
</TABLE>
Presidential Management Company holds the entire general partnership interest
in the Partnership. In addition, Presidential Management Company holds
approximately 3.8% of the limited partnership interests.
F-56
<PAGE> 118
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------
Mar 31, Jun 30, Sept 30, Dec 31,
1995 1995 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $2,612,000 $2,424,000 $2,368,000 $ 2,173,000
Interest expense 1,405,000 1,426,000 1,248,000 1,120,000
- ------------------------------------------------------------------------------
Net interest income 1,207,000 998,000 1,120,000 1,053,000
Provision for loan losses 446,000 554,000 861,000 1,428,000*
Other income 2,608,000 2,841,000 3,366,000 4,450,000
Other expense 3,592,000 3,905,000 4,494,000 5,283,000
Income tax benefit 430,000 84,000 664,000 44,000
- ------------------------------------------------------------------------------
Net income (loss) $ 207,000 $ (536,000) $ (205,000) $(1,164,000)
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
- ------------------------------------------------------------------------------
Mar 31, Jun 30, Sept 30, Dec 31,
1994 1994 1994 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 2,915,000 $ 3,514,000 $ 3,414,000 $ 1,561,000
Interest expense 1,185,000 1,200,000 1,182,000 1,360,000
Net interest income 1,730,000 2,314,000 2,232,000 201,000
Provision for loan losses 217,000 468,000 2,064,000 3,347,000**
Other income 1,143,000 1,091,000 1,149,000 2,619,000
Other expense 3,684,000 4,738,000 4,139,000 3,336,000
- ------------------------------------------------------------------------------
Net loss $(1,028,000) $(1,801,000) $(2,822,000) $(3,863,000)
==============================================================================
</TABLE>
* The increase in the provision for loan losses is primarily a result of
an increased general reserve. Management represents that it was not
practical to determine whether or not a portion of these additional
provisions should have been recorded in earlier quarters.
** The substantial increase in the provision for loan losses is due to an
increase in the level of nonperforming loans and the high level of
charge-offs. Management represents that it was not practical to determine
whether or not a portion of these substantial additional provisions should
have been recorded in earlier quarters.
F-57
<PAGE> 119
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
18. SEGMENT FINANCIAL REPORTING
The Company operates principally in two industries, real estate secured lending
(including the origination and sale of loans) and trustee and foreclosure
services. A summary of selected financial information by industry segment is
as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Interest and other
income from real
estate secured lending $19,016,000 $ 13,475,000 $ 15,210,000
Fees from trustee 3,826,000 3,931,000 4,307,000
- ------------------------------------------------------------------------------
Total revenues $22,842,000 $ 17,406,000 $ 19,517,000
- ------------------------------------------------------------------------------
Operating profit (loss)
Real estate secured
lending $(3,148,000) $ (9,741,000) $ (6,737,000)
Trustee and foreclosure
services 747,000 811,000 1,319,000
General expenses (519,000) (583,000) (450,000)
- ------------------------------------------------------------------------------
Loss before income taxes $(2,920,000) $ (9,513,000) $ (5,868,000)
- ------------------------------------------------------------------------------
Identifiable assets
Real estate secured
lending $76,896,000 $ 97,930,000 $108,966,000
Trustee and foreclosure
services 5,532,000 5,564,000 5,201,000
General assets 129,000 253,000 157,000
- ------------------------------------------------------------------------------
Total assets $82,557,000 $103,747,000 $114,324,000
==============================================================================
</TABLE>
F-58
<PAGE> 120
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY
MEMORANDUM OF UNDERSTANDING AND INITIAL ORDERS TO CEASE AND DESIST WITH THE
FEDERAL DEPOSIT INSURANCE CORPORATION AND CALIFORNIA DEPARTMENT OF CORPORATIONS
In February 1993, Pacific Thrift, the FDIC, and the California Department of
Corporations (DOC) entered into a Memorandum of Understanding (MOU). In
connection with the MOU, Pacific Thrift was required to maintain primary
capital in an amount that equals or exceeds 7.5% of its total assets; obtain
and retain qualified management; notify and obtain approval from the FDIC and
the DOC prior to adding any individual to the Board of Directors or employing
any individual as a senior executive officer of Pacific Thrift; eliminate loans
classified loss and reduce loans classified substandard to specified levels
within a specified period of time; revise, adopt, and implement policies to
provide effective guidance and control over Pacific Thrift's lending function;
develop, adopt, and implement written policies governing relationships between
Pacific Thrift, the Partnership, and other affiliated companies; establish and
maintain an adequate reserve for loan losses and develop, adopt, and implement
a policy and methodology for determining the adequacy of the reserve for loan
losses; formulate and implement a budget for all categories of income and
expense; revise, adopt, and implement a written liquidity and funds management
policy; maintain assets within certain limits; obtain written consent from the
FDIC and DOC prior to paying any cash dividends; refrain from extending
additional credit to any borrower who has a loan from Pacific Thrift that has
been adversely classified, unless the loan is classified as substandard or
doubtful and the proper approval has been obtained; and take certain other
actions.
F-59
<PAGE> 121
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
As of March 31, 1993, Pacific Thrift's total assets had moderately exceeded the
limitation provided in the MOU. In addition, Pacific Thrift made certain
payments in 1993 to the Partnership in excess of the amounts authorized under
the Personnel Services Agreement between Pacific Thrift and the Partnership.
The overpayment amount was repaid by the Partnership in April 1993. The Audit
Committee of the Board of Directors of Pacific Thrift performed an
investigation of the circumstances that allowed the overpayments to occur and
determined that such overpayments reflected a weakness in the internal control
procedures of Pacific Thrift with respect to intercompany payments.
Accordingly, new control procedures were adopted by the Board of Directors of
Pacific Thrift to prevent overpayments of any kind by Pacific Thrift to the
Partnership in the future.
In November 1993, the FDIC and DOC terminated the MOU and issued an Order to
Cease and Desist (C&D) with the consent of Pacific Thrift. The C&D prohibits
Pacific Thrift from paying excessive fees to affiliates in such a manner as to
produce operating losses; prohibits Pacific Thrift from including accrued
interest in the carrying amount of a property acquired by foreclosure on a
loan; prohibits Pacific Thrift from accepting or renewing brokered deposits
unless it is adequately capitalized and a waiver is obtained; requires Pacific
Thrift to disclose any extensions of credit to executive officers or principal
shareholders from a correspondent bank; requires Pacific Thrift to prepare and
display minimum information in its disclosure statement; requires Pacific
Thrift to comply with the limits specified in the California Industrial Loan
Company regulations on the amount of outstanding thrift certificates, based on
its unimpaired capital and surplus; requires Pacific Thrift to develop a
comprehensive asset/liability dependency policy, including establishing a range
for, and reducing, the volatile liability dependency ratio; requires Pacific
Thrift to adopt and implement a written policy to increase its liquidity; and
requires Pacific Thrift to adopt and implement a satisfactory policy governing
the relationship between Pacific Thrift and its affiliates and to reduce the
payment of management, consulting, and other fees to the affiliates to amounts
that are reasonable and necessary for the services. See Note 20.
F-60
<PAGE> 122
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
In September 1994, the FDIC issued a second C&D with the consent of Pacific
Thrift. The second C&D prohibits Pacific Thrift from operating in such a
manner as to produce low earnings; requires Pacific Thrift to refrain from
opening any additional offices without the prior written approval of the FDIC;
requires Pacific Thrift to formulate and implement a written profit plan; and
requires Pacific Thrift to provide the FDIC with a study of the operations and
profitability of its loan production office opened in June 1994. See Note 20.
CAPITAL ADEQUACY
Pacific Thrift is subject to various regulatory capital requirements
administered by the FDIC. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly discretionary - actions by the FDIC
that, if undertaken, could have a direct material effect on Pacific Thrift's
financial statements. The regulations require Pacific Thrift to meet specific
capital adequacy guidelines that involve quantitative measures under of Pacific
Thrift's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. Pacific Thrift's capital classification
is also subject to qualitative judgements by the regulators about components,
risk weightings, and other factors.
F-61
<PAGE> 123
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require Pacific Thrift to maintain minimum amounts and ratios of Tier 1 capital
(as defined in the regulations) to total average assets (as defined), and
minimum ratios of Tier 1 and total capital (as defined) to risk-weighted assets
(as defined). To be considered adequately capitalized as defined under the
Prompt Corrective Action (PCA) provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991, Pacific Thrift must maintain the minimum
Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios presented in
the table. Pacific Thrift's actual unaudited capital amounts and ratios as of
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Capital Adequacy
as of December 31, 1993
(Unaudited)
-----------------------------------------------
Required Actual
Amount (Ratio) Amount (Ratio)
-----------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital
(to average assets) $2,646,000 (4.0%) $4,654,000 (7.0%)
Tier 1 capital
(to risk-weighted assets) 2,161,000 (4.0%) 4,654,000 (8.6%)
Total capital
(to risk-weighted assets) 4,322,000 (8.0%) 5,330,000 (9.9%)
</TABLE>
Pacific Thrift incurred losses in 1994 and, in December 1994, Pacific Thrift
was notified by the FDIC that its tangible capital ratio (tangible capital
compared to average total assets) as of October 31, 1994 was less than 2%.
Based on the tangible and other capital ratios, Pacific Thrift was considered
to be "critically undercapitalized" as defined under the PCA provisions. The
PCA notice also stated that the FDIC may be required to place Pacific Thrift in
receivership in March 1995. See Subsequent Events, Note 20.
F-62
<PAGE> 124
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
As a result of such PCA designation, Pacific Thrift became subject to mandatory
requirements as of October 31, 1994, including, but not limited to, a
requirement to submit a capital restoration plan to the FDIC and various
restrictions on asset growth, acquisitions, new activities and branches,
dividend payments, management fees, and executive compensation.
Subsequent to October 31, 1994, Pacific Thrift improved its capital position
from "critically undercapitalized" to "undercapitalized" as a result of certain
capital contributions and loan sales prior to December 31, 1994. Pacific
Thrift's actual unaudited capital amounts and ratios as of December 31, 1994
were as follows:
<TABLE>
<CAPTION>
Capital Adequacy
as of December 31, 1994
(Unaudited)
------------------------------------------------
Required Actual
Amount (Ratio) Amount (Ratio)
------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital
(to average assets) $3,216,000 (4.0%) $3,112,000 (3.9%)
Tier 1 capital
(to risk-weighted assets) 2,301,000 (4.0%) 3,112,000 (5.4%)
Total capital
(to risk-weighted assets) 4,602,000 (8.0%) 3,831,000 (6.7%)
</TABLE>
In addition, Pacific Thrift received an Order to Cure Deficiency of Net Worth
(Order) from the DOC in connection with a $1,414,000 deficiency in its capital
as of December 31, 1994. The Order requires that Pacific Thrift increase its
capital to a level where the ratio of its outstanding thrift certificates
compared to capital does not exceed the permitted ratio of 15 to 1. Based on
the applicable section of the California Financial Code, failure to increase
its capital within 120 days would require the DOC to take possession of the
property and business of Pacific Thrift. See Subsequent Events, Note 20.
F-63
<PAGE> 125
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
19. REGULATORY MATTERS AND CAPITAL DELINQUENCY (CONTINUED)
Settlement with Department of Housing and Urban Development
In April 1993, Pacific Thrift was notified by the Mortgagee Review Board of the
Department of Housing and Urban Development (HUD) of certain alleged violations
of certain requirements in the origination of 59 loans selected during its
examination of Title I loan origination activities. Pacific Thrift was advised
that HUD intended to seek civil money penalties and was considering an
administrative action. Pacific Thrift filed a response to the allegations
affirming its compliance with HUD requirements. On September 15, 1993, HUD and
Pacific Thrift entered into a settlement agreement in which Pacific Thrift
agreed not to seek claims for insurance on 24 loans that violated the
prohibition against subordinating Title I loans to non-Title I loans, as well
as on three loans in which the proceeds were used for ineligible purposes. HUD
did not impose any penalties or take any other action.
20. EVENTS SUBSEQUENT TO DECEMBER 31, 1994
During February 1995, Pacific Thrift submitted its original capital restoration
plan to the FDIC, but the FDIC denied approval of the plan and required certain
modifications. During March 1995, Pacific Thrift submitted a revised capital
restoration plan, including a guarantee by the Partnership and, in May 1995,
the revised capital restoration plan was incorporated by reference in a new C&D
(see below).
In May 1995, Pacific Thrift was informed by the FDIC that, based on unaudited
financial information in the Consolidated Report of Condition and Income (Call
Report) filed for the first quarter of 1995, Pacific Thrift was "adequately
capitalized" as of March 31, 1995. Based on such Call Report, Pacific Thrift's
unaudited capital ratios as of March 31, 1995 were as follows:
<TABLE>
<CAPTION>
Capital Ratio as of March 31, 1995
(Unaudited)
- ------------------------------------------------------------------------------
Required Actual
-------- ------
<S> <C> <C>
Tier 1 capital (to average assets) 4.0% 5.5%
Tier 1 capital (to risk-weighted assets) 4.0 7.2
Total capital (to risk-weighted assets) 8.0 8.5
</TABLE>
F-64
<PAGE> 126
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
20. EVENTS SUBSEQUENT TO DECEMBER 31, 1994 (CONTINUED)
In addition, Pacific Thrift was informed by the DOC that Pacific Thrift had
cured the deficiency in its net worth as of April 30, 1995 and has complied
with the Order.
Also in May 1995, the FDIC terminated the prior C&Ds, and the FDIC and DOC
issued a new comprehensive Order to Cease and Desist (the new C&D) with the
consent of Pacific Thrift. The new C&D: requires that Pacific Thrift have and
retain qualified management; requires that Pacific Thrift have Tier 1 capital
which equals or exceeds 8% of total assets on or before September 30, 1995;
requires that Pacific Thrift maintain at least the minimum risk-based capital
levels throughout the life of the new C&D; requires Pacific Thrift to eliminate
from its books, through charge-off or collection, all assets classified "loss"
as of September 1994 within 10 days from the effective date of the new C&D;
requires Pacific Thrift to reduce assets classified "substandard" as of
September 1994 to $6.5 million within 180 days and to $5 million within 365
days; prohibits Pacific Thrift from extending any additional credit to any
borrower who has a loan with Pacific Thrift which has been charged off or
classified "loss"; requires Board of Directors or loan committee approval prior
to the extension of additional credit to a borrower who has a loan classified
"substandard"; requires Pacific Thrift to establish within 10 days, and then to
maintain on a quarterly basis, an adequate allowance for loan losses; requires
that Pacific Thrift implement within 60 days the provisions of the capital
restoration and business/profitability plans submitted to the FDIC in order to
control overhead and other expenses and restore profitability; requires that
Pacific Thrift correct the violation of the thrift-to-capital ratio required
under California law within 60 days; requires that Pacific Thrift file with the
FDIC amended Call Reports as of December 31, 1993 and as of the end of the
first three quarters of 1994 which accurately reflect Pacific Thrift's
financial condition as of those dates; requires that throughout the life of the
new C&D, Pacific Thrift shall file Call Reports which accurately reflect
Pacific Thrift's financial condition as of the end of each period; prohibits
Pacific Thrift from paying cash dividends in any amount without the prior
written approval of the FDIC; prohibits Pacific Thrift from opening any
additional offices without the prior written approval of the FDIC; and requires
the Company to submit written progress reports on a quarterly basis until the
Company accomplishes the corrections and is released by the Regional Director
of the FDIC and the Commissioner of the DOC.
F-65
<PAGE> 127
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
20. EVENTS SUBSEQUENT TO DECEMBER 31, 1994 (CONTINUED)
Noncompliance with the terms of the new C&D could result in various regulatory
actions, including the assessment of civil money penalties, termination of
deposit insurance, and placing Pacific Thrift in conservatorship of
receivership. Although there is no assurance as to the ultimate outcome, these
consolidated financial statements do not include any provisions or adjustments
that might result from the outcome of these uncertainties.
At December 31, 1995, management of Pacific Thrift believes that it is in full
compliance with the terms of the New C&D.
On February 26, 1996, Pacific Thrift was notified by the FDIC that, based on
the FDIC examination of the September 30, 1995 financial information, full
compliance with the new C&D is reported. In addition, Pacific Thrift would be
allowed to enter into a Memorandum of Understanding (MOU) that, when received
by the FDIC, would provide for the initial step towards removal of the New C&D.
The proposed MOU provides a framework for Pacific Thrift's recovery and its
provisions are similar to crucial sections of the existing C&D. However, since
the New C&D and the proposed MOU contain provisions requiring the maintenance
of a specified capital level, Pacific Thrift would be classified as "adequately
capitalized" under the regulations, and continue to be considered a troubled
institution for all regulatory purposes.
As of December 31, 1995, Pacific Thrift had increased its total risk-based
capital ratio to 12.4%, its Tier 1 risk-based capital ratio to 11.2% and its
leverage capital ratio to 9.1%, which meet the FDIC definition of "well
capitalized." However, due to the requirement of maintaining a specific
capital level, the Company would be classified as "adequately capitalized"
under the regulation.
F-66
<PAGE> 128
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
21. POTENTIAL RESTRUCTURING PLAN
On November 24, 1995, the Partnership filed a Registration Statement on Form
S-4 with the Securities and Exchange Commission ("SEC") in connection with a
proposed restructuring plan of the Partnership, the terms of which will be
presented for the vote of the limited partners in 1996. On March 1, 1996, an
Amendment to the Registration Statement on Form S-4 was filed with the SEC,
together with a Registration Statement on Form S-4 in connection with a
proposed public offering to be conducted concurrently with the restructuring
plan. The terms of the restructuring plan and concurrent public offering are
subject to change, and will not be finalized until the Registration Statements
are declared effective by the SEC. Management currently anticipates that the
restructuring plan will be presented for the vote of the limited partners of
the Partnership in April 1996.
F-67
<PAGE> 129
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE I
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1994
================================================================================
<TABLE>
<CAPTION>
Pacific Lenders
Presidential Thrift Consolidated Posting and Eliminating Entries
Mortgage and Loan Reconveyance Publishing ------------------------
Company Company Company Company Dr Cr Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 655,000 $18,700,000 $ 197,000 $ 76,000 $ - $ - $ 19,628,000
Accounts receivable 1,000 1,713,000 3,348,000 48,000 - 39,000 5,071,000
Accrued interest receivable 478,000 647,000 - - - - 1,125,000
Loans receivable 13,064,000 39,981,000 - - - - 53,045,000
Loans held for sale 2,605,000 9,406,000 - - - - 12,011,000
Receivable from related party 426,000 235,000 - - - 183,000 478,000
Excess yield receivable - 888,000 - - - - 888,000
Other real estate 6,479,000 1,142,000 - - - - 7,621,000
Property and equipment 64,000 1,304,000 139,000 4,000 - 189,000 1,322,000
Goodwill 1,749,000 - - - - - 1,749,000
Other assets 379,000 388,000 34,000 8,000 - - 809,000
Investment in subsidiaries 4,732,000 - - - 7,640,000 12,372,000 -
- ----------------------------------------------------------------------------------------------------------------------------------
$30,632,000 $74,404,000 $3,718,000 $ 136,000 $7,640,000 $12,783,000 $103,747,000
==================================================================================================================================
See independent auditors' report and notes to consolidated financial statements.
</TABLE>
F-68
<PAGE> 130
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE I
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1994
================================================================================
<TABLE>
<CAPTION>
Pacific Lenders
Presidential Thrift Consolidated Posting and Eliminating Entries
Mortgage and Loan Reconveyance Publishing ---------------------
Company Company Company Company Dr Cr Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Thrift certificates payable
Full-paid certificates $ - 58,058,000 $ - $ - $ - $ - 58,058,000
Installment certificates - 11,443,000 - - - - 11,443,000
- --------------------------------------------------------------------------------------------------------------------------------
- 69,501,000 - - - - 69,501,000
Accounts payable and accrued 971,000 1,280,000 2,187,000 89,000 56,000 - 4,471,000
expenses
Accrued interest payable 234,000 171,000 - - - - 405,000
Payable to related party 214,000 - - - 80,000 - 134,000
Mortgage notes payable 2,101,000 212,000 - - - - 2,313,000
Notes payable 14,778,000 - - - - - 14,778,000
Note payable to related party 600,000 - 86,000 - 86,000 - 600,000
Partnership withdrawals payable 1,120,000 - - - - - 1,120,000
- -------------------------------------------------------------------------------------------------------------------------------
20,018,000 71,164,000 2,273,000 89,000 222,000 - 93,322,000
- -------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- -------------------------------------------------------------------------------------------------------------------------------
Partners' capital
Common stock - 3,000,000 - - 3,000,000 - -
Additional paid-in capital - 7,880,000 - - 7,880,000 - -
Accumulated deficit - (7,640,000) - - - 7,640,000 -
Partners' capital 10,614,000 - 1,445,000 47,000 1,681,000 - 10,425,000
- -------------------------------------------------------------------------------------------------------------------------------
10,614,000 3,240,000 1,445,000 47,000 12,561,000 7,640,000 10,425,000
- -------------------------------------------------------------------------------------------------------------------------------
$30,632,000 $74,404,000 $3,718,000 $136,000 $12,783,000 $7,640,000 $103,747,000
===============================================================================================================================
See independent auditors' report and notes to consolidated financial statements.
</TABLE>
F-69
<PAGE> 131
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATING SCHEDULE - OPERATIONS
YEAR ENDED DECEMBER 31, 1994
================================================================================
<TABLE>
<CAPTION>
Pacific Lenders
Presidential Thrift Consolidated Posting and Eliminating Entries
Mortgage and Loan Reconveyance Publishing ------------------------
Company Company Company Company Dr Cr Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 2,969,000 $ 8,034,000 $ - $ - $ - $ - $11,003,000
Deposits with financial
institutions 1,000 400,000 - - - - 401,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 2,970,000 8,434,000 - - - - 11,404,000
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Thrift certificates greater
than $100,000 - 28,000 - - - - 28,000
Other thrift certificates - 2,917,000 - - - - 2,917,000
Notes payable 1,974,000 8,000 - - - - 1,982,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,974,000 2,953,000 - - - - 4,927,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 996,000 5,481,000 - - - - 6,477,000
Provision for loan losses 4,682,000 1,414,000 - - - - 6,096,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses (3,686,000) 4,067,000 - - - - 381,000
- ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and reconveyance fees - - 3,344,000 - - - 3,344,000
Other income 319,000 806,000 - 587,000 - - 1,712,000
Gain on sale of loans - 946,000 - - - - 946,000
Loan servicing fees - 545,000 - - 545,000 - -
Equity in income (loss)
of subsidiaries (2,001,000) - - - 907,000 2,908,000 -
- ----------------------------------------------------------------------------------------------------------------------------------
(1,682,000) 2,297,000 3,344,000 587,000 1,452,000 2,908,000 6,002,000
- ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 295,000 4,460,000 1,569,000 169,000 - - 6,493,000
General and administrative 1,752,000 4,081,000 1,168,000 89,000 - - 7,090,000
Related party fees 1,350,000 - - - - 545,000 805,000
Operations of other real estate 439,000 293,000 - - - - 732,000
Depreciation and amortization 310,000 437,000 29,000 - - - 776,000
- ----------------------------------------------------------------------------------------------------------------------------------
4,146,000 9,271,000 2,766,000 258,000 - 545,000 15,896,000
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (9,514,000) (2,907,000) 578,000 329,000 1,452,000 3,453,000 (9,513,000)
INCOME TAXES - 1,000 - - - - 1,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(9,514,000) $(2,908,000) $ 578,000 $329,000 $1,452,000 $3,453,000 $(9,514,000)
==================================================================================================================================
See independent auditors' report and notes to consolidated financial statements.
</TABLE>
F-70
<PAGE> 132
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE III
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Pacific Lenders Pacific
Presidential Thrift Consolidated Posting and United Eliminating Entries
Mortgage and Loan Reconveyance Publishing Group, -----------------------
Company Company Company Company Inc. Dr Cr Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 609,000 $ 9,550,000 $ 283,000 $ 47,000 $ - $ - $ - $10,489,000
Accounts receivable 1,000 126,000 2,925,000 285,000 - - - 3,337,000
Accrued interest receivable 357,000 546,000 - - - - - 903,000
Loans receivable 3,332,000 40,576,000 - - - - - 43,908,000
Loans held for sale 3,000,000 9,577,000 - - - - - 12,577,000
Receivable from related party 417,000 116,000 - - - - 186,000 347,000
Excess yield receivable - 2,725,000 - - - - - 2,725,000
Other real estate 1,408,000 1,748,000 - - - - - 3,156,000
Property and equipment 48,000 1,269,000 115,000 20,000 - - 54,000 1,398,000
Goodwill 1,808,000 - - - - - - 1,808,000
Other assets 90,000 1,665,000 44,000 6,000 104,000 - - 1,909,000
Investment in subsidiaries 7,970,000 - - - - 4,485,000 12,455,000 -
- -----------------------------------------------------------------------------------------------------------------------------------
$19,040,000 $67,898,000 $3,367,000 $358,000 $104,000 $4,485,000 $12,695,000 $82,557,000
===================================================================================================================================
See independent auditors' report and notes to consolidated financial statements.
</TABLE>
F-71
<PAGE> 133
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE III
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Pacific Lenders Pacific
Presidential Thrift Consolidated Posting and United Eliminating Entries
Mortgage and Loan Reconveyance Publishing Group, -----------------------
Company Company Company Company Inc. Dr Cr Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND PARTNERS'
CAPITAL
Thrift certificates payable
Full-paid certificates $ - $35,881,000 $ - $ - $ - $ - $ - $35,881,000
Installment certificates - 24,275,000 - - - - - 24,275,000
- -----------------------------------------------------------------------------------------------------------------------------------
- 60,156,000 - - - - - 60,156,000
Accounts payable and
accrued expenses 694,000 769,000 2,444,000 132,000 - 21,000 - 4,018,000
Accrued interest payable 170,000 103,000 - - - - - 273,000
Payable to related party 345,000 - - - 101,000 165,000 - 281,000
Mortgage notes payable 560,000 51,000 - - - - - 611,000
Notes payable 6,771,000 - - - - - - 6,771,000
Note payable to related
party 600,000 - - - - - - 600,000
Partnership withdrawals
payable 1,120,000 - - - - - - 1,120,000
- -----------------------------------------------------------------------------------------------------------------------------------
10,260,000 61,079,000 2,444,000 132,000 101,000 186,000 - 73,830,000
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- -----------------------------------------------------------------------------------------------------------------------------------
Partners' capital
Common stock - 3,000,000 - - - 3,000,000 - -
Additional paid-in capital - 8,304,000 - - 3,000 8,307,000 - -
Accumulated deficit - (4,485,000) - - - - 4,485,000 -
Partners' capital 8,780,000 - 923,000 226,000 - 1,202,000 - 8,727,000
- -----------------------------------------------------------------------------------------------------------------------------------
8,780,000 6,819,000 923,000 226,000 3,000 12,509,000 4,485,000 8,727,000
- -----------------------------------------------------------------------------------------------------------------------------------
$19,040,000 $67,898,000 $3,367,000 $358,000 $104,000 $12,695,000 $4,485,000 $82,557,000
===================================================================================================================================
See independent auditors' report and notes to consolidated financial statements.
</TABLE>
F-72
<PAGE> 134
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE IV
CONSOLIDATING SCHEDULE - OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Pacific Lenders Pacific
Presidential Thrift Consolidated Posting and United Eliminating Entries
Mortgage and Loan Reconveyance Publishing Group, ---------------------
Company Company Company Company Inc. Dr Cr Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 1,872,000 $ 7,013,000 $ - $ - $ - $ - $ - $8,885,000
Deposits with financial
institutions 10,000 682,000 - - - - - 692,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,882,000 7,695,000 - - - - - 9,577,000
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Thrift certificates greater
than $100,000 - 7,000 - - - - - 7,000
Other thrift certificates - 3,813,000 - - - - - 3,813,000
Notes payable 1,379,000 - - - - - - 1,379,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,379,000 3,820,000 - - - - - 5,199,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 503,000 3,875,000 - - - - - 4,378,000
Provision for loan losses 1,894,000 1,395,000 - - - - - 3,289,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (expense)
after provision for loan
losses (1,391,000) 2,480,000 - - - - - 1,089,000
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and reconveyance fees - - 3,248,000 - - - - 3,248,000
Other income 139,000 353,000 - 577,000 - - 53,000 1,122,000
Gain on sale of loans - 8,895,000 - - - - - 8,895,000
Loan servicing fees - 351,000 - - - 351,000 - -
Equity in income of
subsidiaries 4,016,000 - - - - 4,016,000 - -
- ------------------------------------------------------------------------------------------------------------------------------------
4,155,000 9,599,000 3,248,000 577,000 - 4,367,000 53,000 13,265,000
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 392,000 5,608,000 1,712,000 146,000 - - - 7,858,000
General and administrative 1,192,000 4,002,000 927,000 152,000 - - - 6,273,000
Related party fees 1,363,000 - - - - - 351,000 1,012,000
Operations of other real estate 1,120,000 92,000 - - - - - 1,212,000
Depreciation and amortization 529,000 446,000 26,000 - - - 82,000 919,000
- ------------------------------------------------------------------------------------------------------------------------------------
4,596,000 10,148,000 2,665,000 298,000 - - 433,000 17,274,000
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAXES (BENEFIT) (1,832,000) 1,931,000 583,000 279,000 - 4,367,000 486,000 (2,920,000)
INCOME TAXES (BENEFIT) 1,000 (1,224,000) 1,000 - - - - (1,222,000)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(1,833,000) $ 3,155,000 $ 582,000 $279,000 $ - $4,367,000 $486,000 (1,698,000)
====================================================================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-73
<PAGE> 135
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.3 Fifth Amended and Restated Certificate and Agreement of Limited
Partnership of the Registrant (the "Partnership Agreement"), dated as
of September 7, 1989, incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form S-2, as filed with the
Securities and Exchange Commission August 15, 1989, as amended by
Amendment No. One thereto, as filed with the Securities and Exchange
Commission on October 10, 1989 (Registration No. 33-30517) (the "1989
Registration Statement").
3.4 Certificate of Limited Partnership of the Registrant on Form LP-1, as
filed with the California Secretary of State and currently in effect,
incorporated by reference to Exhibit 3.2 of the Registration Statement
on Form S-11, filed with the Securities and Exchange Commission on
November 13, 1984, as amended on February 4 and March 1, 1985, and
declared effective on March 6, 1985 (Registration No. 2-94289) (the
"1984 Registration Statement").
3.5 First Amendment to the Partnership Agreement dated as of May 15, 1993,
incorporated by reference to Exhibit 3.3 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993, as filed with
the Securities and Exchange Commission on November 27, 1994 (the "1993
Annual Report").
3.6 Second Amendment to the Partnership Agreement dated as of January 1,
1994, incorporated by reference to Exhibit 3.4 of the 1993 Annual
Report.
10.1 Employment Agreement by and between Pacific Thrift and Loan Company,
Inc. and Frank Landini, incorporated by reference to Exhibit 10.6 of
the Registrant's Registration Statement on Form S-4, as filed with the
Securities and Exchange Commission on November 24, 1995 (the "S-4
Registration Statement").
10.2 Employment Agreement, dated May 9, 1984, by and among Pacific and Loan
Association and the Registrant, as employers, and Joel R. Schultz, as
employee, as currently in effect only with the Registrant, incorporated
by reference to Exhibit 10.2 of the 1984 Registration Statement.
10.3 Employment Agreement, dated May 9, 1984, by and among Pacific and Loan
Association and the Registrant, as employers, and Norman A. Markiewicz,
as employee, as currently in effect only with the Registrant,
incorporated by reference to Exhibit 10.3 of the 1984 Registration
Statement.
10.4 Loan Agreement (the "Loan Agreement"), dated as of August 28, 1990, as
amended and restated May 20, 1992, and as further amended and restated
as of September 28, 1994, by and among National Westminster Bank USA
("NatWest"), as Agent and a participating Bank, the banks signatory
thereto (the "Banks"), and the Registrant, incorporated by reference to
Exhibit 10.4 of the 1993 Annual Report.
10.5 Letter Agreement to amend Loan Agreement, dated October 26, 1995,
incorporated by reference to Exhibit 10.14 to S-4 Registration
Statement.
10.6 Agreement for Purchase of Limited Partnership Interests of Consolidated
Reconveyance Company and Lenders Posting and Publishing Company, dated
as of July 1, 1990, incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1990, as filed with the Securities and Exchange Commission on March 31,
1991.
10.7 Master Loan Purchase Agreement dated as of June 21, 1995 by and between
Pacific Thrift and Loan Company and Aames Capital Corporation,
incorporated by reference to Exhibit 10.7 of the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1994, as filed with
the Securities and Exchange Commission on July 26, 1995.
10.8 Amendment to Loan Agreement dated as of November 28, 1995, incorporated
by reference to Exhibit 10.17 to the S-4 Registration Statement.
S-1
<PAGE> 136
10.9 Amendment to Loan Agreement dated as of March 15, 1996.
16.1 Letter of Ernst & Young regarding termination dated September 27, 1995,
incorporated by reference to the Partnership's Report on Form 8-K dated
September 12, 1995, as filed with the Securities and Exchange
Commission on September 28, 1995.
21.1 Subsidiaries of the Registrant, incorporated to Exhibit 21.1 of the S-4
Registration Statement.
S-1
<PAGE> 1
EXHIBIT 10.9
SECOND AMENDMENT TO LOAN AGREEMENT
This SECOND AMENDMENT TO LOAN AGREEMENT (this "Agreement"), dated as
of march 15, 1996, is entered into among PRESIDENTIAL MORTGAGE COMPANY, a
California limited partnership (the "Borrower"), the financial institutions
party to the Loan Agreement, and NATWEST BANK N.A., a national banking
association (formerly known as National Westminster Bank USA), as the Agent.
Preliminary Statement
A. The Borrower, the Agent, and the Banks, are parties to the Loan
Agreement.
B. The Borrower has requested that the Agent and the Banks amend the
Loan Agreement in certain respects as hereinafter specified.
C. The parties hereto are willing to enter into this Agreement.
NOW, THEREFORE, for valuable consideration (the receipt and
sufficiency of which are acknowledged), the parties hereto agree as follows:
ARTICLE I
DEFINITIONS, RULES OF CONSTRUCTION
1.1 Definitions. As used herein:
"Agent" means NatWest Bank N.A., a national banking association,
formerly known as National Westminster Bank USA, as agent on behalf of itself
and the banks under the Loan Agreement, and any successor thereto in such
capacity.
"Banks" means the banks party to the Loan Agreement as of the date
first set forth above.
"Borrower" has the meaning set forth in the introduction hereto.
"First Amendment" means the Amendment to Loan Agreement, dated as of
November 29, 1995, among the Borrower, the financial institutions party to the
Loan Agreement, and Agent, which Amendment to Loan Agreement amends the Loan
Agreement as set forth therein.
<PAGE> 2
"Loan Agreement" means that certain Loan Agreement, dated as of August
28, 1990, as amended, as amended and restated as of May 20, 1992, as amended,
as amended and restated as of September 28, 1994, as amended by the First
Amendment, as further amended to the date first set forth above, between the
Borrower, as the borrower thereunder, and NatWest, as the Agent and the sole
Bank thereunder.
"NatWest" means NatWest Bank N.A., a national banking association,
formerly known as National Westminster Bank USA.
"Released Parties" means, collectively, the Agent, the Banks, and all
of the Agent's and each Bank's current and former shareholders, directors,
officers, employees, accountants, attorneys, and agents, and all of their
respective successors and assigns.
1.2 Certain Rules of Construction. For purposes of this Agreement and
unless otherwise specified herein:
1.2.1 Construction. References to the plural include the singular
and to the singular include the plural, references to any gender include any
other gender, the part includes the whole, the term "including" is not
limiting, and the term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or." References to any fiscal
period are references to fiscal periods of the Borrower. References in this
Agreement to any determination by the Agent, the Required Banks, or any Bank
include good faith estimates (in the case of quantitative determinations) and
good faith estimates (in the case of qualitative determinations) by the Agent,
the Required Banks, or any Bank, as applicable; any determination made in good
faith by the Agent, the Required Banks, or any Bank shall be conclusive absent
manifest error. The words "hereof," "herein," "hereby," and "hereunder," and
any other similar words, refer to this Agreement as a whole and not to any
particular provision of this Agreement. Article, section, subsection, clause,
exhibit and schedule references are to this Agreement. Any reference to this
Agreement or any other Loan Document includes all permitted alterations,
amendments, changes, extensions, modifications, renewals, or supplements
thereto or thereof, as applicable.
1.2.2 No Presumption Against Any Party. Neither this Agreement nor
any uncertainty or ambiguity herein shall be construed or resolved using any
presumption against any party hereto, whether under any rule of construction or
otherwise. On the contrary, this Agreement has been reviewed by each of the
parties and their counsel and, in the case of any ambiguity or uncertainty,
shall be construed and interpreted according to the
-2-
<PAGE> 3
ordinary meaning of the words used so as to fairly accomplish the purposes and
intentions of all parties hereto.
1.2.3 Independence of Provisions. All agreements and covenants
hereunder shall be given independent effect such that if a particular action or
condition is prohibited by the terms of any such agreement or covenant, the
fact that such action or condition would be permitted within the limitations of
another agreement or covenant shall not be construed as allowing such action to
be taken or condition to exist.
1.2.4 Other Defined Terms. Capitalized terms used in this Agreement,
unless otherwise defined, shall have the respective meanings specified in the
Loan Agreement.
ARTICLE II
AMENDMENTS, MODIFICATIONS, AND REAFFIRMATIONS
2.1 Amendment To The Loan Agreement. The Borrower, the Banks, and the
Agent hereby amend the Loan Agreement as follows:
The Borrower hereby acknowledges and agrees that the current
outstanding principal amount of the Loans is $6,500,000.00. In light thereof,
Section 2.5(b)(i) of the Loan Agreement is hereby amended to read in full as
follows:
(b) Mandatory Prepayments.
(i) The Borrower shall prepay the Loans so that the
outstanding principal balance of the Loans immediately after
such prepayment will not exceed, on each of the dates set forth
below, the correlative amount set forth below for such date:
Maximum Outstanding
Date Principal Balance of the Loans
---- ------------------------------
03/31/96 $6,155,000
06/30/96 $3,755,000
09/30/96 $2,755,000
12/31/96 $1,755,000
03/31/97 $755,000
06/30/97 $0
The Borrower shall give notice of such prepayments
to the Agent pursuant to subsection (d) of this section.
-3-
<PAGE> 4
Notwithstanding the foregoing, the Borrower shall prepay the Loans so
that the outstanding principal balance of the Loans immediately after such
prepayment will not exceed the amount of $4,993,000 upon the first to occur of
(x) the completion of the initial public offering of the common stock of
Pacific Unified Mortgage, Inc., a Delaware corporation, as contemplated by
Section 2.2 of the First Amendment, (y) ten days following the date that the
Federal Deposit Insurance Corporation terminates the cease and desist order
previously issued to Pacific Thrift, dated May 18, 1995, thereby allowing
Pacific Thrift to pay upstream stock dividends to the Borrower (the Borrower
hereby agreeing, upon the termination of such cease and desist order, to cause
Pacific Thrift to pay upstream stock dividends to the Borrower in the maximum
amount which will not result in Pacific Thrift's core capital falling below
8.25%), and (z) May 31, 1996.
2.2 Amendment Fee; Reimbursement of Costs and Expenses. In consideration
of the Agent's and NatWest's agreement to amend the Loan Agreement as provided
in this Agreement, the Borrower hereby agrees to pay the Agent an amendment fee
equal to $10,000 simultaneously with the execution and delivery of this
Agreement by the Borrower. The amendment fee herein described is in addition
to the Administration Fees payable by the Borrower pursuant to Section
2.6(a)(ii) of the Loan Agreement. Upon demand, the Borrower will reimburse the
Agent for the costs and expenses of its outside counsel in negotiating and
preparing this Agreement.
2.3 No Other Amendments; Reaffirmation. Except as expressly amended
hereby, the Loan Agreement is in all respects ratified and confirmed and shall
remain unchanged and in full force and effect. The Borrower reaffirms its
obligations and duties under the Loan Agreement, as amended hereby.
ARTICLE III
RELEASE
3.1 Release.
3.1.1 No Present Claims. The Borrower acknowledges and agrees that:
(a) the Borrower has no claim or cause of action against any Released Party
arising under or in any way related to the Loans or the Loan Documents; (b) the
Borrower has no offset right, counterclaim, or defense of any kind against any
of the obligations and liabilities of the Borrower under the Loan Documents;
and (c) each Released Party has heretofore properly performed and satisfied in
a timely manner any and all of such Released Party's obligations, if any, to
the Borrower. The Agent
-4-
<PAGE> 5
and the Banks desire, and the Borrower agrees, to eliminate any possibility
that any past conditions, acts, omissions, events, circumstances, or matters
would impair or otherwise adversely affect the Agent or the Banks or any of the
Agent's or the Banks' rights, interests, collateral, security, or remedies
under the Loan Documents. Therefore, the Borrower, on behalf of the Borrower
and all successors and assigns of and any and all other parties claiming rights
through the Borrower, unconditionally releases, acquits, and forever discharges
each and every Released Party from: (i) all liabilities, obligations, duties,
or indebtedness of any of the Released parties to the Borrower, whether known
or unknown, arising prior to the date first above written; and (ii) all calims,
offsets, causes of action, suits, or defenses, whether known or unknown, which
the Borrower might otherwise have against any of the Released Parties on
account of any condition, act, omission, event, contract, liability,
obligation, indebtedness, claim, cause of action, defense, circumstance, or
matter of any kind which existed, arose, or occurred at any time prior to the
date first written above. As further consideration for the above release, the
Borrower specifically agrees, represents, and warrants that the matters
released herein are not limited to matters which are known or disclosed, and
the Borrower hereby waives any and all rights and benefits which the Borrower
now has, or in the future may have, conferred upon the Borrower by virtue of
the provisions of either New York law or the provisions of Section 1542 of the
Civil Code of the State of California which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
3.2 Waiver of Unknown Claims. The Borrower is aware that the Borrower
may later discover facts in addition to or different from those which the
Borrower now knows or believes to be true with respect to the releases given
herein, and that it is nevertheless the Borrower's intention to settle,
release, and discharge fully, finally, and forever all of these matters, known
or unknown, suspected or unsuspected, which previously existed, now exist, or
may exist. In furtherance of such intention, the Borrower specifically
acknowledges and agrees that the releases given in this Agreement shall be and
shall remain in effect as full and complete releases of the matters being
released, notwithstanding the discovery or existence of any such additional or
different facts and that such releases shall not be subject to termination or
rescission by reason of any such additional or different facts.
-5-
<PAGE> 6
3.3 Warranty of Non-Assignment. The Borrower hereby represents and
warrants that it has not previously assinged or transferred, or purported to
assign or transfer, to any Person any of the claims, demands, grievances,
liabilities, debts, accounts, obligations, costs, expenses, liens, rights,
actions, or causes of action released by the terms of this Agreement.
ARTICLE IV
GENERAL PROVISIONS
4.1 Conditions to the Effectiveness of this Agreement. This Agreement
shall become effective upon the execution and delivery of this Agreement by
both the Borrower and the Agent.
4.2 Entire Agreement. This Agreement embodies the entire agreement and
understanding among the parties hereto relating to the subject matter hereof
and supersedes all prior agreements and understandings relating to the subject
matter hereof. No course of prior dealings among the parties hereto, no usage
of the trade, and no parol or extrinsic evidence of any nature, shall be used
or be relevant to supplement, explain or modify any term used herein.
4.3 Governing Law; Jurisdiction and Venue; Waiver of Trial by Jury.
4.3.1 GOVERNING LAW. THE VALIDITY, CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT OF THIS AGREEMENT, AND THE RIGHTS OF THE PARTIES HERETO AND
THERETO, SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK.
4.3.2 JURISDICTION AND VENUE. THE PARTIES HERETO AGREE THAT ALL
ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT OR THE LOAN
DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS
LOCATED IN THE CITY OF NEW YORK, STATE OF NEW YORK OR, AT THE SOLE OPTION OF
THE REQUIRED LENDERS, IN ANY OTHER COURT IN WHICH THE LENDER SHALL INITIATE
LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS JURISDICTION OVER THE SUBJECT
MATTER AND PARTIES IN CONTROVERSY. EACH PARTY HERETO WAIVES ANY RIGHT TO
ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT
ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 6.3.2 AND STIPULATES
THAT THE STATE AND FEDERAL COURTS LOCATED IN THE CITY OF NEW YORK, STATE OF NEW
YORK, SHALL HAVE IN PERSONAM JURISDICTION AND VENUE OVER EACH SUCH PARTY FOR
THE PURPOSE OF LITIGATING ANY SUCH DISPUTE, CONTROVERSY, OR PROCEEDING ARISING
OUT OF OR RELATED TO THIS AGREEMENT, OR THE LOAN DOCUMENTS.
-6-
<PAGE> 7
4.3.3 WAIVER OF TRIAL BY JURY. THE PARTIES TO THIS AGREEMENT HEREBY
EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION, CAUSE
OF ACTION, OR PROCEEDINGS ARISING UNDER OR WITH RESPECT TO THIS AGREEMENT, OR
THE LOAN DOCUMENTS, OR IN ANY WAY CONNECTED WITH, OR RELATED TO, OR INCIDENTAL
TO, THE DEALINGS OF THE PARTIES HERETO WITH RESPECT TO THIS AGREEMENT, THE LOAN
DOCUMENTS, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND IRRESPECTIVE OF WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE. THE PARTIES TO THIS AGREEMENT AGREE THAT ANY
SUCH CLAIM, DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING SHALL BE DECIDED BY
A COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION 6.3.3 WITH ANY COURT AS WRITTEN EVIDENCE
OF THE CONSENT OF THE OTHER PARTY OR PARTIES HERETO TO WAIVER OF THE RIFHT TO
TRIAL BY JURY.
4.4 Counterparts; Telefacsimile Signatures. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the
same effect as if all signatures were upon the same insturment. Delivery of an
executed counterpart of the signature page to this Agreement by telefacsimile
shall be effective as delivery of a manually executed counterpart of this
Agreement, and any party delivering such an executed counterpart of the
signature page to this Agreement by telefacsimile to any other party shall
thereafter also promptly deliver a manually executed counterpart of this
Agreement to such other party, provided that the failure to deliver such
manually executed counterpart shall not affect the validity, enforceability, or
binding effect of this Agreement.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
THE BORROWER: PRESIDENTIAL MORTGAGE COMPANY,
a California limited partnership
By: Presidential Management Company,
a California limited partnership
Title: General Partner
By: Presidential Services Corporation,
a California corporation
Title: General Partner
By:
---------------------------------------
Joel R. Schultz
Title: President
THE AGENT: NATWEST BANK N.A.,
a national banking association
By:
---------------------------------------
Title:
---------------------------------------
-8-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,552
<INT-BEARING-DEPOSITS> 237
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0
0
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<EXPENSE-OTHER> 17,274
<INCOME-PRETAX> (2,920)
<INCOME-PRE-EXTRAORDINARY> (2,920)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,698)
<EPS-PRIMARY> 0
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<YIELD-ACTUAL> 5.79
<LOANS-NON> 793
<LOANS-PAST> 1,317
<LOANS-TROUBLED> 948
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<ALLOWANCE-OPEN> 4,307
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