<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
THE SECURITIES EXCHANGE ACT OF 1934
[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, 1997
-----------------
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 _______
PACIFICAMERICA MONEY CENTER, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 6162 95-3302338
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
21031 Ventura Boulevard
Woodland Hills, California 91364
(818) 992-8999
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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. YES [X] NO [ ].
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
The number of shares of common stock of the Registrant outstanding as of
March 25, 1998: 5,017,583 shares.
The aggregate market value of the outstanding common stock of the
Registrant held by non-affiliates of the Registrant, based on the market price
at March 25, 1998 was approximately $89,670,856.
Documents Incorporated by Reference
-----------------------------------
Certain portions of the following documents are incorporated by
reference into Part III of this Form 10-K: The Registrant's Proxy Statement for
the 1998 Annual Meeting of Shareholders.
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PACIFICAMERICA MONEY CENTER, INC.
PART I
Except for historical information contained herein, statements in this
report are forward-looking statements that involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Such risks include, among others, reliance on
continuing securitization of loans; risk of loss on the interest-only strip
receivables resulting from differences between actual and assumed prepayments or
loss experience; risk of further changes in accounting methods for gains on sale
of loans for securitization; loan delinquencies and defaults; possible decline
of collateral values for loans; fluctuations in interest rates; increased
competition in the lending industry resulting in lower lending rates and/or
reduced loan originations; and possible regulatory enforcement actions and
legislative action. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Risk Factors" below for a more
complete description of these factors.
ITEM 1. BUSINESS
GENERAL
PacificAmerica Money Center, Inc. (the "Company") is a mortgage banking
company primarily engaged, through its subsidiaries, in the business of
originating, purchasing, selling, holding and servicing home equity mortgage
loans secured by single family residences. The Company has, since its formation
in 1981, specialized in home equity loans for borrowers whose credit histories
or other factors limit their access to credit from traditional mortgage lenders.
The Company currently originates fixed and adjustable rate residential mortgage
loans to borrowers of all credit grades. Borrowers generally obtain loans from
the Company for the purpose of financing a purchase of the related property,
refinancing an existing mortgage loan on more favorable terms, consolidating
debt or obtaining cash proceeds for personal use by the borrowers.
The Company originates loans through its Wholesale and Retail Divisions.
The Wholesale Division currently consists of approximately 100 employee loan
representatives and over 3,100 independent mortgage loan brokers. The Retail
Division is currently comprised of 50 offices throughout the United States and
approximately 110 employee loan representatives. The Company's business plan is
to continue to expand its loan origination volume primarily by opening new
retail branches throughout the United States and increasing its direct marketing
efforts, and secondarily by continuing to add representatives and independent
mortgage loan brokers to its Wholesale Division.
The Company sells substantially all of its new loans for securitization.
Until the fourth quarter of 1996, the Company sold substantially all of its
loans for a cash premium, and did not retain any residual interest in the loans
sold. Since the fourth quarter of 1996, the Company has retained a residual
interest in each of the securitization pools sponsored by Aames Capital
Corporation ("Aames") and Advanta Mortgage Corp. USA Conduit, Inc. ("Advanta"),
in which its loans have been sold. In the fourth quarter of 1997, the Company
completed its first direct securitization with the sale of $100 million of home
equity loans to the PacificAmerica Home Equity Loan Trust Series 1997-1. For the
years ended December 31, 1995, 1996 and 1997, the Company sold a total of $145
million, $338 million and $743 million of loans for securitization. The Company
completed its second direct securitization on March 25, 1998 with the sale of
$100 million and prefunding for the sale of an additional $30 million of home
equity loans to the PacificAmerica Home Equity Loan Trust Series 1998-1. The
Company has released servicing on loans sold to Aames and Advanta, and has an
agreement for Advanta to act as sub-servicer on all loans sold to the
PacificAmerica 1997-1 and 1998-1 Trusts.
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The Company's principal operating subsidiary is Pacific Thrift and Loan
Company, a California corporation ("Pacific Thrift") and a California licensed
thrift and loan formed in 1988. Pacific Thrift originates loans for
securitization, services the Company's loan portfolio of approximately $20.6
million (net of loan loss reserves) and issues deposits insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Pacific Thrift is subject to
regulation by both the FDIC and the California Department of Financial
Institutions (the "DFI"). The Company also conducts business through
PacificAmerica Money Centers, Inc. ("PacificAmerica Centers"), a Delaware
corporation which is licensed or exempt from licensing under the mortgage
lending laws of 22 states, has license applications pending in 10 additional
states, and intends to file applications in 18 additional states.
Until December 31, 1996, the Company also engaged in the trust deed
foreclosure services business through three subsidiaries: Consolidated
Reconveyance Company ("CRC"), Lenders Posting and Publishing Company ("LPPC")
and Consolidated Reconveyance Corporation ("CRCWA"). The Company sold
substantially all of the assets of CRC and LPPC and all of the stock of CRCWA as
part of the Company's strategy to concentrate all of its financial and human
resources on its primary business of residential lending for securitization.
The Company's main offices are located at 21031 Ventura Boulevard,
Woodland Hills, California 91364. Its telephone number is (818) 992-8999.
1997 STOCK SPLIT EFFECTED BY MEANS OF A STOCK DIVIDEND
On August 13, 1997, the Company paid a one-for-one stock dividend to all
stockholders of record on July 31, 1997, having the effect of a two-for-one
stock split. All share and per share data reported herein reflects the
one-for-one stock dividend.
1996 CORPORATE RESTRUCTURING
The Company commenced its operations in 1981 as a California limited
partnership under the name Presidential Mortgage Company (the "Partnership"). On
June 27, 1996, the Company and the Partnership completed a restructuring plan
(the "Restructuring"), pursuant to which all of the assets and liabilities of
the Partnership were transferred to the Company in exchange for shares of Common
Stock of the Company. As a result of the Restructuring, 1,206,468 shares of
Common Stock were issued to partners of the Partnership for their interests in
the Partnership and $2,855,600 was paid by the Company to partners electing a
"cash out option." As part of the Restructuring, the Company also sold to the
general partner of the Partnership warrants (the "General Partner Warrants"),
each exercisable until December 27, 1997, for one share of Common Stock at an
exercise price of $7.50 per share. Concurrently with the solicitation of consent
of the partners for the Restructuring, the Company made a rights offering to the
partners of the Partnership and certain other related persons of the Partnership
(the "Rights Offering"), pursuant to which a total of 649,256 shares were
subscribed for and issued at $5.00 per share and 129,850 warrants ("Subscriber
Warrants") were issued to the subscribers, each exercisable until June 27, 1998,
for one share of Common Stock at an exercise price of $6.25 per share.
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Concurrently with the Restructuring, the Company completed a public offering of
an additional 1,756,420 shares of Common Stock at $5.00 per share (the "Public
Offering").
As of December 31, 1997, a total of 1,124,990 General Partner Warrants
had been exercised, and the remaining General Partner Warrants had expired. As
of March 13, 1998, a total of 76,540 Subscriber Warrants had been exercised, and
51,242 remained outstanding. Any unexercised Subscriber Warrants will expire on
June 27, 1998.
BUSINESS STRATEGY
The Company's business strategy is to continue the expansion of loans
originated for securitization in 1998. The Company's goal is to increase loan
production to an average of $100 million per month in 1998, from a high point of
$80 million per month reached in the fourth quarter of 1997. The Company intends
to take the following actions in 1998 to further its strategy:
o increase the number of retail offices from 40 to 70 and increase the
number of retail loan representatives from 95 to 200 throughout
the country;
o increase the number of wholesale loan representatives from 88 to 125
in regions throughout the country where the Company has not already
established a strong presence;
o increase use of telemarketing throughout the country; and
o increase loan-to-value ratios to borrowers with higher credit
scores.
The Company has also retained Friedman, Billings, Ramsey & Co., Inc., to
assist it in locating strategic opportunities. The Company intends to actively
pursue strategic opportunities in 1998, while continuing to execute its own plan
for loan origination growth. There can be no assurance that any transactions
will be completed by the Company as a result of its engagement of Friedman,
Billings, Ramsey & Co., Inc.
MORTGAGE LOAN PRODUCTION
GENERAL
The Company has specialized in residential mortgage loans to borrowers
underserved by traditional financial institutions since its formation in 1981.
Until the Company began selling loans for securitization in late 1993, the
Company generally originated loans to hold and service in its own loan
portfolio. From 1994 through 1996, the Company steadily increased the volume of
loans originated for sale and securitization and decreased the volume of loans
originated for portfolio investment. In 1996, the Company determined to
discontinue the origination of portfolio loans and concentrate all of its
resources on increasing the volume of loans originated for sale and
securitization.
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Unlike many of its competitors, the Company directly originates all
loans sold by it for securitization. The Company believes that its control of
the underwriting process leads to higher quality loans and, ultimately, lower
loan losses and possibly slower prepayment speeds than loans purchased in bulk
from correspondent lenders.
The Company historically has originated the substantial majority of its
loans through independent loan brokers. As the volume of lending for
securitization increased, the Company determined to expand its business through
retail loan production. Accordingly, the Company has increased retail lending as
a percentage of total loans originated for sale over the past three years. The
following table sets forth the combined loan originations by category and
purchases, sales and repayments for the past two years:
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
(Dollars in Thousands)
<S> <C> <C>
Beginning Balance(1) ....................... $ 51,662 $ 56,485
Loans Originated for Sale
Wholesale ..................... 584,527 292,116
Retail ........................ 183,699 43,355
Portfolio Loans originated ......... -0- 37,978
Loans purchased ............................ -0- -0-
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Total .............................. 819,888 429,943
Less:
Principal repayments ..................... (1,053) (12,388)
Sales of loans originated for sale ....... (742,776) (337,563)
Sales of portfolio loans ................. (17,063) (26,176)
Transfers of REO net of reserves ......... (2,936) (3,945)
Other net changes(2) ..................... (151) 1,791
--------- ---------
Total loans(1) ..................... $ 55,909 $ 51,662
========= =========
</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.
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RETAIL LOAN OFFICE NETWORK
The Company originates home equity mortgage loans through a network of
retail loan offices. Prior to 1994, the Company conducted lending operations
exclusively in California. For the last three years, the Company has steadily
expanded operations throughout the United States. At March 15, 1998, the Company
operated 50 retail loan offices in 23 states and the District of Columbia,
including 11 in California; 12 in the western states of Nebraska, New Mexico,
Colorado, Nevada, Arizona, Oregon, Utah, Washington, and Alaska; 11 in the
mid-Atlantic states of Pennsylvania, Maryland, Virginia, Delaware, New Jersey
and the District of Columbia; 7 in the northeastern states of New York,
Connecticut and New Hampshire; and 9 in the mid-western states of Ohio,
Michigan, Wisconsin, Kentucky and Indiana. The Retail Division seeks to
originate loans directly with borrowers through contacts developed from mailing
lists, using telemarketing and direct mail. The Company seeks to expand its
Retail Division to approximately 70 offices by the end of 1998, and the number
of its retail loan representatives from 95 at the end of 1997 to approximately
200 by the end of 1998. There can be no assurance that these goals will be
achieved.
WHOLESALE LENDING NETWORK
The Company also originates home equity mortgage loans through a
current network of 100 employee loan representatives and over 3,100 independent
mortgage loan brokers. Loan representatives have the ability to work with or
without offices within regions throughout the United States. Currently, the
Company's loan representatives are located in and originate loans in 44 states.
Loan representatives maintain contacts with the independent mortgage loan
brokers who refer loan applications to the Company. Mortgage loan brokers act as
intermediaries between property owners and the Company in arranging mortgage
loans, and provide a cost effective means of originating loans over a large
geographic area. Management has developed policies and procedures to service
these brokers which emphasize timely decision making and funding and a
competitive fee structure, which encourage brokers to continue bringing new
loans to the Company. The Company seeks to expand its Wholesale Loan Division
from 88 loan representatives at the end of 1997 to approximately 125 by the end
of 1998. There can be no assurance that this goal will be achieved.
UNDERWRITING
The following is a description of the current underwriting guidelines
customarily employed by the Company with respect to the origination of home
equity mortgage loans. The Company's underwriting guidelines may change from
time to time as management of the Company deems appropriate.
The Company views its underwriting process as one that begins with the
marketing of its products and includes each function involved in the lending
activity through the ultimate loan
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funding. As an integral part of this process, the Company trains its
telemarketing representatives, account executives, account managers, loan
processors, and underwriters to evaluate each loan request relative to the
Company's underwriting guidelines and overall lending philosophy. Such
philosophy is to evaluate the merits of each loan application on a case-by-case
basis in accordance with the Company's underwriting guidelines. On occasion,
such an evaluation leads the Company to approve a loan application that does not
completely meet the guidelines. Conversely, the Company occasionally rejects a
loan application that does meet the guidelines.
The Company believes that its underwriting guidelines (which are revised
from time to time) are consistent with those generally used by lenders in the
business of making subprime mortgage loans. The underwriting process is intended
to assess both the prospective borrower's ability to repay and the adequacy of
the real property as collateral for the loan. The Company's guidelines require
an analysis of the value of and equity in the collateral, the property type, the
payment history of the borrower and the borrower's ability to repay debt.
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As presented in the following table, the Company's guidelines permit the
origination of mortgage loans with multi-tiered credit characteristics tailored
to individual credit profiles.
<TABLE>
<CAPTION>
CREDIT
CLASSIFICATION A A- B
- -------------- -------------------------------------------------------------------
*Maximum LTV Owner Non-Owner Owner Non-Owner Owner Non-Owner
Occupied Occupied Occupied Occupied Occupied Occupied
<S> <C> <C> <C> <C> <C> <C>
Full Doc
SFR 90% 80% 90% 80% 85% 75%
Condo/PUD 90% 80% 90% 80% 85% 75%
2/3-4 Unit 90% 80% 90% 80% 85% 75%
Alt Doc
SFR 85% 75% 85% 75% 80% 70%
Condo/PUD 85% 75% 85% 75% 80% 70%
2/3-4 Unit 85% 75% 85% 75% 80% 70%
No Doc
(1003 Stated Income) 80% 70% 80% 70% 80% 70%
- --------------------
# Maximum LTV includes 5% LTV Piggyback Second Mortgage Loan.
MAXIMUM (2) DEBT RATIO 42% 45% 50%
- ----------------------
12 MONTH MORTGAGE RATING 0x30 0x60 0x90 2x30 0x60 0x90 2x30 1x60 0x90 or
- ------------------------ 4x30 0.60 0x90 or
3x30 1x60(3) 0x90
CONSUMER CREDIT
General 24 mos. excellent credit 24 mos. good credit. 24 mos. satisfactory credt
Minimum of 3 accounts Minimum of 3 accounts 12 mo. "B" or better
open/active for 6 month open/active for 6 month Rental or Mtg. Rating but
no consumer credit (less
than 3 open/active
accounts).
Credit Items Less than 25% of Credit Less than 35% of Credit Less than 40% of Credit
(Accounts with no activity items derogatory. No 60 items derogatory. No 90 items derogatory.
the last 24 months are not day derogatory credit. day derogatory credit.
considered.)
Bankruptcy 2 yrs. since discharge/ 2 yrs. since discharge/ 1 yr since discharge/
dismissal with a minimum dismissal with a minimum dismissal with 3 "B" re-
of 3 "A" re-established of 3 "A" re-established established accounts
accounts (open/active accounts (open/active accounts (open/active
at least 6 months) at least 6 months) at least 6 mos.) or 18
mos. since discharge/
dismissal with no re-
established credit.
Charge-offs, Collections Collections, Charge-offs and Judgments under $500 are not to be considered.
All judgments that appear as a lien of record against the subject property
must be paid through the loan. and Judgments The date of the original
occurrence of the collection is to be used in all credit.
</TABLE>
<TABLE>
<CAPTION>
CREDIT
CLASSIFICATION A A- B
- -------------- -------------------------------------------------------------------
*Maximum LTV Owner Non-Owner Owner Non-Owner Owner Non-Owner
Occupied Occupied Occupied Occupied Occupied Occupied
<S> <C> <C> <C> <C> <C> <C>
Full Doc
SFR 80% 70% 75%# 70%# 70%# 65%#
Condo/PUD 80% 70% 75%# 70%# 70%# 65%#
2/3-4 Unit 80% 70% 75%# 70%# 70%# 65%#
Alt Doc
SFR 75-77%(5) 70% 75%# 70%# 70%# 65%#
Condo/PUD 75% 70% 75%# 70%# 70%# 65%#
2/3-4 Unit 75% 70% 75%# 70%# 70%# 65%#
No Doc
(1003 Stated Income) 75-77%(5) 65% 65%(4) 60%(4) 65%(4) 60%(4)
- --------------------
# Maximum LTV includes 5% LTV Piggyback Second Mortgage Loan.
MAXIMUM (2) DEBT RATIO 55% 55% 60%
- ----------------------
12 MONTH MORTGAGE RATING 2x60 or 1x90 1x120 1x150 or more
- ------------------------
CONSUMER CREDIT
General 24 mos. fair credit. No 24 mos. poor credit with 24 mos. poor credit. The
Consumer Credit (Less some currently majority of the credit is
3 open/active accounts). delinquent accounts. derogatory.
Credit Items Less than 50% of Credit Less than 60% of Credit % of Credit items
(Accounts with no activity items derogatory. items derogatory. derogatory not a factor.
the last 24 months are not
to be considered.)
Bankruptcy BK filed at least 12 mos. BK filed within last 12 Currently in BK. Must be
ago & discharged prior to months but discharged/ paid through the loan.
applying for loan. Open dismissed prior to
BK 13 if filed at least application for loan.
24 mos. ago & evidence
provided that plan & mtg.
paid as agreed. BK must
be paid off thru loan.
Charge-offs, Collections Collections, Charge-offs and Judgments under $500 are not to be considered.
and Judgments All judgments that appear as a lien of record against the subject property
must be paid through the loan. The date of the original occurrence of the
collection is to be used in all credit.
</TABLE>
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(1) Loan cannot be upgraded to receive maximum LTV.
(2) Will allow 5% increase in D/R (not to exceed 60%) for a corresponding 5%
reduction in LTV. (3) Max LTV is 80%. (4) No DOC not available for salaried
or other "fixed" income borrowers.
(5) Over 75% available for SFR only.
* For 2nd homes & vacation properties reduce maximum LTV by 5%. Maximum CLTV
for second mortgages may not exceed 65%.
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The final grade for a loan is determined by blending the mortgage credit
grade and the consumer credit grade using a credit blending table. In addition,
a final grade of B or C (as determined by the credit blending table) is eligible
for a one credit class upgrade through the Company's upgrade matrix. The upgrade
matrix takes into account such compensating factors as property condition,
length of employment and length of property ownership.
The Company's guidelines permit the origination of fixed or adjustable
rate loans that either fully amortize over a period not to exceed 30 years or,
in the case of a balloon mortgage loan, are amortized based on a 30-year or less
amortization schedule with a maturity date and balloon payment due prior to the
end of the amortization. Loan amounts generally range from a minimum of $20,000
to a maximum of $350,000 unless a higher amount is specifically approved by
senior management of the Company. The average loan size of loans originated
during 1997 was approximately $95,000.
The collateral securing the loans may be either owner-occupied or
non-owner-occupied one-to-four family dwellings, which includes condominiums,
townhouses, manufactured housing, and occasionally second and vacation homes.
Substantially all of the loans secured by first mortgages are limited to a
maximum loan-to-value ratio of 90%, and substantially all of the loans secured
by second mortgages are limited to a combined maximum loan-to-value ratio of
85%.
In order to determine the loan-to-value ratio, all home equity loans
require at least one recent written appraisal on a current Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC") form with certain supporting information (e.g., location maps, legal
descriptions, sale and listing histories, floor plans, and photographs) from a
state licensed appraiser. Properties with higher appraised values ($650,000 in
California and Hawaii, $500,000 elsewhere) will require a second appraisal. All
appraisals are required to contain at least three recently closed sales of
comparable properties located near the subject property. The Company's appraisal
review departments review each appraisal for reasonableness, completeness,
conformity with the Company's guidelines and acceptable property condition. A
review appraisal is then performed by an independent review appraiser on every
appraisal prior to loan funding. The Company intends to continually monitor the
quality of both its internal and external appraisal reviews with follow-up
additional reviews on a percentage of loan appraisals. The Company's
underwriting guidelines require that any major deferred maintenance on any
property securing a loan be cured either by the applicant prior to loan closing
or the amount to cure will be withheld from the proceeds of the loan until such
deferred maintenance is completed.
A credit report combining information from two separate independent
credit reporting agencies is required reflecting the applicant's complete credit
history. If the report is obtained more than 60 days prior to the loan closing,
the Company will obtain an updated credit report to determine whether or not the
reported information has changed in a materially negative way, in which case
such loan will be reunderwritten.
The Company's underwriting guidelines provide for the origination of
loans under three general income documentation programs: (i) full documentation,
(ii) alternate documentation, and
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(iii) stated income. Under the full documentation program the Company obtains
one of the following: (i) Verification of Employment signed by the employer and
the most recent paycheck stub showing year to date income; (ii) IRS Form W-2 for
the most recent two-year period and the most recent paycheck stub showing
year-to-date income; (iii) individual tax returns for the most recent two years
and the most recent paycheck stub showing year-to-date income; or (iv) personal
bank statements for the most recent 24-month period and the most recent paycheck
stub showing year-to-date income. For each of the above, the Company obtains
telephone verification of employment. If the applicant is self-employed, the two
most recent years' applicable tax returns (Form 1040, 1120, 1120S or 1065) are
required. Under the alternative documentation program, applicants are required
to submit six months of personal bank statements, a recent paycheck stub showing
year-to-date income and the Company obtains telephone verification of
employment. For self-employed borrowers, proof that the business has been in
existence for at least one year is required. Under the stated income program,
income is taken from the application as stated by the applicant and employment
or business is verified telephonically.
Exceptions to the Company's underwriting guidelines can only be approved
by senior underwriters, managers or higher level of senior management. Where
exceptions are made on loan-to-value or debt-to-income ratios, such exceptions
are generally limited to no more than 2%.
The Company's guidelines require title insurance coverage issued by an
approved title insurance company on each mortgage loan. The Company and its
assignees are named as the insured. Title insurance policies guarantee the lien
position of the loan and protect the insured against loss if the title or lien
position is not as indicated.
The following table sets forth selected information relating to loan
originations for sale and securitization during the three years ended December
31, 1997 (portfolio loans which are not originated for sale and "piggyback
loans" which are held for sale are not included):
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<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Principal balance of loans $ 768,226,000 $ 335,471,000 $ 151,538,000
Average principal balance per loan $ 93,867 $ 91,993 $ 102,681
Percent of first mortgage loans (based on 95.6% 95.1% 91.5%
principal dollar amount of all loans
originated)
Weighted average interest rate 11.08% 11.57% 11.02%
Weighted average initial loan-to value ratio 76.65% 66.92% 64.23%
</TABLE>
QUALITY CONTROL
The Company's quality control program monitors and improves the overall
quality of loan production in both the Wholesale and Retail Divisions. Sample
loan files are reviewed on a regular basis to assure the accuracy of all credit
information, the compliance with appraisal standards, the compliance with
employment and income verification requirements and the accuracy of legal
documents. Any inaccuracies or inadequacies are corrected, and the internal
audit department reports its findings to senior management of the Company on a
quarterly basis.
LOAN SALES AND SECURITIZATIONS
Since 1995, the Company has originated mortgage loans primarily for sale
and securitization. Prior to the fourth quarter of 1996, the Company sold
substantially all of its loans for a cash premium, with no continuing interest
in the loans after sale. In the fourth quarter of 1996, the Company entered into
new agreements with Aames and Advanta pursuant to which the Company retained the
right to receive an interest-only strip ("excess spread") on its loans above the
specified rates paid to holders of certificates in each securitization pool in
which the Company's loans were included, less transactional, sponsor, servicing
and credit enhancement fees and expenses. Under its agreements with Aames and
Advanta, the Company received an advance of a portion of the excess spread from
the loan purchaser, and the balance, after repayment of the advance, was paid
over the life of the loans. To the extent that a loss is realized on loans sold
by the Company in each pool, losses are paid first out of excess spread that
would otherwise be paid to the Company.
As of March 30, 1998, the Company held interest-only strips in seven
securitization trusts, including one formed by Aames in the fourth quarter of
1996, four formed by Advanta in each of the four quarters of 1997 and two
sponsored by the Company (one in the fourth quarter of 1997 and one in the first
quarter of 1998). Securities issued by each trust are credit enhanced either
through an insurance policy issued by a monoline insurer or through
over-collateralization. As of March 30, 1998, the securities issued
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by each of the trusts in which the Company holds an interest are rated "AAA" by
Standard & Poor's Ratings Group and "AAA" by Moody's Investor Service, Inc. Each
trust holds loans sold by the Company, as well as loans originated or purchased
by either Aames or Advanta. However, the Company's interest-only strip
receivable is dependent only upon the performance of the loans originated by the
Company and held by each Trust. All loans sold for securitization have been sold
on a nonrecourse basis, except for the obligation to repurchase any loan which
does not meet certain customary representations and warranties, and the
obligation to repurchase loans adversely affected by any breach of general
representations and warranties.
On July 17, 1997, the Company entered into an engagement letter with
Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch") under which the Company
committed to offer exclusively to Merrill Lynch the position of sole lead
manager or sole lead placement agent of each offering of mortgage-backed
securities by the Company backed by mortgage loans for which Merrill Lynch
provided warehouse financing. The Company's commitment expires on the later of:
(i) one year from the effective date of the warehouse financing agreement; or
(ii) the date that Merrill Lynch has acted as sole lead manager or sole lead
placement agent with respect to mortgage-backed securities aggregating $750
million. As of March 30, 1998, the Company has securitized $200 million of
loans through Merrill Lynch and an additional $30 million has been prefunded
for sale to a trust formed in the first quarer of 1998.
On October 31, 1997, the Company entered into a Master Repurchase
Agreement with affiliates of Merrill Lynch (the "Warehouse Financing
Agreement"), under which Merrill Lynch may provide warehouse financing of
mortgage loans pending securitization by the Company. The Warehouse Financing
Agreement contemplates that the Company will complete securitization
transactions on a quarterly basis, and any loans not securitized by a specified
date within each quarter are ineligible for financing under the Warehouse
Financing Agreement. Financing provided by Merrill Lynch under the Warehouse
Financing Agreement bears interest at rates established at the time of each
advance by Merrill Lynch. The Company is required to meet margin call
requirements in the event the mortgage loans assigned under the Warehouse
Financing Agreement experience a decline in market value during the period of
warehouse financing.
-12-
<PAGE> 13
On December 18, 1997, the Company entered into a Master Assignment
Agreement (the "Master Assignment Agreement"), with Merrill Lynch Mortgage
Capital, Inc. ("MLMCI"), under which the Company may obtain financing secured by
interest-only strip receivables retained by the Company in securitization
transactions underwritten by Merrill Lynch. Each advance will be due one year
from the date of the advance, unless extended pursuant to the mutual agreement
of the Company and Merrill Lynch. The interest rate on each advance under the
Master Assignment Agreement will be established at the time of each advance by
Merrill Lynch. The Company is required to make mandatory prepayments under the
Master Assignment Agreement in the event that the residual interests assigned to
Merrill Lynch experience a decline in value from the levels established at the
time of the advance.
On December 18, 1997, the PacificAmerica Home Equity Loan Trust Series
1997-1 issued $100 million in securities backed by home equity loans originated
by Pacific Thrift. On March 25, 1998, the PacificAmerica Home Equity Loan Trust
Series 1998-1 issued $130 million in securities backed by home equity loans
originated by Pacific Thrift. The Company has delivered approximately $100
million of loans to the 1998-1 Trust, and expects to deliver approximately $30
million by April 27, 1998. The loan purchase agreements under which loans have
been securitized provide, among other terms, that the sale of loans is
non-recourse except for the obligation to repurchase or replace loans upon a
breach of certain standard and customary representations and warranties. The
Company is named as master servicer for loans held by the 1997-1 and 1998-1
Trusts, and Advanta has been appointed Sub-Servicer. Advanta is expected to
provide substantially all servicing related to the loans.
To the extent that the Company or one of its subsidiaries originates
loans for sale, it bears an interest rate risk between the loan approval date
and the date that each loan is securitized. However, loans are generally
securitized on a quarterly basis, which reduces the risk of interest rate
fluctuations. In addition, because subprime mortgage loans have a higher
interest rate spread than prime mortgage loans, fluctuations in rates which may
occur during the period prior to securitization could reduce the value of the
residual interest anticipated to be retained by the Company upon securitization,
but would not generally be sufficiently large to eliminate the excess spread
entirely. 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
Until Pacific Thrift began originating loans for securitization in 1994,
both the Partnership and Pacific Thrift originated loans for their own loan
portfolios, and generally held and serviced those loans until payoff or
refinancing. As of December 31, 1997, the aggregate remaining balance of all
portfolio loans held by the Company was approximately $20.6 million net of loan
loss reserves. All portfolio loans are secured primarily by one-to-four family
residential, multi-family residential
-13-
<PAGE> 14
and commercial real property. In 1996, as volume levels of loans originated for
sale and securitization increased, management determined to terminate portfolio
lending in order to concentrate its resources on loans originated for sale and
securitization. The Company also determined to sell portions of its loan
portfolio to provide additional resources for use in its mortgage banking
business, and completed sales of an aggregate of approximately $17.1 million and
$26.2 million of portfolio loans in 1997 and 1996, respectively. The
characteristics of the Company's remaining loan portfolio at December 31, 1997,
are described below.
GEOGRAPHIC CONCENTRATION. At December 31, 1997, the Company's loan
portfolio included loans geographically distributed, based on principal loan
balances, approximately 55% in Southern California (south of San Luis Obispo),
16% in Northern California and the remaining 29% in other states, primarily
Washington and Oregon. The Company's portfolio 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.
COLLATERAL. At each of the dates set forth below the gross loan
portfolio of the Company (net of reserves for loan losses) was collateralized by
the following types of real property:
-14-
<PAGE> 15
PORTFOLIO COLLATERAL
<TABLE>
<CAPTION>
Dec. 31, Dec. 31, Dec. 31,
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
1997 Percentage 1996 Percentage 1995 Percentage
Loan of Total Loan of Total Loan of Total
Balances Portfolio Balances Portfolio Balances Portfolio
---------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
One-to-four family
residential property
1st TDs $ 2,539,000 11.39% $ 2,629,371 7.19 $ 5,553,762 11.33%
2nd TDs 3,037,000 13.62 11,148,015 30.48 8,149,818 16.62
3rd TDs 452,000 2.03 700,997 1.92 968,926 1.98
Home Imp. Loans 1,090,000 4.89 1,321,983 3.61 1,742,976 3.55
---------- ------ ----------- ------ ----------- ------
TOTAL 7,118,000 31.93 15,800,366 43.20 16,415,482 33.48
========== ====== =========== ====== =========== ======
Five and Over
Multi-Family
residential property
1st TDs 5,425,000 24.34 8,467,515 23.15 8,534,795 17.41
2nd TDs 747,000 3.35 840,081 2.30 1,811,741 3.70
3rd TDs -0- -0- -0- -0- -0- -0-
---------- ------ ----------- ------ ----------- ------
TOTAL 6,172,000 27.69 9,307,596 25.45 10,346,536 21.11
========== ====== =========== ====== =========== ======
Commercial
Property
1st TDs 8,528,000 38.26 9,761,472 26.69 18,145,302 37.02
2nd TDs 445,000 2.00 869,128 2.38 2,172,655 4.43
3rd TDs 28,000 .12 101,757 .28 68,766 .14
---------- ------ ----------- ------ ----------- ------
TOTAL 9,001,000 40.38 10,732,357 29.35 20,386,723 41.59
========== ====== =========== ====== =========== ======
Undeveloped
Property
1st TDs -0- -0- 732,424 2.00 1,873,953 3.82
2nd TDs -0- -0- -0- -0- -0- -0-
3rd TDs -0- -0- -0- -0- -0- -0-
---------- ------ ----------- ------ ----------- ------
TOTAL -0- -0- 732,424 2.00 1,873,953 3.82
========== ====== =========== ====== =========== ======
TOTAL
PORTFOLIO
1st TDs 16,492,000 73.99 21,590,782 59.04 34,107,812 69.58
2nd TDs 4,229,000 18.97 12,857,224 35.16 12,134,214 24.75
3rd TDs 480,000 2.15 802,754 2.19 1,037,692 2.12
Home Imp. Loans 1,090,000 4.89 1,321,983 3.61 1,742,976 3.55
---------- ------ ----------- ------ ----------- ------
TOTAL $22,291,000 100.00 $36,572,743 100.00 $49,022,694 100.00%
========== ====== =========== ====== =========== ======
</TABLE>
-15-
<PAGE> 16
LOAN ORIGINATION AND UNDERWRITING. Each portfolio loan made by the
Company (other than "piggyback" loans as described below), was analyzed at
origination based on the loan applicant's credit history and repayment ability,
using the Company's then existing underwriting guidelines. Portfolio loans
generally required credit histories from independent credit reporting companies,
proof of income and independent appraisal reports of the value of the mortgaged
property.
Since 1995, the Company has also made "piggyback loans," which are
residential loans made in tandem with loans originated for sale. Management uses
piggyback loans to enhance the loan products available from some of 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 loans originated for sale, except that loan-to-value ratios are
usually 5% higher than the loan-to-value ratios allowed by the purchaser of the
senior loans. To compensate for the higher loan-to-value ratios, the Company
provides higher general reserves for piggyback loans. From time to time, the
Company sells piggyback loans to third party purchasers. During 1997, the
Company sold $5.7 million of piggyback loans at par value. During 1996, the
Company sold $5.5 million of piggyback loans, of which $3.8 million were sold
for a discount of approximately 1% of par value and $1.7 million were sold at
par value. As of December 31, 1997, the Company held 1707 piggyback loans, with
an aggregate principal balance of $11.6 million. Of this amount, $8.4 million
was sold in January 1998 at a discount of approximately 24% of par value. As
this discount was fully reserved at December 31, 1997, the effect was that the
sale resulted in a nominal gain.
MATURITIES AND RATE SENSITIVITIES OF LOAN PORTFOLIO. The following table
sets forth the contractual maturities of the loan portfolio at December 31,
1997.
PORTFOLIO LOAN MATURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------------------------------------------------------------------
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..... $ 717 $ 534 $ 560 $ 656 $ 2,685 $ 902 $ 6,054
Multi-family............ 122 769 76 2,884 498 2,042 6,391
Commercial.............. 1,129 1,213 630 4,271 1,202 139 8,584
Home improvement........ 0 7 46 1,097 112 0 1,262
---------- ----------- ----------- ---------- --------- -------- -----------
Total amount due........ $ 1,968 $ 2,523 $ 1,312 $ 8,908 $ 4,497 $ 3,083 $ 22,291
========== =========== =========== ========== ========= ======== ===========
</TABLE>
The following table sets forth, as of December 31, 1997, the dollar
amounts of loans receivable (not including loans held for sale) that are
contractually due after December 31, 1998 and whether such loans have fixed or
adjustable interest rates:
-16-
<PAGE> 17
PORTFOLIO LOANS
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1998
-------------------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family ............... $ 3,200 $ 2,137 $ 5,337
Multi-family ...................... 119 6,150 6,269
Commercial ........................ 660 6,795 7,455
Home improvement .................. 1,262 0 1,262
------- ------- -------
Total loans receivable ..... $ 5,241 $15,082 $20,323
======= ======= =======
</TABLE>
The Company generally rewrites a portfolio loan 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 the applicable
loan-to-value guidelines, the Company will generally rewrite the loan.
A substantial portion of the Company's loan portfolio is repriced, pays
off or matures approximately every year. Of the 26% of all loans bearing fixed
rates at December 31, 1997, 11% were due in one year or less. Based upon these
facts, over 77% of the loan portfolio at December 31, 1997, consisted of either
variable rate loans or fixed rate loans which mature within one year. Management
therefore expects that within one year, approximately 77% of the loan portfolio
will be paid off or 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 portfolio loans is set as of
the date of origination of each loan based upon the then prevailing reference
rate established by Bank of America. The 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 Company's general policy 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 ratios of substantially all
delinquent loans are determined by new independent appraisal or broker price
opinions, unless an independent appraisal was obtained no more than twelve
months prior to the monthly review of each delinquent loan. When a loan is
reclassified from accrual to nonaccrual status, all previously accrued interest
is reversed. Interest income on nonaccrual loans is subsequently recognized when
the loan resumes payment or becomes contractually current as appropriate. Loans
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 real estate acquired in settlement of loans
("REO") are not recognized until the close of escrow.
-17-
<PAGE> 18
Unless an extension, modification or rewritten loan is obtained, or a
bankruptcy is filed, the Company'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. A delinquent loan will only be rewritten or
extended if it can be determined that the borrower has the ability to repay the
loan on the modified terms. 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 bring payments current or
undertake other remedies so that a foreclosure sale is not required.
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. Therefore, changes in
the amount of nonaccrual loans will not necessarily result in increases in the
allowance for loan losses. The ratio of nonaccrual portfolio loans past due 90
days or more to total portfolio loans was 4.96% at December 31, 1997, 3.81% at
December 31, 1996 and 1.62% at December 31, 1995. The ratio of the allowance for
loan losses to nonaccrual loans past due 90 days or more was 130.14% at December
31, 1997, 176.76% at December 31, 1996, and 533.29% at December 31, 1995.
The following table sets forth the number and remaining balances of all
loans in the Company's loan portfolio (net of specific reserves for loan losses)
that were more than 30 days delinquent at December 31, 1997, 1996 and 1995.
PORTFOLIO LOAN
DELINQUENCIES
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
------------------------ ------------------------- ------------------------
Percent Percent Percent
of of of
Loan Loans Total Loans Total Loans Total
Delinquencies Delinquent Loans Delinquent Loans Delinquent Loans
------------- ---------- ----- ----------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 150,000 .67% $ 1,428,000 3.91% $ 210,000 .43%
60 to 89 days 321,000 1.44% 1,431,000 3.91% 527,000 1.08%
90 days or more 1,913,000 8.58% 3,019,000 8.25% 2,110,000 4.30%
---------- ----- ----------- ----- ---------- ----
TOTAL .... $2,384,000 10.69% $ 5,879,000 16.07% $2,848,000 5.81%
========== ===== =========== ===== ========== ====
</TABLE>
NONACCRUAL AND RESTRUCTURED LOANS. The following table sets forth the
aggregate amount of loans at December 31, 1997, 1996 and 1995 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, which are defined in SFAS 15 as loans modified to
reduce interest rates below market rates, to reduce amounts due at maturity, to
reduce accrued interest or to loan additional funds.
PORTFOLIO LOAN
NON ACCRUALS AND RESTRUCTURINGS
-18-
<PAGE> 19
<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, 1997 $ 808 $1,105 0 $1,913
At December 31, 1996 $1,625 $1,394 $ 357 $3,376
At December 31, 1995 $1,317 $ 793 $ 948 $3,058
</TABLE>
The following table sets forth information concerning interest accruals
and interest on nonaccrual loans past due 90 days as of December 31, 1997, 1996
and 1995.
PORTFOLIO LOAN INTEREST
DUE ON DELINQUENT LOANS
<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, 1997 $323 $119 $204
At December 31, 1996 $886 $133 $753
At December 31, 1995 $673 $125 $548
</TABLE>
Upon request of a borrower, the Company generally grants one to two
month extensions of payments during the term of a loan. In 1997, six loans with
an aggregate principal balance of $.4 million were extended for terms not
exceeding six months, one loan with a principal balance of $.4 million was
modified and one delinquent loan with a principal balance of $.1 million was
rewritten. The Company applies the same documentation standards on a rewritten
loan as on an original loan, and makes 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
borrower's current income, current debt to income ratio, or anticipated sale of
the collateral.
At December 31, 1997, the Company held REO (net of specific reserves)
of $2.0 million. In accordance with the policy for recognizing losses upon
acquisition of REO, the Company charges off or posts specific reserves for
those portions of the loans with respect to which REO has been acquired to the
extent of the difference between the loan amount and the estimated fair value of
the REO. Included in REO at December 31, 1997 were 10 single-family residences
with an aggregate net book value of $.9 million; three multi-family units with
an aggregate net book value of $.5 million; four commercial properties with an
aggregate net book value of $.5 million; and three undeveloped properties with
an aggregate net book value of $.1 million. For the year ended December 31,
1997, total expenses on operation, including valuation allowances, and losses on
sale of REO were $.7 million and gains on sale of REO and REO income were $.3
million, for a total expense of $.4 million. There can be no assurance that net
losses on the sale of REO will not be experienced in the future.
-19-
<PAGE> 20
ALLOWANCE FOR LOAN LOSSES. The following is a summary of the changes in
the consolidated allowance for loan losses of the Company for each of the years
ended December 31, 1997, 1996 and 1995:
PORTFOLIO LOANS
RESERVE FOR LOAN LOSSES
<TABLE>
<CAPTION>
-------------------------------------
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------------------------------------
(IN THOUSANDS)
-------------------------------------
<S> <C> <C> <C>
Balance at beginning of period ....... $ 2,464 $ 4,229 $ 4,307
Provision for loan losses ............ 3,087 1,151 3,289
Transferred to loans held for sale ... (1,902) -0- -0-
Chargeoffs: (2,211) (3,187) (3,369)
Recoveries ........................... -0- 271 2
------- ------- -------
Balance at end of period ............. $ 1,438 $ 2,464 $ 4,229
======= ======= =======
</TABLE>
Pacific Thrift uses 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 of the Company 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 provision is made for that loan.
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. PacificAmerica Center'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 could require Pacific Thrift, just as any other
FDIC-insured institution, to post 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.
-20-
<PAGE> 21
INVESTMENT ACTIVITIES
Pacific Thrift maintains an investment portfolio which is used
primarily for liquidity purposes and secondarily for investment income. 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, the limit is $100,000.
As of December 31, 1997, Pacific Thrift held no investments in federal funds.
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, 1997, Pacific
Thrift had outstanding 2,818 deposit accounts of approximately $132.5 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, 1997.
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
Averages for 1997 Averages for 1996 Averages for 1995
-------------------- --------------------- ---------------------
(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 21,516 5.11% $31,300 5.20% $13,322 5.39%
Investment Certificates
under $100,000 74,184 5.87% $47,582 5.86% $49,931 6.20%
Investment Certificates
over $100,000 823 6.08% -0- -0- 100 7.02%
------ ---- ------- ---- ------- ----
Total 96,523 5.71% 78,882 5.60% $63,353 6.03%
====== ==== ======= ==== ======= ====
</TABLE>
The following schedule sets forth the time remaining until maturity for
all certificates at December 31, 1997, 1996 and 1995.
-21-
<PAGE> 22
DEPOSIT MATURITIES
<TABLE>
<CAPTION>
At At At
December 31, December 31, December 31,
1997 1996 1995
(Dollars in (Dollars in (Dollars in
Thousands) Thousands) Thousands)
----------- ---------- ----------
<S> <C> <C> <C>
Passbook/Money Market $ 18,793 $24,659 $24,275
-------- ------- -------
Accounts under $100,000
3 months or less $ 20,588 $14,451 $12,723
Over 3 months through 6 months 32,649 19,745 13,439
Over 6 months through 12 months 56,219 22,147 9,084
Over 12 months 95 -0- 635
-------- ------- -------
Total $109,551 $56,343 $35,881
-------- ------- -------
Accounts over $100,000
3 months or less 400 -0- -0-
Over 3 months through 6 months -0- -0- -0-
Over 6 months through 12 months 3,780 -0- -0-
Over 12 months -0- -0- -0-
-------- ------- -------
Total $ 4,180 $ -0- $ -0-
-------- ------- -------
TOTAL DEPOSITS $132,524 $81,002 $60,156
======== ======= =======
</TABLE>
OTHER BORROWINGS. The Partnership made use of substantial lines of
credit from major banks to fund its loan portfolio growth from 1984 through
1989. The original bank loan in 1990 was a revolving credit line of $105
million, under which the Partnership 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. From 1992 through December
1996, the loan agreement was amended annually to provide for a steady pay down
of the remaining loan balance. The Partnership and the Company continued making
regular paydowns of the balance owed until the Company made the last payment in
January 1997.
On October 31, 1997, the Company entered a Warehouse Finance Agreement
with affiliates of Merrill Lynch, under which Merrill Lynch may provide
warehouse financing to mortgage loans pending securitization by the Company.
Merrill Lynch has provided warehouse financing for all loans securitized through
Merrill Lynch since the fourth quarter of 1997. The Warehouse Financing
Agreement contemplates that the Company will complete securitization
transactions on a quarterly basis, and any loans not securitized by a specified
date within each quarter are ineligible for financing under the Warehouse
Financing Agreement. Financing provided by Merrill Lynch under the Warehouse
Financing Agreement bears interest at rates established at the time of each
advance by Merrill Lynch. The Company is required to meet margin call
requirements in the event the mortgage loans assigned under the Warehouse
Financing Agreement experience a decline in market value during the period of
warehouse financing. At December 31, 1997, there were no borrowings outstanding
under the Warehouse Financing Agreement.
On December 18, 1997, the Company entered into Master Assignment
Agreement with an affiliate of Merrill Lynch under which the Company may obtain
financing secured by interest-only strip receivables retained by the Company in
securitization transactions underwritten by Merrill Lynch. The Company obtained
$5.0 million in financing for its interest-only strip in the 1997-1
securitization, which bears interest at LIBOR plus 2.5%. The Company expects to
obtain financing for its interest-only strip in the 1998-1 securitization. Each
advance will be due one year from the date of advance, unless extended pursuant
to the mutual agreement of the Company and Merrill Lynch. The interest rate on
each advance under the Master Assignment Agreement is established at the time of
each advance by Merrill Lynch. The Company is required to make mandatory
prepayments under the Master Assignment Agreement in the event that the
interest-only strips assigned to Merrill Lynch experience a decline in value
from the levels established at the time of the advance.
The Company obtained advances from Aames and Advanta on interest-only
strips retained by the Company in the Aames 1996-4 pool and the Advanta 1997
pools. At December 31, 1997, advances from Aames and Advanta totalled $23.6
million, and bore interest ranging from LIBOR plus 1.0% to 12.5% per annum.
Advances are repaid from cash flow allocated to the Company's interest-only
strips.
COMPETITION
The Company faces significant competition for the origination and
selling of home equity mortgage loans from consumer finance companies, mortgage
banking companies and other subprime lenders. Many of these companies are
substantially larger and have considerably greater financial, technical and
marketing resources than the Company. In addition, many other financial services
organizations have formed national loan origination networks offering loan
products that are substantially similar to the Company's loan programs. Factors
influencing consumer decisions to choose one lender over another include
convenience, customer service, marketing and distribution channels, amount and
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<PAGE> 23
term of the loan, loan origination fees and interest rates. Increases in
competition may result in lower rates charged to borrowers, which could lower
gain on future loan sales and securitizations. Fluctuations interest rates and
general economic conditions may also affect competition in the consumer finance
industry. During periods of rising rates, competitors that have locked in low
borrowing costs may have a competitive advantage. During periods of declining
rates, competitors may solicit the Company's customers to refinance their loans.
The senior executive officers of the Company each have over 20 years of
experience in home equity lending, which the Company believes has been a
significant factor in the rapid growth of its loan production. The Company has
developed an emphasis on customer service, flexibility in adopting new loan
programs to meet competition, and incentives for retaining top producing loan
representatives.
Pacific Thrift faces competition for depositors' funds from other thrift
and loans, banks, savings and loans and credit unions. 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 seeking these services. Pacific Thrift's lower costs,
however, enable it to compensate 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, 1997 the Company and its subsidiaries had 596
full-time employees, including 183 commission-based loan representatives.
SUPERVISION AND REGULATION
Financial and lending institutions are extensively regulated under both
federal and state law. Set forth below is a summary description of the principal
laws which relate to the regulation of Pacific Thrift and PacificAmerica
Centers. 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
Pacific Thrift and PacificAmerica Centers 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 certain finance charges, fees and other charges on loans, require
certain disclosures be made to borrowers and loan applicants, regulate the
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<PAGE> 24
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. Pacific Thrift and PacificAmerica Centers believe they
are currently in compliance in all material respects with all applicable laws,
but there can be no assurance that they or any other financial institution 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 Pacific Thrift or PacificAmerica Centers.
STATE LAW
PACIFICAMERICA CENTERS
PacificAmerica Centers is licensed or exempt as a mortgage lender in 22
states, has lender license applications pending in 10 states and intends to file
license applications in 18 additional states. The lending laws of some states
have certain interest and fee limitations, disclosure and loan document
requirements and penalties for failure to meet these requirements.
PacificAmerica Centers reviews the applicable lending laws of each state prior
to commencement of business in the state and regularly monitors changes in the
lending laws of all states in which it conducts business.
PACIFIC THRIFT
Pacific Thrift is subject to regulation, supervision and examination
under its California thrift and loan license by the Department of Financial
Institutions ("DFI") which regulates all banks, savings and loans, thrift and
loans, and credit unions chartered by the State of California. The California
Industrial Loan Law and the rules and regulations of the DFI regulate interest
rates, fees, collateral requirements, payment terms and maturities of the
various types of loans that are permitted to be made by California-licensed
thrift and loan companies. The majority of these limitations, however, apply to
loans under $10,000.
A thrift and loan generally may not make any loan to, or hold an
obligation of, any of its directors, officers or any shareholder holding 10% or
more of its shares, or any director or officer or any shareholder holding 10% or
more of the shares of its holding company or affiliates, except in specified
cases and subject to regulation by the DFI. 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. There are currently no outstanding loans made
by Pacific Thrift to any officers or directors of the Company 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 DFI.
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<PAGE> 25
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 DFI, Pacific Thrift can currently operate with a
ratio of deposits to unimpaired capital and unimpaired surplus of up to 15:1.
At December 31, 1997, Pacific Thrift's deposit ratio was 7:1.
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 DFI'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 DFI, 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, 1997.
Under California law, thrift and loan companies are generally limited to
investments, other than loans, that are legal investments for commercial banks.
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. Management believes Pacific Thrift was in compliance with these
provisions throughout 1997 and at December 31, 1997.
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 Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") 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,
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<PAGE> 26
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 November 1995.
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.
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.
Pacific Thrift is subject to certain capital adequacy guidelines issued
by the FDIC. See "Federal Law -- Capital Adequacy Guidelines" under this
heading.
REGULATORY ACTIONS
On April 1, 1996, Pacific Thrift entered into a Memorandum of
Understanding ("1996 MOU") with the FDIC. This informal agreement provided that
Pacific Thrift was required to: (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 by September 30, 1996; (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 1996 MOU.
On March 9, 1998, the 1996 MOU was replaced with a new MOU (the "1998
MOU") between Pacific Thrift and the FDIC. This informal agreement provides that
Pacific Thrift shall: (i) continue to maintain Tier 1 capital equal to 8.0% of
its total assets; (ii) by July 7, 1998, have and thereafter maintain risk-based
capital equal to 10.0% of total risk weighted assets; (iii) maintain a fully
funded loan loss reserve; (iv) by March 19, 1998, eliminate assets classified
"loss" as of June 30, 1997, and by September 5, 1998, reduce assets classified
as "substandard" as of June 30, 1997 to not more than $4 million; (v) by June 7,
1998, reduce and thereafter maintain the amount of interest-only strip
receivables, net of tax liabilities, to no more than 100% of total capital; (vi)
by June 7, 1998, obtain an independent valuation of interest-only strip
receivables, and thereafter
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obtain an annual independent valuation of such receivables until they represent
50% or less of Tier 1 capital; (vii) by June 7, 1998, and thereafter quarterly,
perform valuations and cash flow analyses on the interest-only strip
receivables; (viii) by May 8, 1998, eliminate and/or correct certain
transactions between Pacific Thrift and its parent; (ix) by May 8, 1998,
develop, adopt and implement a written policy governing the relationship between
Pacific Thrift and its parent; (x) by June 7, 1998, revise, adopt and implement
a written asset/liability management policy to include risk tolerance levels for
income and annual independent audits of Pacific Thrift's interest rate risk
process; (xi) pay no cash dividends without prior written FDIC approval; (xii)
pay no executive or director bonuses without prior written FDIC approval; (xiii)
by June 7, 1998, submit a strategic plan covering the period 1998 through 2000
reflecting restricted growth of the interest-only strip receivable asset; and
(xiv) by May 15, 1998, and thereafter at the end of each quarter, furnish
written progress reports to the FDIC detailing actions taken to comply with the
1997 MOU.
As of March 30, 1998, management of Pacific Thrift believes that it has
complied with items (i), (iii), (iv) and (v), that it is in the process of
complying with item (vi), and that it has responded to item (viii). Management
further believes that it will be able to fully comply with the MOU without any
material adverse effect on its operations.
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 the Company 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 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 support its level of assets. The board of directors of Pacific Thrift may
unrestrict all or any portion of its equity in the future for dividends to the
Company, provided that Pacific Thrift remains adequately capitalized.
The FDIC also has authority to prohibit Pacific Thrift, just as any
other FDIC- insured institution, 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
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<PAGE> 28
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 Company. See "Capital Standards" under this
heading for a discussion of these additional restrictions on capital
distributions.
Pacific Thrift, just as any other FDIC-insured institution, 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 Company 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 Company or other affiliates. Such restrictions prevent the
Company 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 Company 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, just as any other FDIC-insured institution, under the prompt
corrective action provisions of the FDIC Improvement Act. Management believes
that Pacific Thrift is in compliance with all provisions regarding transactions
with affiliates.
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, noncumulative perpetual preferred
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<PAGE> 29
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%. At December 31, 1997, Pacific Thrift's total risk-based capital
ratio was 8.1%.
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. At
December 31, 1997, Pacific Thrift's leverage ratio was 12.8%.
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.
The federal banking agencies interagency policy statement on the
allowance for loan and lease losses 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. Management
believes that Pacific Thrift is in compliance with these requirements.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. The
federal banking agencies limit the amount of deferred tax assets that are
allowable in computing an institution's regulatory capital. 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
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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. Management
believes that Pacific Thrift is in compliance with these requirements.
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, just as any other FDIC-insured
institution, to grow and could restrict the amount of profits, if any, available
for the payment of dividends.
The following table presents the capital ratios for Pacific Thrift, as
of December 31, 1997, compared to the regulatory capital requirements for
adequately capitalized and well capitalized institutions.
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------
Well
Actual Adequately Capitalized
Ratio Capitalized Requirement
------ ----------- -----------
<S> <C> <C> <C> <C>
Leverage ratio..................... 12.8% 4.0% 5.0%(1)
Tier 1 risk-based ratio............ 7.1% 4.0% 6.0%
Total risk-based ratio............. 8.1% 8.0% 10.0%(1)
</TABLE>
(1) Pursuant to the 1998 MOU, Pacific Thrift is required to maintain a
minimum 8.0% leverage ratio and by July 8, 1998, to reach and thereafter
maintain, a 10.0% total risk-based capital ratio.
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)
"Undercapitalized" "Significantly undercapitalized"
------------------ --------------------------------
</TABLE>
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<PAGE> 31
<TABLE>
<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)
"Critically undercapitalized"
-----------------------------
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.
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
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<PAGE> 32
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 and/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 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.
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<PAGE> 33
SAFETY AND SOUNDNESS STANDARDS
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by the 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.
The regulations of the federal banking agencies prescribe uniform
guidelines for real estate lending. The regulations 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
Pacific Thrift's deposit accounts are insured by the FDIC generally up
to a maximum of $100,000 per separately insured depositor, and Pacific Thrift,
like all FDIC- insured institutions, is subject to FDIC deposit insurance
assessments. Pursuant to FDICIA, the FDIC adopted a risk-based system for
determining deposit insurance assessments under which all insured institutions
were placed into one of nine categories and assessed annual insurance premiums,
ranging from $2,000 to 0.27% of insured deposits, based upon their level of
capital and supervisory evaluation. Because the FDIC sets the assessment rates
based upon the level of assets in the insurance fund, premium rates rise and
fall as the number and size of bank failures increases and decreases,
respectively.
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<PAGE> 34
Under the system, institutions are assigned to one of three capital groups which
is based solely on the level of an institution's capital - "well capitalized,"
"adequately capitalized" and "undercapitalized" - which are defined in the same
manner as the regulations establishing the prompt corrective action system under
Section 38 of FDIA, as discussed in "-- Capital Standards." These three groups
are then divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be of minimal
supervisory concern to those which are considered to be of substantial
supervisory concern.
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, as of 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 was permitted to allow such
combinations earlier than June 1, 1997, and was permitted 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.
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.
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<PAGE> 35
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Pacific Thrift, just as all other mortgage lenders, 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 include the Company, 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 Company, 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.
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<PAGE> 36
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 21031 Ventura
Boulevard, Woodland Hills, California 91364, where the Company leases
approximately 20,000 square feet of office space. The lease expires on July 31,
2003. The Company also leases approximately 22,000 square feet of office space
in Walnut Creek, California, where its Wholesale Division is headquartered,
under leases which expire between July 1998 and November 2000, with the largest
lease, for 14,000 square feet, expiring November 14, 2000. In addition, the
Company leases approximately 11,000 square feet of office space in Irvine,
California, where its Retail Division is currently headquartered, under a lease
which expires on December 31, 2001. On January 13, 1998, the Company entered a
new lease for 28,000 square feet of office space in Irvine, California, which
the Company intends to use as the new headquarters of the Retail Division. The
existing 11,000 square foot Irvine space is expected to be used for loan
processing. The Company also leases offices for its 50 retail branch offices in
23 states. The average size of these retail branch offices is approximately 750
square feet, with an annual average base rent of approximately $16,800,
generally with terms of 18 months or less. The Company believes its facilities
are both suitable and adequate for the current business activities conducted at
all of its offices.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to certain legal
proceedings including primarily actions incidental to its lending business. Some
of these actions 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 actions, has determined that it
is unlikely that the outcome of any proceedings currently pending against the
Company would have a material adverse impact on the Company's business,
financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders during the fourth
quarter of 1997.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
Company's executive officers.
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<PAGE> 37
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE OCCUPATION FOR THE PAST FIVE YEARS
---- --- --------------------------------------
<S> <C> <C>
Joel R. Schultz 61 Chairman of the Board, President, Chief Executive Officer and Chief
Operating Officer of the Company; Chief Managing Officer of the Partnership from
1981 to June 1996; Chairman of the Board and Chief Executive Officer of Pacific
Thrift since 1988; President of Pacific Thrift from 1988 to December 1993;
Chairman of the Board, President and Chief Executive Officer of
PacificAmerica Centers; California licensed attorney-at-law; Certified
Public Accountant; California licensed real estate broker.
Richard D. Young 58 Director and Senior Executive Vice President of the Company; Senior
Executive Vice President and Chief Operating Officer and a director of
PacificAmerica Centers; President and Chief Operating Officer of Pacific
Thrift from November 1993 to present; director of Pacific Thrift from
November 1993 to present; Chief Operating Officer of the Partnership
from May 1994 until June 1996; President and Chief Executive Officer
of Topa Thrift and Loan from 1983 to 1993; President of Thrift Guaranty
Corporation from 1984 to 1988; director of Thrift Guaranty Corporation
from 1983 to 1988 and from 1989 to 1995, when the Thrift Guaranty
Corporation was liquidated; member, Mortgage Bankers Association
Secondary and Capital Markets Committee; member, California
Association of Thrift and Loan Companies ("CATL") Regulatory
Committee; member and former chairman, CATL Executive Committee;
former chairman, CATL Legislative Committee; Vice President of
CATL (1995-present).
Charles J. Siegel 48 Chief Financial and Administrative Officer and Assistant Secretary of the
Company; Chief Financial and Administrative Officer and Assistant
Secretary of Pacific Thrift from December 1993 to present; Chief
Financial Officer of PacificAmerica Centers from June 1996 to present;
Chief Financial Officer of the Partnership from May 1994 to June 1996;
Chief Financial Officer of Topa Thrift and Loan from 1983 to 1993;
Certified Public Accountant.
Frank Landini 46 Executive Vice President in charge of the Wholesale Division of Pacific
Thrift since December 1994; Senior Vice President of Pacific Thrift from
October 1993 to December 1994; Senior Vice President of Topa Thrift
and Loan from 1983 to 1993.
Norman A. Markiewicz 51 Executive Vice President of the Company; Chief Operating Officer of the
Partnership from 1981 to May 1994; Chief Operating Officer of Pacific
Thrift from 1988 to September 1993; Executive Vice President of Pacific
Thrift from 1993 to present; director of Pacific Thrift from 1988 to
present; Executive Vice President and director of PacificAmerica Centers.
Richard B. Fremed 55 Executive Vice President and Secretary of the Company; Chief Financial Officer
of the Partnership from 1981 to April 1994; Chief Financial Officer of Pacific
Thrift from 1988 to December 1993; Secretary of Pacific Thrift from December
1988 to present; Treasurer of Pacific Thrift from December 1993 to present;
director of Pacific Thrift from 1988 to present; Secretaty and director of
PacificAmerica Centers; Certified Management Accountant and California
licensed real estate sales person.
</TABLE>
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<PAGE> 38
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In June 1996, the Company's Common Stock began trading under the symbol
PAMM on the Nasdaq National Market. The following table sets forth the range of
high and low sale prices. All share prices have been adjusted to reflect the
two-for-one stock split in the form of a stock dividend effected on August 13,
1997.
<TABLE>
<CAPTION>
High Low
---- ---
1996
----
<S> <C> <C>
Third Quarter 11.125 6.50
Fourth Quarter 16.00 10.875
1997
----
First Quarter 17.00 14.00
Second Quarter 16.375 12.00
Third Quarter 27.25 15.50
Fourth Quarter 29.50 15.00
</TABLE>
On March 20, 1998, the closing sale price for the Common Stock reported
on the Nasdaq National Market was $23.25 per share.
As of March 13, 1998, there were approximately 1,670 shareholders of the
Common Stock, including the beneficial holders whose shares are held of record
by brokerage firms and clearing agencies.
DIVIDEND POLICY
The Company, which was recently organized, has never paid a cash
dividend on its Common Stock. The Company's ability to pay dividends is subject
to restrictions set forth in the Delaware General Corporation law. The Delaware
Corporation Law provides that a Delaware corporation may pay dividends either
(i) out of the corporation's surplus (as defined in Delaware law), or (ii) if
there is no surplus, out of the corporation's net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. However,
pursuant to Section 2115 of the California General Corporation Law, under
certain circumstances, certain provisions of the California General Corporation
Law may be applied to foreign corporations qualified to do business in
California, which may reduce the amount of dividends payable by the Company.
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<PAGE> 39
Since the Company derives a substantial amount of its revenues from
Pacific Thrift, a California corporation, California law and FDIC regulations
with respect to dividends will have a substantial effect on the Company's
ability to pay dividends. Under California law, a corporation is prohibited from
paying dividends unless (i) the retained earnings of the corporation immediately
prior to the distribution exceeds the amount of the distribution; (ii) the
assets of the corporation exceed 1-1/4 times its liabilities; or (iii) the
current assets of the corporation exceed its current liabilities, but if the
average pretax net earnings of the corporation before interest expense for the
two years preceding the distribution was less than the average interest expense
of the corporation for those years, the current assets of the corporation must
exceed 1-1/4 times its current liabilities.
On August 13, 1997, the Company paid a one-for-one stock dividend to
all stockholders of record on July 31, 1997, having the effect of a two-for-one
stock split.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables present selected consolidated financial and other
data of the Company (or the Partnership for periods prior to June 27, 1996) as
of and for each of the years in the five years ended December 31, 1997. The
information below should be read in conjunction with, and is qualified in its
entirety by, the more detailed information included elsewhere in this Report,
including the Consolidated Financial Statements of the Company and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
1997 1996 1995 1994 1993
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total interest income .................... $11,730 $11,502 $9,577 $11,404 $14,212
Total interest expense.................... 6,540 4,966 5,199 4,927 5,718
Net interest income..................... 5,190 6,536 4,378 6,477 8,494
Total noninterest income.................. 82,055 29,994 9,440 2,071 998
Provision for loan losses................. 3,087 1,151 3,289 6,096 4,655
Other real estate owned expense........... 444 681 1,212 732 3,307
General and administrative expense........ 54,151 28,227 13,099 12,140 8,794
Provision (benefit) for income taxes...... 12,468 1,658 (1,223) 1 1
-------- ------- ------- ------- -------
Income from continuing operations......... 17,095 4,813 (2,559) (10,421) (7,265)
Income from discontinued operations....... -0- 387 861 907 1,396
Loss on disposal of discontinued operations -0- (1,038) -0- -0- -0-
Income (loss)............................. $178,095 $ 4,162 $(1,698) $(9,514) $(5,869)
======== ======= ======== ======== ========
Distributions paid........................ -0- -0- -0- -0- 1,943
BASIC EARNINGS PER SHARE(1)
Continuing operations.................. 4.18 1.53 (1.82) n/a n/a
Discontinued operations................ -0- (0.32) 0.41 n/a n/a
Net income............................. 4.18 1.21 (1.41) n/a n/a
DILUTED EARNINGS PER SHARE(1)
Continuing operations 3.48 1.27 (1.82) n/a n/a
Discontinued operations -0- (0.26) 0.41 n/a n/a
Net income 3.48 1.01 (1.41) n/a n/a
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets.............................. $227,826 $110,235 $82,994 $103,747 $114,324
</TABLE>
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<PAGE> 40
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
1997 1996 1995 1994 1993
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-only strip receivable............ 94,424 11,698 -0- -0- -0-
Loan held for sale........................ 35,280 18,418 12,577 12,011 572
Portfolio Loans(2)........................ 20,629 33,515 43,908 53,045 84,183
Total deposits............................ 132,524 81,002 60,156 69,501 62,421
Notes payable............................. 28,318 3,290 6,771 14,778 23,200
Equity.................................... 48,386 21,966 8,727 10,425 19,939
SELECTED RATIOS (%)
Return on average assets.................. 9.97% 4.21% (1.82)% (8.73)% (5.00)%
Return on average equity.................. 48.60% 27.12% (17.73)% (62.67)% (24.07)%
Net interest margin(3).................... 5.24% 7.46% 5.79% 6.82% 8.65%
Noninterest expense to average assets..... 31.85% 29.21% 15.33% 11.81% 10.32%
Efficiency ratio(4)....................... 62.58% 79.13% 103.57% 150.58% 127.49%
Efficiency ratio excluding REO expense(4). 62.07% 77.27% 94.80% 142.02% 92.65%
General and administrative expense to
average assets.......................... 31.59% 28.52% 14.03% 11.13% 7.50%
Average equity to average assets.......... 20.52% 15.51% 10.26% 13.92% 20.79%
Loan originations......................... $768,226 $373,457 $170,961 $76,838 $48,612
ASSET QUALITY DATA:
Nonaccrual loans.......................... 1,105 $1,394 $793 $3,146 $5,316
REO (net of senior liens)................. 2,028 2,728 2,545 5,308 4,225
Total nonperforming assets................ 3,133 4,122 3,338 8,454 9,541
Troubled debt restructurings.............. -0- 357 948 -0- -0-
Allowance for credit losses on
portfolio loans......................... 1,438 2,464 4,229 4,307 3,122
Net portfolio loan charge offs............ 2,211 $2,916 3,367 4,912 4,178
ASSET QUALITY RATIOS:
Nonperforming assets to total assets...... 1.37% 3.59% 4.02% 8.15% 8.35%
Allowance for credit losses to net
portfolio loans......................... 6.97% 7.35% 9.63% 8.12% 4.96%
Allowance for credit losses to
nonaccrual portfolio loans.............. 130.14% 176.76% 533.29% 136.94% 58.74%
Net portfolio loan charge offs to
average portfolio loans................. 8.17% 7.53% 6.95% 7.16% 5.30%
</TABLE>
================================================================================
(1) Earnings per common share for the years ended December 31, 1996 and 1995
assumes the Restructuring took place at the beginning of the
period and the Company was taxed for federal and state income tax
purposes as a taxable corporation at a 42% effective tax rate.
(2) Net of allowances for loan loss and deferred loan fees and costs.
(3) Net interest margin represents net interest income divided by total
average earning assets.
(4) Efficiency ratio represents noninterest expense divided by noninterest
income and net interest income.
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<PAGE> 41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
preceding Selected Financial Data and the Company's Financial Statements and the
Notes thereto and the other financial data included elsewhere in this Report.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which always involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth below under the heading "Forward
Looking Statements."
On June 27, 1996, the Company completed the Restructuring with the
Partnership, which was accounted for as a change in legal organization but not
in the enterprise of the Partnership. Therefore, the financial statements of the
Company give effect to the Restructuring as a recapitalization of the
Partnership into the Corporation. References to the Company in this Report refer
to the financial condition and results of operations of the Partnership on a
consolidated basis for all periods prior to June 27, 1996.
The Company, through its subsidiaries Pacific Thrift and PacificAmerica
Centers, is engaged in the business of originating, purchasing and selling
mortgage loans secured primarily by one-to-four family residences. The Company's
primary source of revenue is the recognition of gains upon sale of loans. Most
loans sold by the Company until the fourth quarter of 1996 were sold for a cash
premium received on the date of sale. Beginning in the fourth quarter of 1996,
the Company began selling loans under agreements providing that it would retain
an interest in the purchasers' residual interest in excess spread in each
securitization pool in which the Company's loans were placed by the purchaser.
The Company recognizes gain from the sale of these loans as the present value of
the interest-only strips, if any, and/or excess spread in which it retains
interests under its agreements with the purchasers of the loans. See "Certain
Accounting Considerations," below.
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<PAGE> 42
The Company has increased its loan origination volume from $171.0
million for 1995 to $769 million during 1997, representing a growth rate of 450%
over this three year period. This increase in loan origination volume was
primarily due to the expansion of the Company's lending operations from one
state (California) in 1994 to 50 states by December 31, 1997.
Until the sale of the assets of CRC and LPPC and the stock of CRCWA as
of December 31, 1996, the Company operated two business segments: the subprime
residential mortgage lending business and the trust deed foreclosure services
business. See Note 15 in the Notes to Consolidated Financial Statements. The
Company's primary business has always been subprime residential mortgage
lending, and in November 1996, the Company sold CRC, LPPC and CRCWA in order to
devote all of its financial and human resources to its primary lending business.
Since January 1, 1997, the Company has operated only its mortgage lending
business.
CERTAIN ACCOUNTING CONSIDERATIONS
In 1995, the Company began originating a substantial portion of its
loans for sale in securitization transactions. In 1996, the Company determined
to concentrate exclusively on this business. In 1995 and the first three
quarters of 1996, the Company sold its loans for a cash premium with no residual
interest in loans sold. The Company determined that it would yield higher profit
margins if it retained an interest-only strip in loans sold for securitization,
and in the fourth quarter of 1996, it revised its primary loan sale agreements
to provide for an interest-only strip in lieu of a cash premium. In accordance
with these agreements, in 1997, a substantial majority of the Company's loans
were sold in securitization transactions in which the Company retains an
interest-only strip.
The interest-only strip receivable is recorded as a result of the
Company's sale and securitization of real estate loans. Interest-only strip
receivables are recorded at their estimated fair value. The fair value is based
on the present value of the expected future cash flows. The Company estimates
future cash flows from this interest-only strip receivable utilizing
assumptions that it believes are consistent with those that would be utilized
by an unaffiliated third party purchaser. To the Company's knowledge, there is
no active market for the sale of this interest-only strip receivable.
The fair value of the interest-only strip receivable is determined by
computing the present value of the excess cash flows based on the weighted
average coupon and estimated prepayment penalties received on the loans sold
over the sum of: (i) the coupon on the senior interests, (ii) the contracted
servicing fee, (iii) expected losses to be incurred on the portfolio of loans
sold over the lives of the loans, (iv) overcollateralization; and (v) fees
payable to the trustee and the monoline insurer. The cash flow model uses
prepayment and default assumptions that market participants would be expected
to use for similar financial instruments that are subject to use for similar
financial instruments that are subject to prepayment, credit and interest rate
risk.
The cash flows are then discounted at an interest rate that the Company
believes an unaffiliated third-party purchaser would require as a rate of
return on such a financial instrument. To the extent that actual future excess
cash flows are different from estimated excess cash flows, the fair value of
the Company's interest-only strip will be adjusted quarterly with corresponding
adjustments made to earnings in that period.
The Company builds overcollateralization from the excess cash flows.
The current amount of such overcollateralization built through cash flows is
part of the interest-only strip receivable and earns a market rate of interest.
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<PAGE> 43
As of December 31, 1997, the Company adjusted the fair value of its
interest-only strip receivable by approximately $2.3 million, which reflected
the use of the "cash out" method of estimating future cash flows from the
various mortgage trusts. The Company believes the "cash out" method is a
preferred methodology for estimating ultimate residual cash flows used to
determine the fair value of its interest-only strip receivables at each
reporting period in accordance with the requirements of SFAS No. 115. The "cash
out" method assumes that the cash flows placed by the mortgage pool trustee in
an overcollateralization account are not considered available until they are
received by the Company. The impact of this change in estimate adjustment on
the December 31, 1997 fair value relates primarily to loans sold and/or
securitized in the fourth quarter of 1997. During 1997, the Company utilized a
modified "cash in" method of modeling the cash flows which included some
accelerated amortization of the interest only strip receivable asset on loans
sold and securitized prior to the fourth quarter of 1997. In March, 1998, the
Company obtained and independent valuation and report of the interest-only
strip receivable as of December 31, 1997, which, using the "cash out" method of
modeling cash flows, determined fair values of the interest-only strip
receivable. The fair value of the interest-only strip receivable reflected on
the Statement of Financial Condition at December 31, 1997 is consistent with
the results of that report.
The fair value at December 31, 1997 can be calculated with a constant
prepayment rate assumption on the Aames 1996-4 pool of 36%, and constant
prepayment rate assumptions on the Advanta 1997-1, 1997-2, 1997-3 and 1997-4
and PacificAmerica 1997-1 pools of 26% to 27%; a 50 basis point annual loss
rate on each of its pools (after the first six months) with a three month ramp
up period; and an 11% discount rate on estimated cash flows from each of its
pools. Other combinations of these assumptions could produce similar results.
It is possible that these assumptions could change in the near future,
due to changes required by future accounting pronouncements, the general
economy, adverse changes in the securitization market, and actual prepayment
and default experience which vary from the assumed rates, which would require
adjustments in the reported fair value of the interest-only strip receivable.
As a result, the actual cash flows received by the Company could differ
significantly from the modeled cash flows using current assumptions. The
estimated fair value of the Company's interest-only strip receivable is
reviewed quarterly with required adjustments, if necessary, made to earnings in
that period. The Company intends to obtain an annual third party valuation of
its interest-only strip receivables as further assurance regarding the
Company's valuation methodology.
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<PAGE> 44
The following table compares the actual loan losses through February 28,
1998 for each of the Company's securitization pools with the loan loss reserve
for each pool used by the Company to value its interest-only strip receivables
in those pools.
COMPARISON OF ACTUAL CUMULATIVE LOSSES
WITH LOAN LOSS RESERVES
<TABLE>
<CAPTION>
Actual
Pool Securitization Cumulative Loan Loss
Description Date Losses Reserve
----------- -------------- ---------- ---------
<S> <C> <C> <C>
Aames 96-4 Nov 96 .09% 1.57%
Advanta 97-1 Feb 97 .00% 1.94%
Advanta 97-2 May 97 .00% 1.93%
Advanta 97-3 Aug 97 .00% 2.04%
Advanta 97-4 Nov 97 (not available due to recent age of loans)
PAMM 97-1 Dec 97 (not available due to recent age of loans)
</TABLE>
The interest only strip receivables retained by the Company are
accounted for under SFAS 115 "Accounting for Investments in Certain Debt and
Equity Marketable Securities." As an interest-only strip receivable is subject
to significant prepayment risk, and therefore has an undetermined maturity date,
it cannot be classified as held to maturity. The Company has chosen to classify
its interest-only strip receivables as trading securities. Based on this
classification, the Company is required to mark these securities to fair value
with the accompanying increases or decreases in fair value being recorded as a
component of
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<PAGE> 45
gain on sale of loans. The determination of fair value is based on the
previously mentioned valuation methodology, and the Company assesses fair
value quarterly.
As the gain recognized in the year of sale includes the present value
of the estimated future cash flows from the interest only strip receivables, the
amount of cash actually received over the lives of the loans normally exceeds
the gain previously recognized at the time the loans were sold, and, therefore,
residual interest income is recognized over the life of the loans securitized.
There can be no assurance that future performance of the above
identified securitization pools will remain positive relative to the Company's
initial assumptions, particularly since the loans in these pools were only
originated in September 1996 or more recently.
FINANCIAL CONDITION
AT DECEMBER 31, 1997 COMPARED WITH DECEMBER 31, 1996
Total consolidated assets of the Company increased $117.7 million
(106.8%) to $227.9 million at December 31, 1997 from $110.2 million at December
31, 1996. The increase resulted primarily from the increase in interest-only
strip receivables, cash and cash equivalents and loans held for sale, partially
offset by decreases in receivable for mortgage loans shipped, loans receivable,
and REO. Interest-only strip receivable increased $82.7 million (706.8%), to
$94.4 million at December 31, 1997, from $11.7 million at December 31, 1996,
reflecting a substantially higher volume of loans sold for securitization in
1997 and a full year of securitization transactions in which the Company
retained residual interests. See "Business -- Lending Activities - Loan Sales
and Securitizations." Cash and cash equivalents increased $57.5 million (668.6%)
to $66.1 million at December 31, 1997, from $8.6 million at December 31, 1996,
due to timing of payments for loan sales in December of each year. Loans held
for sale increased $17.2 million (95.0%), to $35.3 million at December 31, 1997,
from $18.1 million at December 31, 1996. A receivable for mortgage loan sales of
$24.3 million was held at December 31, 1996 for a pool of loans sold to Advanta,
which was paid in January 1997; no similar item was held at the end of 1997.
Loans receivable decreased $12.9 million (38.5%) to 20.6 million from $33.5
million, due to the Company's strategic decision to cease portfolio lending in
1996 and sell portfolio loans to raise additional funds for its mortgage banking
business. REO decreased $2.3 million (53.5%) to $2.0 million at December 31,
1997, from $4.3 million at December 31, 1996, due to the reduction in the
Company's loan portfolio and sales of REO held during 1997.
Total liabilities increased $91.2 million (103.3%) to $179.5 million at
December 31, 1997, from $88.3 million at December 31, 1996. The increase
resulted from an increase in total thrift certificates payable, notes payable
and deferred income tax liability. Total thrift certificates payable increased
$51.5 million (63.6%), to $132.5 million from $81.0 million, reflecting
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<PAGE> 46
increased issuance of thrift certificates to fund Pacific Thrift's lending
operations. Notes payable increased $25.0 million (757.6%) to $28.3 million at
December 31, 1997 from $3.3 million at December 31, 1996, reflecting advances
received by the Company on interest-only strip receivables under arrangements
with Advanta and Merrill Lynch. See "Business -- Lending Activities - Loan Sales
and Securitizations." The deferred income tax liability increased by $12.4
million to $12.1 million at December 31, 1997, primarily from the deferred tax
liability primarily related to the interest only strip offset by deferred tax
assets primarily related to the net operating loss carryforwards. Accounts
payable and accrued expenses increased $3.9 million (177.3%), to $6.1 million
from $2.2 million, due primarily to the accrual of executive bonuses of $2.5
million, the Supplemental Employee Retirement Plan accrual of $.6 million and
accrued interest on the residual financing note payable of $.7 million.
Total stockholders' equity increased $26.4 million, to $48.4 million at
December 31, 1997 from $22.0 million at December 31, 1996, due to consolidated
net income of $17.1 million in 1997 and net proceeds from exercise of General
Partner and Subscriber Warrants of $9.3 million.
AT DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995.
Total consolidated assets of the Company increased $27.3 million (32.9%)
to $110.2 million at December 31, 1996 from $82.9 million at December 31, 1995.
The increase resulted primarily from increases in a receivable for mortgage loan
sales and interest-only strip receivable, partially offset by decreases in
loans receivable, cash and cash equivalents, and goodwill. A receivable for
mortgage loan sales of $24.3 million was held at December 31, 1996 for a pool of
loans sold to Advanta, which was paid in January 1997; no similar item was held
in 1995. Interest only strip receivable increased $9.0 million, to $11.7 million
from $2.7 million, due to the Company's retention of an interest in excess
spread on loans sold for securitization under agreements with Aames and Advanta.
See "BUSINESS -- Lending Activities - Loan Sales and Securitizations." Loans
receivable decreased $10.4 million (23.7%) to $33.5 million from $43.9 million,
due to the Company's strategic decision to cease portfolio lending in 1996 and
sell portfolio loans to raise additional funds for its mortgage banking
business. Cash and cash equivalents decreased by $1.9 million (18.1%) to $8.6
million from $10.5 million, due to timing of payments for loan sales in
December. Goodwill decreased $1.8 million (100%) due to the sale of CRC, LPPC
and CRCWA.
Total liabilities increased $14.1 million (19.0%) to $83.3 million at
December 31, 1996 from $74.2 million at December 31, 1995. The increase resulted
from an increase in total thrift certificates payable, partially offset by
declines in note payable, accounts payable and partnership withdrawals payable.
Total thrift certificates payable increased $20.8 million (34.5%), to $81.0
million from 60.2 million, reflecting increased issuance of thrift certificates
to fund Pacific Thrift's lending operations. Note payable decreased
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<PAGE> 47
$3.5 million (51.5%) to $3.3 million from $6.8 million, due to pay downs of the
bank loan in 1996 offset by an advance on excess yield of $2.6 million from
Aames, which will be repaid from excess spread payments on loans sold by the
Company to Aames for securitization. The remaining balance of $745,000 on the
bank loan was completely paid off in January 1997. Accounts payable and accrued
expenses decreased $1.8 million (45.0%), to $2.2 million from $4.0 million, due
to the sale of CRC. Partnership withdrawals payable of $1.1 million were paid
off in 1996 immediately following the Restructuring.
Total stockholders' equity increased $13.3 million, due to consolidated
net income of $4.2 million in 1996 and the net proceeds of the Company's Rights
Offering and Public Offering in 1996.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
GENERAL
The Company reported net income of $17.1 million for 1997, an increase
of $12.9 million (307.1%) from $4.2 million in 1996, compared with a net loss of
$1.7 million for 1995. The increase in net income is due primarily to a
substantial increase in gain on sale of loans in 1997, resulting from a
substantial increase in loan originations in 1997.
INTEREST INCOME AND EXPENSE
Net interest income before provision for loan losses decreased $1.3
million (20.0%), to $5.2 million for 1997 from $6.5 million for 1996. Total
interest income increased $.2 million (1.7%), to $11.7 million for 1997 from
$11.5 million for 1996. Interest expense increased $1.5 million (30.0%), to $6.5
million for 1997 from $5.0 for 1996, due to increases in total outstanding
thrift certificates and notes payable.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $1.9 million (158.3%), to $3.1
million for 1997 from $1.2 million for 1996. The increase in the provision was
made to reflect an increase in the reserve for $8.4 million of piggyback loans
reclassified as held for sale in December 1997 and sold in January 1998 at a
discount of approximately 24%. As this discount was fully reserved at December
31, 1997, the effect was that the sale resulted in a nominal gain.
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 Loan Losses."
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<PAGE> 48
NONINTEREST INCOME AND EXPENSE
Total noninterest income increased $52.1 million (173.7%), to $82.1
million for 1997 from $30.0 million for 1996, reflecting an increase in gain on
sale of loans. Gain on sale of loans increased $52.5 million (179.8%) to $81.7
million for 1997 from $29.2 million for 1996. Total noninterest expense
increased $25.7 million (88.9%) to $54.6 million for 1997 from $28.9 million for
1996, due to expansion of the Company's mortgage banking business, which
required the addition of more employees and office space. Salary and related
benefits increased $14.9 million (102.1%) to $29.5 million in 1997 from $14.6
million in 1996, and general and administrative expenses increased $12.1 million
(100.8%), to $24.1 million in 1997 from $12.0 million in 1996, because of
expanded mortgage banking activities.
INCOME TAXES
Income tax expense from continuing operations was $12.5 million for
1997, compared to $1.7 million for 1996, as a result of the $23.1 million
increase in income before income taxes, to $29.6 million for 1997 from $6.5
million for 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
GENERAL
The Company reported net income of $4.2 million for the year ended
December 31, 1996, compared with a net loss of $1.7 million for the year ended
December 31, 1995. The increase in net income is due primarily to a $20.3
million increase in gain on sale of loans in 1996, which has resulted from
steady increases in the Company's loans originations over the past year. Net
interest income also increased $2.1 million for the year ended December 31,
1996, primarily due to an increase in total interest income resulting from the
Company's retention of interest income on loans originated for sale prior to the
date of their securitization.
INTEREST INCOME AND EXPENSE
Net interest income before provision for loan losses increased $2.1
million (47.7%), to $6.5 million for the year ended December 31, 1996 from $4.4
million for the year ended December 31, 1995. Total interest income increased
$1.9 million (19.8%), to 11.5 million for the year ended December 31, 1996 from
$9.6 million for the year ended December 31, 1995 as a result of interest
accrued on loans originated and sold. Interest expense decreased $.2 million
(3.8%), to $5.0 million for the year ended December 31, 1996 from $5.2 million
for the year ended December 31, 1995, due to declines in interest rates paid on
thrift certificates, partially offset by an increase in total outstanding thrift
certificates.
PROVISION FOR LOAN LOSSES
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<PAGE> 49
The provision for loan losses decreased $2.1 million (63.6%), to $1.2
million for the year ended December 31, 1996 from $3.3 million for the year
ended December 31, 1995, reflecting a $10.4 million decrease in the total amount
of portfolio loans held during 1996.
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 Loan Losses."
NONINTEREST INCOME AND EXPENSE
Total noninterest income (not including income of CRC, LPPC and CRCWA,
which are reflected as discontinued operations due to their sale in 1996)
increased $20.6 million (219.1%), to $30.0 million for the year ended December
31, 1996 from $9.4 million for the year ended December 31, 1995. Income from
discontinued operations was $.4 million in 1996 compared to $.9 million in 1995.
In addition, the Company incurred a $1.0 million loss on the sale of CRC, LPPC
and CRCWA, primarily from a write-off of related goodwill. The primary source of
the increase was the $20.3 million increase in gain on sale of loans, to $29.2
from $8.9 million. Total noninterest expense (not including expenses of CRC,
LPPC and CRCWA, which are reflected as discontinued operations due to their sale
in 1996) increased $14.6 million (102.1%) to $28.9 million for the year ended
December 31, 1996 from $14.3 million for the year ended December 31, 1995, due
to expansion of the Company's mortgage banking business which required the
addition of more employees and office space. Salary and related benefits
increased $8.6 million (143.3%) to $14.6 million from $6.0 million, and general
and administrative expenses increased $6.8 million (130.8%), to $12.0 million
from $5.2 million, because of expanded mortgage banking activities. Expense on
operation of REO decreased $.5 million (41.7%), to $.7 million from $1.2
million.
INCOME TAXES (BENEFIT)
Income tax expense from continuing operations was $1.7 million in 1996,
compared to an income tax benefit of $1.2 million in 1995. During 1996, the
Company reversed valuation allowances for deferred tax assets totaling $1.7
million, based upon events and earnings in 1996 which management believes
indicate it is more likely than not that sufficient revenue will be generated in
the future to use these deferred tax assets. See Note 8 to the Consolidated
Financial Statements for additional information.
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 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 $.2 million, $.3 million and $.7 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
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<PAGE> 50
YIELDS AND RATES ON INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ----------- ------------ ------------- ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $90,958 $11,332 12.46% $81,492 $11,174 13.71%
Interest-bearing deposits in
other financial institutions
and securities purchased under
agreements to sell 8,026 398 4.96% 6,155 328 5.33%
------- ------- ---- ------- ------- ------
Total interest-earning assets 98,984 11,730 11.85% 87,647 11,502 13.12%
======= ====== ===== ====== ====== ======
Noninterest-earning assets:
Cash and due from banks 7,864 6,212
Premises & equipment, net 7,868 1,875
Real estate acquired in settlement
of loans 3,173 3,445
Other Assets 62,714 6,668
------ -------
Total noninterest-earning assets 81,619 18,200
------ ------
Less allowance for loan losses 2,001 -0- 3,712
----- --------- -------
182,604 11,730 102,135 11,502
======= ====== ======= ======
Liabilities & Stockholders'
Equity/Partners' Capital
Interest-bearing liabilities:
Notes payable 20,495 1,033 5.04% 3,831 553 14.43%
Savings deposits 21,516 1,099 5.11% 31,299 1,627 5.20%
Time CDs 75,007 4,408 5.88% 47,583 2,787 5.86%
------ ----- ----- ------- ------- ------
Total interest-bearing
liabilities 117,018 6,540 5.59% 82,713 4,967 6.01%
======= ===== ===== ====== ===== =====
Noninterest-bearing liabilities:
Accounts payable & accrued
expenses 14,923 4,308
------ ------
Total liabilities 87,021
Stockholders' Equity/Partners'
------ ----- ------- -----
Capital 32,554 15,114
164,495 6,540 $102,135 4,967
======= ===== ======== =====
Net interest income/spread 5,190 6.26% 6,535 7.12%
===== ===== ===== =====
Net interest margin 5.24% 7.46%
Net Income (loss) 17,095 4,162
====== =====
Average interest earning assets to
average interest bearing liabilities .85% 1.060%
</TABLE>
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<PAGE> 51
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 new 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.
Rate Volume Analysis
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 compared to 1996 1996 compared to 1995
Increase (decrease) Increase (decrease)
due to change in due to change in
------------------------------- ---------------------------------
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
----- ------ ------ ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans 1,179 (1,021) 158 2,439 (150) 2,289
Interest-bearing deposits
in other financial
institutions and securities
purchased under
agreements to sell 93 (23) 70 (308) (56) (364)
----- ------ ----- ----- ---- -----
Total interest-earning
assets 1,272 (1,044) 228 2,131 (206) 1,925
===== ====== ===== ===== ==== =====
Interest-bearing liabilities:
Notes payable 840 (360) 480 (1,164) 338 (826)
Savings deposits (500) (28) (528) 936 (26) 909
Time CDs 1,612 9 1,621 (148) (168) (315)
------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities 1,952 (379) 1,573 (376) 144 (232)
===== ====== ===== ===== ==== =====
</TABLE>
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<PAGE> 52
<TABLE>
<CAPTION>
Rate Volume Analysis
(Dollars in Thousands)
-------------------------------------------------------
1997 compared to 1996 1996 compared to 1995
Increase (decrease) Increase (decrease)
due to change in due to change in
----------------------- --------------------------
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
----- ------ ------ ----- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Change in net interest income (680) (665) (1,345) 2,507 (350) 2,157
==== ==== ===== ===== ==== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash requirements include the funding or
payment of: (i) loan originations; (ii) fees and expenses incurred in connection
with securitizations; (iii) income taxes; (iv) capital expenditures; and (v)
other operating and administrative expenses. The Company generates cash flow
from loans sold for securitization, advances on interest-only strip receivables,
deposits issued by Pacific Thrifty to fund its lending operations, whole loan
sales, principal payments and interest income on portfolio loans, and sale of
REO.
The Company has obtained advances on interest-only strips from Advanta
on loans sold to it for securitization, which are payable from the cash flow
payments made on the interest-only strips. The Company has also obtained
advances on interest-only strips from Merrill Lynch on loans securitized through
it, which are payable one year from the date of the advance, unless renewed at
the option of Merrill Lynch.
Certificates of deposit which are scheduled to mature in one year or
less from December 31, 1997 totaled $113.7 million. Based upon historical
experience, management believes that a significant portion of such deposits will
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. From
time to time during 1994 and 1995, management of Pacific Thrift intentionally
took steps to reduce deposit renewals in order to reduce the total amount of
deposits. These steps included
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<PAGE> 53
reducing the interest rates offered on maturing deposits and declining to renew
certain large deposits.
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, 1997 was 68.0%, which exceeded the 10% minimum established by the Board. At
December 31, 1996 and 1995, the liquidity ratio was 49.0% and 31.7%,
respectively.
Pacific Thrift has a federal funds credit line with Wells Fargo Bank,
bearing interest at the federal funds rate as announced from time to time by the
Federal Reserve Board, in the amount of $5.0 million. 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. At December 31,
1997, there were no outstanding borrowings under the credit line.
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, 1996, 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 MOU requiring Pacific Thrift
to maintain certain capital levels, it is still classified as "adequately
capitalized." See "SUPERVISION AND REGULATION -- Federal Law -- Capital Adequacy
Guidelines."
The Company used $45.6 million net cash in operating activities in 1997,
compared to $23.0 million in 1996 and $4.9 million in 1995, reflecting the
funding of substantially more loans for sale and securitization in 1998. The
Company realized net cash from investing activities of $17.1 million in 1997.
The Company used net cash from investing activities of $1.8 million in 1996,
primarily due to an increase in loan receivables in 1996 before the Company
determined to discontinue portfolio. The Company realized net cash from
investing activities of $13.1 million in 1995, reflecting primarily proceeds
from sale of REO. The Company realized $85.9 million net cash from financing
activities in 1997, reflecting a net increase of $51.6 million in thrift
certificates, $26.2 million in advances on interest-only strips and $9.3 million
from the issuance of common stock upon exercise of General Partner and
Subscriber Warrants and stock options. The Company realized $22.8 million net
cash from financing activities in 1996, reflecting primarily a net increase of
$20.8 million in thrift certificates, and $10.8 million in proceeds form the
Public Offering and Rights Offering. The Company used $17.4 million net cash in
financing activities in 1995, reflecting a $9.3 million net decrease in thrift
certificates and a $8.0 million paydown of a bank loan.
At December 31, 1997 the Company had a deferred tax asset of $22,635,000
which is primarily related to net operating loss carryforwards. The Company also
has deferred tax liabilities of $34,782,000 which are primarily related to the
interest-only strips receivable. Over the next few years, the Company expects to
generate future taxable income from the interest-only strips receivable.
Management believes that it is more likely than not the such future taxable
income will be sufficient for realization of the deferred tax assets.
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, 1997, total interest-bearing liabilities maturing or
repricing during each period exceeded total interest-earning assets maturing or
repricing in the same periods by $15.4 million, representing a negative
cumulative interest rate sensitivity gap ratio of 13%. However, because interest
rates for different asset and liability products offered by depository
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<PAGE> 54
institutions respond differently to changes in the interest rate environment,
the gap is only a general indicator of interest rate sensitivity.
Pacific Thrift actively monitors its interest rate risk. The Board of
Directors of Pacific Thrift reviews its interest rate risk position no less than
quarterly.
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, 1997 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 (passbook
accounts and money market accounts), which totaled $18.8 million at December 31,
1997 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 increases in 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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<PAGE> 55
INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
After
Assets or Liabilities Which 1 Day 3 Months Sixs 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............... 61,137 -- -- -- -- 61,137
Variable Rate Loans Receivable..... 18,139 -- -- -- -- 18,139
Fixed Rate Loans Receivable........ 428 -- -- 299 1810 2,537
Loans Held for Sale (1)............ 35,280 -- -- -- -- 35,280
------- --------- --------- --- ---- -------
Interest-earning assets.......... 114,984 -- -- 299 1810 117,093
------- --------- --------- --- ---- -------
Certificates of deposit............ 20,988 32,649 59,999 95 -- 113,731
Savings accounts................... 18,793 -- -- -- -- 18,793
------ --------- --------- --------- --------- ------
Interest-bearing liabilities..... 39,781 32,649 59,999 95 -- 132,524
------ ------ ------ -- --------- -------
Interest rate sensitivity gap...... 75,203 (32,649) (59,999) 204 1810 (15,431)
Cumulative interest rate
sensitivity gap.................. 75,203 42,554 (17,445) (17,241) (15,431) (15,431)
Interest rate sensitivity ratio(2). 2.89 -- -- 3.15 -- .88
Cumulative interest rate
sensitivity gap ratio (3)........ .65 .37 (.15) (.15) (.13) (.13)
</TABLE>
(1) Includes loans sold by 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.
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 Company and its subsidiaries. Like
most mortgage companies and industrial loan companies, nearly all the assets and
liabilities of the Company and Pacific Thrift are monetary. As a result,
interest rates have a greater impact on the Company'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.
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<PAGE> 56
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued its Statement of Financial Accounting Standards No. 129 ("SFAS No.
129"), "Disclosure of Information about Capital Structure." SFAS 129 established
disclosure requirements regarding pertinent rights and privileges of outstanding
securities. Examples of disclosure items regarding securities include, though
are not limited to, items such as dividend and liquidation preferences,
participation rights, call prices and dates, conversion or exercise prices or
rates. The number of shares issued upon conversion, exercise or satisfaction of
required conditions during at least the most recent annual fiscal period and any
subsequent interim period must also be disclosed. Disclosure of liquidation
preferences of preferred stock in the equity section of the balance sheet is
also required. SFAS 129 is effective for financial periods ending after December
15, 1997. The adoption of this standard did not have an impact on the Company's
financial position or results of operations.
In June 1997, FASB issued SFAS 130, "Reporting Comprehensive Income."
SFAS 130 established disclosure standards for reporting comprehensive income in
a full set of general purpose financial statements. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of this standard
is not expected to have an impact on the Company's financial position or
results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information" which is effective for periods beginning
after December 15, 1997. SFAS 131 established standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The adoption of
this standard is not expected to have an impact on the Company's financial
position or results of operations.
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<PAGE> 57
DISCLOSURE ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February 1998 the FASB issued SFAS 132, "Disclosures About Pension
and Other Postretirement Benefits." This Statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans.
This Statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Restatement of disclosures
for earlier periods provided for comparative purposes is required unless the
information is not readily available, in which case the notes to the financial
statements should include all available information and a description of the
information not available.
YEAR 2000 COMPLIANCE INFORMATION
The Company has undertaken a full assessment of its operations to
determine all functions which will be impacted by the limitations on existing
computer programs which use only two digits to identify a year in the date
field. Substantially all of the Company's operating software systems, including
loan origination, loan servicing, financial, human resource and payroll systems,
are outsourced to third party providers. The Company distributed a written
request for Year 2000 compliance information to all systems providers in the
fourth quarter of 1997 and the first quarter of 1998 and has received responses
from most providers. The loan origination, financial, human resources and
payroll systems providers have represented that they will implement upgrades
which make their systems Year 2000 compliant. The loan servicing and thrift
deposit system provider has indicated that it is currently undergoing
restructuring and testing needed to become compliant before the end of 1998. The
Company's PC and computer network operating system providers have posted
representations that they are each compliant on their Internet web sites.
Because its operating systems are outsourced, the Company does not expect to
incur any material costs in connection with the upgrades necessary to bring
these systems into Year 2000 compliance.
The Company has also contacted Aames and Advanta, the servicers of loan
pools in which the Company holds interest-only strip receivables, to determine
their Year 2000 compliance, and expects that they will become compliant before
2000. The Company is similarly awaiting responses from its bank, investment bank
and appraisal service providers. The Company does not expect to incur any
material cost in connection with the upgrades necessary to bring the systems of
its service providers into Year 2000 compliance.
-57-
<PAGE> 58
During 1998, the Company plans to conduct internal testing of all of its
computer hardware units to determine their compatibility with Year 2000
information. It is anticipated that testing will be completed by the end of
1998. The Company anticipates that some of the older PC units may require
replacement in order to accept four digit date information. However, the Company
does not anticipate that the cost of these replacements will be material to the
Company.
SEASONALITY
The Company's results of operations have not been materially affected by
seasonality.
RISK FACTORS
The discussion in this Report contains certain forward-looking
statements relating to anticipated financial performance, business prospects and
business plans. Actual future results could differ materially from those
described in the forward-looking statements as a result of factors discussed
below. The Company cautions the reader, however, that these lists of risk
factors may not be exhaustive. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect any future events or circumstances.
RELIANCE ON CONTINUING SECURITIZATIONS. The Company has been able to
substantially increase its lending volume as a direct result of its ability to
sell for securitization substantial amounts of its new loan production. Any
change in the market for securitized subprime residential loans could have an
adverse impact the Company's ability to continue to increase or maintain the
growth of its mortgage banking business.
RISKS OF GAIN ON SALE ACCOUNTING. The Company follows generally accepted
accounting principles to determine the present value of future cash flows on its
interest-only strip receivables retained in each securitization transaction. The
determination of value is made using certain assumptions developed by management
regarding prepayment and loss rates. Actual prepayment and loss rates are
affected by a variety of factors which cannot be predicted with certainty.
Therefore, there is a risk that the value of interest-only strip receivables
will require adjustment to reflect future events. See "Certain Accounting
Considerations" above for a detailed discussion of the various factors which
impact valuation of interest-only strip receivables.
NEGATIVE CASH FLOW AND CAPITAL NEEDS. Upon the closing of each
securitization transaction, the Company recognizes gain on sale of the loans
securitized, representing the present value of anticipated cash flows from a
residual interest in the loans securitized. See "Certain Accounting
Considerations." The Company incurs significant expense in connection with a
securitization and generally incurs both current and deferred tax liabilities as
a result of the gain on sale. Net cash used in operating activities for 1997,
the first year in which the Company recognized significant gain on sale income,
was $45.6 million. The Company currently intends to continue its emphasis on
securitization of loans as its primary business activity, which requires that
the Company have access to external sources of cash to fund its operations. The
Company
-58-
<PAGE> 59
currently relies primarily on funds provided by the issuance of thrift
certificates to fund operations of Pacific Thrift and advances provided by
Merrill Lynch on interest-only strip receivables retained on securitizations
completed through Merrill Lynch. The Company also sells whole loans for cash
from time to time as an additional source of cash to fund operations. The
Company has both warehouse and residual financing arrangements to fund its
operations. The Company is also considering additional sources of equity and/or
debt financing. There can be no assurance that any such sources will be
available to the Company.
RISKS OF CONTRACTED SERVICING. The Company contracts with third parties
to service all of its loans sold for securitization. Aames services all loans in
the Aames 1996-4 pool and Advanta services all loans in each of the Advanta
pools in which the Company owns interest-only strip receivables. In addition,
Advanta services all loans in the PacificAmerica 1997-1 and 1998-1 pools under a
sub-servicing agreement with the Company. The Company is subject to risks
associated with inadequate or untimely service rendered by these loan servicers.
Many of the Company's borrowers require notices and reminders to keep their
loans current and to prevent delinquencies and foreclosures. Any failure by a
servicer to provide adequate or timely service could result in higher
delinquency rates and foreclosure losses on loan pools, which could have an
adverse impact on the value of the Company's interest-only strip receivables in
those pools.
COMPETITION IN THE LENDING INDUSTRY. The subprime residential mortgage
industry is undergoing consolidation and increased competition, which may reduce
profit margins on the Company's lending business and may also have an adverse
impact the Company's ability to continue to increase or maintain the growth of
its mortgage banking business. Competition among industry participants includes
such competitive factors as borrower convenience, customer service, marketing
and distribution channels, amount and terms of loans, loan origination fees and
interest rates. Competition may lower the rates the Company charge to borrowers,
increase the cost of loan origination, reduce the volume of loan originations
and/or increase the demand for the Company's experienced personnel and the
potential for such personnel to leave the Company to join one of its
competitors.
GOVERNMENT REGULATION. The Company's operations are subject to extensive
regulation, supervision and licensing by federal, state and local governmental
authorities and are subject to various laws and judicial and administrative
decisions imposing requirements and restrictions on its lending business. The
Company's consumer lending activities are subject to the Federal Truth-
in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended,
the Federal Real Estate Settlement Procedures Act and Regulation X, the Home
Mortgage Disclosure Act, the Federal Debt Collection Practices Act and the
National Housing Act of 1934, as well as other federal and state statutes and
regulations affecting the Company's activities. The Company is also subject to
the rules and regulations of, and examinations by, state regulatory authorities
with respect to its lending business. Pacific Thrift is subject to additional
extensive governmental supervision, regulation and control by the FDIC and the
California DFI, as well as various other agencies of the states in which it
conducts its lending business. In addition, Pacific Thrift is a party to a 1998
-59-
<PAGE> 60
MOU with the FDIC, pursuant to which it is required to take certain actions. See
"BUSINESS - Supervision and Regulation."
CHANGES IN ECONOMIC CONDITIONS. The risks associated with the Company's
business become more acute in any economic slowdown or recession, particularly
when accompanied by declining real estate values. Any material decline in real
estate values reduces the ability of borrowers to use home equity to support
borrowings and increases the risk of loss on outstanding loans. A sustained
period of increased delinquencies and losses or increased costs could adversely
affect the Company's ability to securitize or sell loans in the secondary market
and/or decrease the profitability of the Company's loan securitization business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Net Interest Income Analysis" and "--Certain Accounting
Considerations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) 1-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the information contained in the Proxy
Statement relating to the 1998 Annual Meeting of Share holders, which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the year ended December 31 1997. Information with respect to
executive officers is included in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
1998 Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the year ended
December 31, 1997.
-60-
<PAGE> 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the infor mation contained in the Proxy Statement relating to the
1998 Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the year ended
December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the infor mation contained in the Proxy Statement relating to the
1998 Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the year ended
December 31, 1997.
-61-
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements
Financial Statements required to be filed hereunder are indexed
on page 64 hereof.
(a)(2) List of Financial Statement Schedules
None.
(a)(3) List of Exhibits
The exhibits required to be filed hereunder are indexed on page S-1
hereof.
(b) The Company filed a Report on Form 8-K to report the completion of a
securitization transaction as of December 18, 1997.
-62-
<PAGE> 63
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 27, 1998.
PACIFICAMERICA MONEY CENTER, INC.
By: /s/ JOEL R. SCHULTZ
---------------------------------------------
Joel R. Schultz, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration Statement has been signed below by the following persons on
behalf of the Company in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ JOEL R. SCHULTZ Director, Chief Executive
- --------------------------------- Officer and Chairman of the Board March 27, 1998
Joel R. Schultz
/s/ RICHARD D. YOUNG Director and Senior
- --------------------------------- Executive Vice President March 27, 1998
Richard D. Young
/s/ CHARLES J. SIEGEL Chief Financial and
- --------------------------------- Accounting Officer March 27, 1998
Charles J. Siegel
/s/ JAMES C. NEUHAUSER Director
- --------------------------------- March 27, 1998
James C. Neuhauser
/s/ PAUL D. WEISER Director
- --------------------------------- March 27, 1998
Paul D. Weiser
/s/ ALAN SIEBLER Director
- --------------------------------- March 27, 1998
Alan Siebler
</TABLE>
-63-
<PAGE> 64
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONTENTS
PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
as of December 31, 1997 and 1996
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders'
Equity/Partners' Capital for the years ended December 31,
1997, 1996 and 1995
Consolidated Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
for the years ended December 31, 1997, 1996 and 1995
Supplemental Material
Schedule I - Consolidated Schedule - Financial Position
-December 31, 1997
Schedule II - Consolidating Schedule - Operations - year
ended December 31, 1997
Schedule III - Consolidating Schedule - Financial Position
-December 31, 1996
Schedule IV - Consolidating Schedule - Operations - year
ended December 31, 1996
Schedule V - Consolidating Schedule - Operations - year
ended December 31, 1995
<PAGE> 65
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
PacificAmerica Money Center, Inc.
We have audited the accompanying consolidated balance sheets of PacificAmerica
Money Center, Inc. and subsidiaries (collectively, the Company) as of December
31, 1997 and 1996 and the related consolidated statements of operations, changes
in stockholders' equity/partners' capital, and cash flows for each of the three
years ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PacificAmerica Money
Center, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and cash flows for each of the three years ended
December 31, 1997, 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, II, III, IV and V 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, II, III, IV and V 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.
/s/ BDO Seidman, LLP
March 27, 1998
Los Angeles, California
F-1
<PAGE> 66
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS (Note 2C) $ 66,090,000 $ 8,640,000
RECEIVABLES 1,532,000 603,000
RECEIVABLE FOR MORTGAGE LOANS SHIPPED (Notes 2E) -- 24,310,000
NOTE RECEIVABLES 1,015,000 1,716,000
ACCRUED INTEREST RECEIVABLE 1,274,000 1,144,000
PREMIUM RECEIVABLE FOR LOANS SOLD -- 1,195,000
LOANS RECEIVABLE (Notes 2D, 2E, and 3) 20,629,000 33,515,000
LOANS HELD FOR SALE, (Notes 2F and 3) 35,280,000 18,148,000
INTEREST-ONLY STRIPS RECEIVABLE (Notes 2G, 2J and 4) 94,424,000 11,698,000
OTHER REAL ESTATE (Notes 2K and 5) 2,028,000 4,285,000
PROPERTY AND EQUIPMENT (Notes 2L and 6) 3,596,000 2,360,000
DEFERRED INCOME TAXES, NET (Notes 2N and 9) -- 296,000
REFUNDABLE INCOME TAXES 222,000 730,000
OTHER ASSETS 1,776,000 1,565,000
- -----------------------------------------------------------------------------------------
$227,866,000 $110,235,000
=========================================================================================
</TABLE>
F-2
<PAGE> 67
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
THRIFT CERTIFICATES PAYABLE (Note 7)
Fully-paid certificates $113,731,000 $ 56,343,000
Installment certificates 18,793,000 24,659,000
- ----------------------------------------------------------------------------------------------
Total thrift certificates payable 132,524,000 81,002,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 6,121,000 2,235,000
ACCRUED INTEREST PAYABLE 370,000 185,000
MORTGAGE NOTES PAYABLE -- 1,557,000
NOTES PAYABLE (Note 8) 28,318,000 3,290,000
DEFERRED INCOME TAXES, net (Notes 2N and 9) 12,147,000 --
- ----------------------------------------------------------------------------------------------
Total liabilities 179,480,000 88,269,000
- ----------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 11, 12, and 16)
- ----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 13)
Preferred stock, $.01 par value, shares authorized
2,000,000; none issued and outstanding -- --
Common stock, $0.1 par value, shares authorized
8,000,000; issued and outstanding 5,016,391 and
3,740,300 50,000 38,000
Additional paid-in capital 27,079,000 17,381,000
General partner warrants -- 385,000
Retained earnings 21,257,000 4,162,000
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 48,386,000 21,966,000
- ----------------------------------------------------------------------------------------------
$227,866,000 $110,235,000
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 68
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable (Notes 2D, 2F and 3) $11,333,000 $11,174,000 $ 8,885,000
Deposits with financial institutions 397,000 328,000 692,000
- ---------------------------------------------------------------------------------------------------------
Total interest income 11,730,000 11,502,000 9,577,000
- ---------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 50,000 23,000 7,000
Other thrift certificates 5,457,000 4,391,000 3,813,000
Notes payable 1,033,000 552,000 1,379,000
- ---------------------------------------------------------------------------------------------------------
Total interest expense 6,540,000 4,966,000 5,199,000
- ---------------------------------------------------------------------------------------------------------
Net interest income 5,190,000 6,536,000 4,378,000
PROVISION FOR LOAN LOSSES (Notes 2E and 3) 3,087,000 1,151,000 3,289,000
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,103,000 5,385,000 1,089,000
- ---------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Other income 345,000 777,000 545,000
Gain on sales of loans (Note 2G) 81,710,000 29,217,000 8,895,000
- ---------------------------------------------------------------------------------------------------------
Total noninterest income 82,055,000 29,994,000 9,440,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE> 69
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits (Notes 10
and 12) 29,457,000 14,622,000 6,000,000
General and administrative (Note 10) 24,139,000 12,019,000 5,194,000
Related party fees (Note 10) -- 872,000 1,012,000
Operations of other real estate (Note 5) 444,000 681,000 1,212,000
Depreciation 555,000 714,000 893,000
- ---------------------------------------------------------------------------------------------------------------
Total noninterest expense 54,595,000 28,908,000 14,311,000
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 29,563,000 6,471,000 (3,782,000)
INCOME TAXES (BENEFIT) (Notes 2N and 9) 12,468,000 1,658,000 (1,223,000)
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 17,095,000 4,813,000 (2,559,000)
INCOME FROM DISCONTINUED OPERATIONS -- 387,000 861,000
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (Note 15) -- (1,038,000) --
- ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 17,095,000 $ 4,162,000 $(1,698,000)
===============================================================================================================
</TABLE>
F-5
<PAGE> 70
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Continuing operations $ 4.18 $ 1.53 $ (1.82)
Discontinued operations -- (.32) .41
- -----------------------------------------------------------------------------------------------
Net income $ 4.18 $ 1.21 $ (1.41)
- -----------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Continuing operations $ 3.48 $ 1.27 $ (1.82)
Discontinued operations -- (.26) .41
- -----------------------------------------------------------------------------------------------
Net income $ 3.48 $ 1.01 $ (1.41)
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 71
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Years Ended December 31, 1997, 1996 and 1995
------------------------------------------------------------------------------
Number Additional General
Partner of Common Paid-In Partner Retained
Interests Shares Stock Capital Warrants Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL, January 1, 1995 $10,425,000 -- $ -- $ -- $ -- $10,425,000
Net loss - 1995 (1,698,00) -- -- -- -- (1,698,00)
- ----------------------------------------------------------------------------------------------------------------------------------
PARTNERS' CAPITAL, December 31, 1995 8,727,000 -- -- -- -- -- 8,727,000
Partner interest converted to stock (8,727,00) 1,780,000 18,000 8,709,000 -- -- --
Rights offering -- 649,256 6,000 3,240,000 -- -- 3,246,000
Partners cash out -- (571,120) (6,000) (2,849,00) -- -- (2,856,00)
Fractional shares paid -- (2,412) -- (12,000) -- -- (12,000)
General partner warrants -- -- -- -- 385,000 -- 385,000
Public offering, net -- 1,756,420 18,000 7,603,000 -- -- 7,621,000
Warrants exercised -- 21,916 -- 162,000 -- -- 162,000
Employee stock purchase plan -- 106,240 2,000 528,000 -- -- 531,000
Net income - 1996 -- -- -- -- -- 4,162,000 4,162,000
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY, December 31, 1996 -- 3,740,300 38,000 17,381,000 385,000 4,162,000 21,966,000
Subscriber warrants exercised -- 75,730 1,000 473,000 -- -- 474,000
General partner warrants exercised -- 1,105,078 10,000 8,663,000 (385,000) -- 8,288,000
Stock options exercised -- 95,283 1,000 562,000 -- -- 563,000
Net income - 1997 -- -- -- -- 17,095,000 17,095,000
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY, December 31, 1997 $ -- 5,016,391 $ 50,000 $27,079,000 $ -- $21,257,000 $48,386,000
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 72
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 17,095,000 $ 4,162,000 $ (1,698,000)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Loss on disposal of discontinued
operations -- 1,038,000 --
Provision for loan losses 3,087,000 1,151,000 3,289,000
Changes in discontinued operations -- 1,034,000 486,000
Provision for losses and other
real estate 26,000 337,000 1,188,000
Net gain on sale of other real estate (181,000) (224,000) (469,000)
Proceeds from sale of loans
originated for sale 742,776,000 337,563,000 145,266,000
Originations of loans held for sale (768,226,000) (335,471,000) (151,538,000)
Depreciation and amortization 663,000 834,000 919,000
Net change in assets and liabilities:
Receivables (929,000) (282,000) 1,548,000
Premium receivable for loans sold 1,195,000 (1,195,000) --
Accrued interest receivable (130,000) (241,000) 222,000
Receivable for mortgage loans
shipped 24,310,000 (24,310,000) --
Receivable from related party -- 347,000 131,000
Interest-only strip receivable (82,726,000) (8,973,000) (1,837,000)
Goodwill -- -- (172,000)
Refundable income taxes 508,000
Other assets (319,000) (1,611,000) (267,000)
Deferred income taxes, net 12,443,000 929,000 (1,225,000)
Payable to related party -- (881,000) 126,000
Accounts payable and accrued
expenses 3,886,000 2,942,000 (732,000)
Accrued interest payable 185,000 (88,000) (132,000)
- ---------------------------------------------------------------------------------------------------
Net cash used in operating activities (46,337,000) (22,939,000) (4,895,000)
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE> 73
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of portfolio loans 17,063,000 26,176,000 13,371,000
Payments from notes receivable 731,000
Increase in loans receivable (1,915,000) (29,697,000) (12,325,000)
Proceeds from sale of other real estate 3,824,000 5,652,000 14,253,000
Proceeds from sale of discontinued
operations, net assets -- (1,180,000) --
Mortgage assumed (repaid) in connection
with other real estate -- (847,000) (1,702,000)
Purchase of property and equipment (1,791,000) (1,791,000) (489,000)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 17,912,000 (1,687,000) 13,108,000
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in thrift
certificates 51,522,000 20,846,000 (9,345,000)
Borrowings under line of credit -- 3,000,000 --
Repayment of line of credit -- (3,000,000) --
Proceeds from note payable 26,159,000 -- --
Paydowns of note payable (1,131,000) (6,026,000) (8,007,000)
Decrease in participations payable -- (1,120,000) --
Public offering, net -- 7,621,000 --
Rights offering -- 3,246,000 --
Partners cash out -- (2,856,000) --
Fractional shares payout -- (12,000) --
General partner warrants 8,288,000 385,000 --
Subscriber warrants 474,000 162,000 --
Stock options 563,000 531,000 --
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 85,875,000 22,777,000 (17,352,000)
- ----------------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE> 74
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 57,450,000 (1,849,000) (9,139,000)
CASH AND CASH EQUIVALENTS, at beginning 8,640,000 10,489,000 19,628,000
- --------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end $ 66,090,000 $ 8,640,000 $ 10,489,000
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 6,355,000 $ 5,054,000 $ 5,331,000
Income taxes 27,000 668,000 2,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Loans transferred to other real estate 2,936,000 6,894,000 10,489,000
Mortgage payable assumed in connection
with other real estate 278,000 1,793,000 1,545,000
Loans to facilitate sales of other real
estate 2,320,000 311,000 895,000
Stock dividend 19,000
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 75
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL ORGANIZATION
On June 27, 1996, PacificAmerica Money Center,
Inc., (the "Corporation" or "Company") a
Delaware Corporation, formed in 1994 as a
wholly owned subsidiary of Presidential
Mortgage Company, and Presidential Mortgage
Company, a California limited partnership (the
"Partnership") completed a Restructuring Plan
dated May 1, 1996 (the "Restructuring"),
whereby all of the assets and liabilities of
the Partnership were transferred to the
Corporation in exchange for common stock of
the Corporation (the "Common Stock"). The
Common Stock was distributed to the partners
of the Partnership, pro rata in accordance
with their capital accounts in the
Partnership. In accordance with the terms of
the Restructuring Plan, the consent of a
majority of limited partners to the
Restructuring Plan was solicited pursuant to a
Proxy Statement/Prospectus dated May 14, 1996,
and the consent of approximately 75% of all
limited partners was obtained by June 17,
1996, the expiration of the solicitation
period. Every limited partner was given the
right to elect to receive cash in lieu of
shares of the Corporation (the "Cash Out
Option"), in an amount equal to $5.00 per
share times the number of shares that would
have been received by that partner based on
their capital account in the Partnership.
Pursuant to the Restructuring Plan, 1,206,468
shares of Common Stock were issued to partners
of the Partnership (other than partners
accepting the cash out option) for their
interests in the Partnership and $2,855,600
was paid by the Corporation to partners
electing the Cash Out Option.
Also pursuant to the terms of the
Restructuring Plan, Presidential Management
Company, the general partner of the
Partnership (the "General Partner") purchased
1,126,666 warrants ("General Partner
Warrants") for a purchase price of $385,000.
The General Partner Warrants were each
exercisable for one share of Common Stock at a
purchase price of $7.50 per share from June
27, 1996 until December 27, 1997. The General
Partner Warrants were nontransferable, except
to and between partners of the General
Partner.
F-11
<PAGE> 76
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL (CONTINUED) ORGANIZATION (Continued)
Concurrently with the solicitation of consent
pursuant to the Proxy Statement/Prospectus
dated May 16, 1996, all partners of the
Partnership, together with all partners of the
General Partner, and all officers, directors,
proposed directors and employees of the
Partnership, all of its subsidiaries and the
Corporation, were given the right to purchase
additional shares of Common Stock (the "Rights
Offering") at a purchase price of $5 per
share. A total of 649,256 shares were
subscribed for and issued in the Rights
Offering. For every five shares subscribed for
in the Rights Offering, a subscriber also
received one warrant ("Subscriber Warrants").
A total of 129,850 Subscriber Warrants were
issued in connection with the Rights Offering,
each exercisable from June 27, 1996 until June
27, 1998, for one share of Common Stock at a
purchase price of $6.25 per share.
Pursuant to a Prospectus dated June 24, 1996,
the Corporation also conducted a public
offering of additional shares of Common Stock
at $5 per share (the "Public Offering"). A
total of 1,756,420 shares were issued in the
Public Offering, including 220,098 shares in
connection with the exercise of an
over-allotment option by the underwriter of
the Public Offering.
The Corporation issued a total of 3,612,144
shares of Common Stock in connection with the
Restructuring Plan, the Rights Offering and
the Public Offering. The shares of Common
Stock were listed for trading on the Nasdaq
National Market under the symbol "PAMM."
Trading in the stock commenced on June 25,
1996.
Concurrently with the closing of the
Restructuring, the Rights Offering and the
Public Offering on June 27, 1996, the
Partnership filed certificates of dissolution
and liquidation with the California Secretary
of State.
F-12
<PAGE> 77
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL (CONTINUED) ORGANIZATION (Continued)
The Restructuring has been accounted for as a
change in legal organization but not in the
enterprise of the Partnership. Therefore, the
financial statements of the Corporation give
effect to the Restructuring as a
recapitalization of the Partnership into the
Corporation. References to the Corporation in
the financial statements refer to the
financial condition and results of operations
of the Partnership on a consolidated basis for
all periods prior to June 27, 1996.
From the date of its formation in 1981 until
1988, the Partnership's sole business was the
direct origination and servicing of real
estate secured loans under California consumer
and commercial finance lender licenses. In
1988, the Partnership formed Pacific Thrift
and Loan Company, a California corporation
("Pacific Thrift"), as a wholly owned
subsidiary, to engage in the business of
origination, purchase and sale of real estate
secured loans under a California thrift and
loan license. Pacific Thrift also issues
deposits insured by the Federal Deposit
Insurance Corporation ("FDIC"), and is
therefore subject to regulation by both the
FDIC and the California Department of
Financial Institutions. Since 1990,
substantially all new lending activity has
been conducted by Pacific Thrift. In recent
years, the Company has been primarily engaged
in mortgage banking activities and as such
originates and sells mortgage loans to
investors in the secondary markets. In
December 1997, the Company began to securitize
loans into asset-backed securities. The
Company's ability to continue to originate
loans is dependent, in part, upon its ability
to sell loans in the secondary market in order
to generate cash proceeds for new origination.
The value of and market for the Company's
loans are dependent upon a number of factors,
including general economic conditions,
interest rates and governmental regulations.
Adverse changes in such factors may affect the
Company's ability to sell loans for acceptable
prices within reasonable periods of time. A
prolonged, substantial reduction in the size
of the secondary market for loans of the types
originated by the Company may adversely affect
the Company's ability to sell loans with a
consequent adverse impact on the Company's
profitability and ability to fund future
originations which could have a material
adverse effect on the Company's financial
position, results of operations and cash
flows.
F-13
<PAGE> 78
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL (CONTINUED) ORGANIZATION (Continued)
Pacific Thrift specializes in home equity
loans for borrowers whose credit histories
and/or other factors limit their ability to
qualify for financing from conventional
sources. Such loans are generally referred to
in the lending industry as "sub-prime" or
"B"/"C" credit loans. Borrowers generally
obtain loans from Pacific Thrift to finance
the purchase of property, refinance an
existing mortgage on more favorable terms,
consolidate debt or obtain cash proceeds for
their personal use. The majority of its loans
are originated through its wholesale division,
consisting of a nationwide network of more
than 100 in-house loan representatives and
3,100 independent mortgage brokers in
approximately 40 states. Approximately 75% of
the current loan production comes from this
division. Pacific Thrift's retail division
originates loans directly with borrowers using
primarily telemarketing and direct mail. The
largest volume of home equity loan
originations were in California, New York, New
Jersey, Washington and Florida. The Company
issues thrift certificates to investors that
are redeemable upon maturity at the option of
the investors, although penalties for early
withdrawal may be assessed. The California
Industrial Loan Law maintains provisions
governing the types of loans that may be made,
the amount of thrift certificates that may be
issued, and the amount of funds that may be
borrowed.
The Company also owns another subsidiary,
PacificAmerica Money Centers, Inc. ("PAMC"),
formed for the purpose of engaging in the
lending business under a California finance
lender's license and other state licenses
where management deems it appropriate.
Immediately after the restructuring the
Company contributed net assets of $2,920,000
to PAMC at book value. As of the date hereof,
PAMC has not engaged in significant loan
production, but it may become more active in
the future, depending upon business
requirements.
The Company formed a wholly-owned subsidiary,
PacificAmerica Securities, Inc. (PSI), which
is a special purpose entity. Its purpose is to
acquire loans from the Company and use them as
collateral under a warehousing agreement with
an outside third party.
The Partnership also owned substantially all
of the interests in three subsidiaries engaged
in the trust deed foreclosure services and
posting and publishing businesses,
Consolidated Reconveyance Company ("CRC"), a
F-14
<PAGE> 79
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL (CONTINUED) ORGANIZATION (Continued)
California limited partnership, Lenders
Posting and Publishing Company ("LPPC"), a
California limited partnership, and
Consolidated Reconveyance Corporation
("CRCWA"), a Washington corporation. The
Corporation acquired all of the Partnership's
interests in these entities in connection with
the Restructuring. Effective December 31,
1996, all of the assets and liabilities of CRC
and LPPC and all of the stock of CRCWA were
sold (Note 15). This is part of the Company's
strategy to concentrate all of its financial
and human resources on its primary business of
residential lending for sale and
securitization.
The Partnership's general partner,
Presidential Management Company, was a
California limited partnership. Presidential
Management Company's general partner,
Presidential Services Corporation, was a
California corporation owned by Joel R.
Schultz, John A. DeRosa and Constance DeRosa.
The Partnership's limited partners consisted
of approximately 2,500 individuals and
entities in classes A, B, C, D, and E. The
differences between the various classes
primarily related to the different offering
dates and unit prices as well as profit
priorities and percentages. In addition,
certain partners elected to reinvest their
distributions in Distribution Reinvestment
Plan (DRP) Units.
2. SUMMARY OF SIGNIFICANT A. CONSOLIDATION
ACCOUNTING
POLICIES The consolidated financial statements
include the accounts of (CONTINUED) the
F-15
<PAGE> 80
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT A. CONSOLIDATION
ACCOUNTING
POLICIES The consolidated financial statements
(CONTINUED) include the accounts of (CONTINUED) the
Corporation, PAMC, PacificAmerica Lending,
CRC, LPPC, CRC Washington and PSI. All
significant intercompany balances and
transactions have been eliminated.
Consolidating information is presented in
Schedules I, II, III, IV and V. On December
31, 1996 CRC, LPPC and CRC Washington were
sold (Note 15).
B. EARNINGS PER SHARE
On July 10, 1997, the Board of Directors of
the Company declared a stock dividend
accounted for as a one-for-one stock split to
all stock holders or record as of July 31,
1997. The stock dividend was paid on August
13, 1997. These financial statements reflect
the effect of the stock dividend on current
and prior periods earnings per share and
shares outstanding.
On December 31, 1997 the Company adopted
Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), "Earnings Per
Share", which established new standards for
calculating and disclosing earnings per
share. All prior period earnings per share
data has been restated to conform with the
provisions of SFAS No. 128.
Basic earnings per share is computed by
dividing net earnings by the weighted average
number of shares of Common Stock outstanding
during each year. Diluted earnings per share
is computed by dividing net earnings by the
weighted average number of shares of Common
Stock and potential Common Stock outstanding
during each year. All share and per-share
amounts have been restated to reflect the
one-for-one stock dividend accounted for as a
stock split,
F-16
<PAGE> 81
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT B. EARNINGS PER SHARE (Continued)
ACCOUNTING
POLICIES in August 1997. The following table
(CONTINUED) presents the earnings per share data
as required by SFAS No. 128.
<TABLE>
<CAPTION>
Historical Proforma
---------- -------------------
Year ended December 31, 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Income (Numerator):
Income/(loss) before
income taxes (benefit) $29,563,000 $6,471,000 $(3,782,000)
Income taxes (benefit) 12,468,000 2,718,000 (1,589,000)
----------------------------------------------------------------------
Income/(loss) from
continuing operations $17,095,000 $3,753,000 $(2,193,000)
----------------------------------------------------------------------
Shares (Denominator):
Weighted average common
shares outstanding for
basic earnings per
share 4,093,274 2,449,454 1,206,468
Effect of dilutive common
shares
Subscriber warrants 68,025 41,681 --
General partner
warrants 471,287 317,666 --
Options 281,816 146,877 --
----------------------------------------------------------------------
Diluted common shares 4,914,402 2,955,678 1,206,468
----------------------------------------------------------------------
Basic earnings per common share
from continuing operations $4.18 $1.53 $(1.82)
Diluted earnings per common share
from continuing operations $3.48 $1.27 $(1.82)
</TABLE>
F-17
<PAGE> 82
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF Options to purchase 11,424 shares of common
SIGNIFICANT stock at a range of price from $23.00 to
ACCOUNTING $28.75 per share were outstanding at
POLICIES December 31, 1997 but were not included in
(CONTINUED) the computation of diluted earnings per
share because the options' exercise price
was greater than the average market price of
the common share. These options expire in
the year 2007.
Earnings per common share for the years
ended December 31, 1996 and 1995 assumes the
restructuring (Note 1) took place at the
beginning of the period and the Company was
taxed for federal and state income tax
purposes as a taxable corporation at a 42%
effective tax rate.
Earning per share related to discontinued
operations and net income for 1996 and 1995
includes additional proforma income tax
expense of $126,000 and 362,000 related to
the tax effect of the income from the
discontinued operations.
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. Cash and cash equivalents at
December 31, 1997 includes $50,000,100 on
deposit with the Federal Reserve and
$15,269,601 on deposit with a major well
capitalized bank in an account which is in
excess of the federally insured limit of
$100,000. Cash and cash equivalents at
December 31, 1996 includes $5,250,000 in
overnight federal funds and $3,156,976 on
deposit with a major well capitalized bank
in an account which is in excess of the
federally insured limit of $100,000.
F-18
<PAGE> 83
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF D. LOANS RECEIVABLE
SIGNIFICANT
ACCOUNTING Loans receivable are stated at the principal
POLICIES amount outstanding, less unamortized
(CONTINUED) deferred fees and costs and the allowance
for loan losses (ALLL). 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,
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, or
included in income when the loan is sold.
E. ALLOWANCE FOR LOAN LOSSES
Loan losses are charged to the ALLL;
recoveries are credited to the ALLL. The
provision for loan losses charged to expense
and added to the ALLL 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.
F-19
<PAGE> 84
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT E. ALLOWANCE FOR LOAN LOSSES (Continued)
ACCOUNTING
POLICIES The Company follows Statement of Financial
(CONTINUED) 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). 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 ALLL 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.
For impaired loans that are on non-accrual
status, cash payments received are generally
applied to reduce the outstanding principal
balance. However, all or a 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 restructuring 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-20
<PAGE> 85
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT F. LOANS HELD FOR SALE
ACCOUNTING
POLICIES The Company has designated certain of its
(CONTINUED) 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.
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. LOAN SALES REVENUE RECOGNITION
The Company principally derives its revenue
from the sale of loans in which it retains
an interest-only strip receivable. Gain or
loss on the sale of mortgage loans to
investors is recognized at the date the
loans are sold to the investors, and all
title and rights to such loans are legally
conveyed to the investors pursuant to
existing sales agreements and the Company
has surrendered control of such financial
assets. Loans are generally sold on a
servicing-released basis.
Gain on sale of loans represents the
difference between the gross proceeds
(including premiums) from the sale, net of
related transaction costs, and the allocated
carrying amount of the loans sold. The
allocated carrying amount is determined by
allocating the carrying amount of loan
between the portion sold and any retained
residual interests (interest-only strip
receivable), based on their relative fair
values at the date of transfer. In addition,
gain on sale includes non-refundable fees on
loans sold.
Gain on sale of loans includes the
recognition of an unrealized gain which
represents the initial difference between
the allocated carrying amount and the fair
value of the interest-only strip at the date
of sale.
The fair value of the interest-only strip
receivable is estimated as the present value
of the anticipated cash flows from excess
interest income from the loans sold over the
coupon interest to the investor after giving
effect to prepayments,
F-21
<PAGE> 86
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF G. LOAN SALES REVENUE RECOGNITION
SIGNIFICANT (Continued)
ACCOUNTING
POLICIES losses, and other transaction costs,
(CONTINUED) servicing and the coupon interest to the
investor. The interest-only strip
receivable, which is classified as a trading
security, is carried at fair value and is
analyzed quarterly by the Company. Changes
in fair value are recognized as unrealized
gains or losses and are included in gain on
sale of loans in the consolidated statement
of operations.
Management's estimate of the fair value of
the interest-only strip receivable includes
significant assumptions such as loan
prepayment speeds, estimated default rates
and an appropriate discount rate given the
risk characteristics associated with the
instrument. It is possible that the estimate
could change in the near term due to
competitive pressures, the overall economy,
adverse changes in the securitization
market, and actual prepayment and default
experience rates. The amounts the Company
will ultimately realize could differ
significantly and could require an
adjustment to the fair value of this asset.
The premium earned from whole loans
originated and subsequently sold at par plus
an upfront premium, with no further rights
to any further yield, is included under gain
on sale of loans in the Statements of
Operations.
H. MORTGAGE SERVICING RIGHTS
In 1996, the Company adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights,
an amendment of FASB Statement No. 65." SFAS
No. 122 requires the Corporation to
capitalize mortgage servicing rights on
originated mortgage loans when the loans are
originated to be sold or securitized and
servicing is retained. When a mortgage loan
is originated to be sold with servicing
retained, the total cost of the loan is
allocated to the mortgage servicing right
and the loan based on their relative fair
values. Under SFAS No. 122, capitalized
servicing rights are assessed for impairment
based on the fair value of those rights. In
addition, capitalized mortgage servicing
rights must be stratified based on one or
more predominant risk characteristics of the
underlying loans and impairment is
recognized through a valuation allowance for
each impaired stratum.
F-22
<PAGE> 87
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF H. MORTGAGE SERVICING RIGHTS (Continued)
SIGNIFICANT
ACCOUNTING The effect of the adoption of SFAS No. 122
POLICIES was not material to the Company, primarily
(CONTINUED) because the Company sells substantially all
of its loans on a servicing released basis.
I. IMPAIRMENT OF LONG-LIVED ASSETS
In 1996, the Company adopted SFAS No. 121,
"Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be
Disposed of," which addresses accounting for
impairment of long-lived assets, including
certain identifiable intangibles, and
goodwill related to those assets. SFAS No.
121 requires that assets to be held and used
be reviewed for impairment whenever events
or changes in circumstances indicate that
the carrying amount of an asset may not be
recoverable.
The adoption of SFAS No. 121 did not have a
material impact on the Company's financial
condition or results of operations.
J. TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENT OF LIABILITIES
In June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of
Liabilities", which superceded SFAS No.
122. SFAS No. 125 provides accounting and
reporting standards for transfers and
servicing of financial assets and
extinguishment of liabilities. Those
standards are based on consistent
application of a financial-components
approach that focuses on control. Under
that approach, after a transfer of
financial assets, an entity recognizes the
financial and servicing assets it controls
and the liabilities it has incurred,
derecognizes financial assets when control
has been surrendered, and derecognizes
liabilities when extinguished. SFAS No. 125
provides consistent standards for
distinguishing transfers of financial assets
that are sales from transfers that are
secured borrowings.
A transfer of financial assets in which
control is surrendered is accounted for as a
sale to the extent that consideration other
than beneficial interests in the transferred
assets is received in the exchange.
Liabilities and derivatives incurred or
obtained by the transfer of financial assets
are required to be measured at fair value,
if practicable. Also, servicing assets and
other retained interests in the transferred
assets must be measured by allocating the
previous carrying value between the assets
sold and the interest retained, if any,
based on their relative fair values at the
date of transfer. For each servicing
contract in existence before January 1,
1997, previously recognized servicing rights
and excess servicing receivables that did
not exceed contractually specified servicing
fees were required to be combined, net of
any previously recognized servicing
obligations under that contract, as a
servicing asset or liability. Previously
recognized servicing receivables that exceed
contractually specified servicing fees
(formerly known as excess yield receivable)
are required to be reclassified as
interest-only strip receivables and the
allowance for credit losses on loans sold
reclassified as a reduction of these
receivables.
F-23
<PAGE> 88
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS 125 also requires an assessment of
interest-only strips, loans, other
receivables and retained interests in
securitizations. If these assets can be
contractually prepaid or otherwise settled
such that the holder would not recover
substantially all of its recorded
investment, the assets will be measured
like available-for-sale securities or
trading securities under SFAS 115. This
assessment is required for financial assets
held on or acquired after January 1, 1997.
F-24
<PAGE> 89
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF K. OTHER REAL ESTATE
SIGNIFICANT
ACCOUNTING Other real estate is comprised of formally
POLICIES foreclosed property to which the Company does
(CONTINUED) 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.
F-25
<PAGE> 90
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT L. PROPERTY AND EQUIPMENT
ACCOUNTING
POLICIES Property and equipment is stated at cost, less
(CONTINUED) 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.
M. GOODWILL
Goodwill represented 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 was amortized using the
straight-line method over approximately 20
years. The Company sold CRC and LPPC in 1996
and wrote off the remaining goodwill which is
included in loss from discontinued operations
in the Consolidated Statement of Operations
(Note 15).
N. INCOME TAXES
The Company 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.
Partnerships are generally not subject to
income taxes, accordingly, the Partnership
income or loss was reported in the individual
partners' tax returns. However, Pacific Thrift,
the Partnership's wholly owned corporate
subsidiary, has always been subject to federal
income and state franchise taxes. Since
completion of the restructuring (Note 1) the
Company is also subject to federal and state
income taxes.
F-26
<PAGE> 91
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT O. FAIR VALUE OF FINANCIAL INSTRUMENTS
ACCOUNTING
POLICIES Statement of Financial Accounting Standards No.
(CONTINUED) 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, 1997. 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.
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
F-27
<PAGE> 92
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT O. FAIR VALUE OF FINANCIAL INSTRUMENTS
ACCOUNTING (Continued)
POLICIES
(CONTINUED) 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, 1997. 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.
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------
Carrying Estimated
Value Fair Value
--------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 66,090,000 $ 66,090,000
Loans receivable 22,067,000 21,981,000
Allowance for loan losses (1,438,000) (1,438,000)
--------------------------------------------------------------------------
Total loans 20,629,000 20,543,000
--------------------------------------------------------------------------
Loans held for sale 35,280,000 37,154,000
Interest-only strips receivable 94,424,000 94,424,000
</TABLE>
F-28
<PAGE> 93
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF O. FAIR VALUE OF FINANCIAL INSTRUMENTS
SIGNIFICANT (Continued)
ACCOUNTING
POLICIES)
(CONTINUED)
<TABLE>
<S> <C> <C>
LIABILITIES
Fully-paid certificates 113,731,000 113,449,000
Installment certificates 18,793,000 18,793,000
Notes payable 28,318,000 28,318,000
</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 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.
The fair value for performing fixed rate
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 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 price opinions adjusted for anticipated
credit loss risk, estimated time for
resolution, and other related resolution costs.
If appraisals or recent broker price 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.
F-29
<PAGE> 94
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT O. FAIR VALUE OF FINANCIAL INSTRUMENTS
ACCOUNTING (Continued)
POLICIES
(CONTINUED) Loans Held for Sale
-------------------
The fair values were estimated by using current
institutional purchaser yield requirements.
Interest-only Strips 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 savings and money
market accounts, is equal to the amount payable
on demand as of December 31, 1997. 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.
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------
Carrying Estimated
Value Fair Value
----------------------------------------------------------------------------
<S> <C> <C>
Installment certificates $ 18,793,000 $ 18,793,000
----------------------------------------------------------------------------
Fully-paid certificates:
Maturing in six months or less $ 53,637,000 $ 53,518,000
Maturing between six months
and one year 59,999,000 59,836,000
Maturing between one and
three years 95,000 95,000
----------------------------------------------------------------------------
Total fully-paid certificates $ 113,731,000 $ 113,449,000
</TABLE>
F-30
<PAGE> 95
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT O. FAIR VALUE OF FINANCIAL INSTRUMENTS
ACCOUNTING (Continued)
POLICIES
(CONTINUED) Notes Payable and Mortgage 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, 1997 for comparable types of
borrowing arrangements.
The remaining assets and liabilities of the
Company 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 the Company. 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.
P. 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 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.
Q. STOCK-BASED COMPENSATION
In 1996, the Company adopted for footnote
disclosure purposes only, SFAS No. 123,
"Accounting for Stock-Based Compensation,"
which requires that companies measure the cost
of stock-based employee compensation at the
grant date based on the value of the award and
recognize this cost over the service period.
The value of the stock-based award is
determined using the intrinsic value method
whereby compensation cost is the excess of the
quoted market prices of the stock at grant date
or other measurement date over the amount an
employee must pay to acquire the stock.
R. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
DISCLOSURE OF CAPITAL STRUCTURE
-------------------------------
In February 1997, the FASB issued SFAS 129,
"Disclosure of Information about Capital
Structure" ("SFAS 129"). SFAS 129 established
disclosure requirements regarding pertinent
rights and privileges of outstanding
securities. Examples of disclosure items
regarding securities include, though are not
limited to, items such as dividend and
liquidation preferences, participation rights,
call prices and dates, conversion or exercise
prices or rates. The number of shares issued
upon conversion, exercise or satisfaction of
required conditions during at least the most
recent annual fiscal period and any subsequent
interim period must also be disclosed.
Disclosure of liquidation preferences of
preferred stock in the equity section of the
balance sheet is also required. SFAS 129 is
effective for financial periods ending after
December 15, 1997. The adoption of this
standard did not have an impact on the
Company's financial position or results of
operations.
REPORTING COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS 130, "Reporting
Comprehensive Income" (SFAS 130"). SFAS 130
established disclosure standards for reporting
comprehensive income in a full set of general
purpose financial statements. SFAS 130 is
effective for fiscal years beginning after
December 15, 1997. The adoption of this
standard is not expected to have an impact on
the Company's financial position or results of
operations.
DISCLOSURE OF BUSINESS ENTERPRISE
In June 1997, the FASB issued SFAS 131,
"Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131") which is
effective for periods beginning after December
15, 1997. SFAS 131 established standards for
the way that public business enterprises report
information about operating segments in annual
financial statements and requires that those
enterprises report selected information about
operating segments in interim financial reports
issued to stockholders. It also establishes
standards for related disclosures about
products and services, geographic areas and
major customers. The adoption of this standard
is not expected to have an impact on the
Company's financial position or results of
operations.
DISCLOSURE ABOUT PENSIONS AND OTHER POST-
RETIREMENT BENEFITS
In February 1998 the FASB issued SFAS 132
"Disclosures About Pension and Other
Postretirement Benefits." This Statement
revises employers' disclosures about pension
and other postretirement benefit plans.
This Statement is effective for fiscal years
beginning after December 15, 1997. Earlier
application is encouraged. Restatement of
disclosures for earlier periods provided for
comparative purposes is required unless the
information is not readily available, in which
case the notes to the financial statements
should include all available information and a
description of the information not available.
S. RECLASSIFICATIONS
Certain reclassifications of balances from
prior years have been made to conform to the
current year's reporting format.
F-31
<PAGE> 96
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS LOANS RECEIVABLE
RECEIVABLE AND
ALLOWANCE FOR Loans receivable at December 31, 1997 and 1996
LOAN LOSSES are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans $ 43,474,000 $ 61,487,000
Participations sold (21,183,000) (24,914,000)
-------------------------------------------------------------------------------
Total real estate loans - net $ 22,291,000 $ 36,573,000
-------------------------------------------------------------------------------
Loans receivable held for
investment $ 22,291,000 $ 36,573,000
Net deferred loan fees and
costs (224,000) (594,000)
Allowance for loan losses (1,438,000) (2,464,000)
-------------------------------------------------------------------------------
$ 20,629,000 $ 33,515,000
-------------------------------------------------------------------------------
</TABLE>
The components of the loan portfolio at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
One-to-four family residential $ 6,028,000 $ 14,479,000
Five-or-more family residential 6,172,000 9,308,000
Home improvement 1,090,000 1,322,000
Commercial 9,001,000 10,732,000
Land and other -- 732,000
-------------------------------------------------------------------------------
$ 22,291,000 $ 36,573,000
-------------------------------------------------------------------------------
</TABLE>
During 1997 and 1996, the Company sold, without
recourse to the Company, approximately
$17,063,000 and $26,176,000 of portfolio
mortgage loans.
F-32
<PAGE> 97
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS SIGNIFICANT CONCENTRATIONS
RECEIVABLE AND
ALLOWANCE FOR The Company made portfolio mortgage loans
LOSSES primarily secured by first or second trust
(CONTINUED) 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. In the fourth quarter of 1996 the
Company stopped portfolio lending in order to
concentrate its financial and human resources
on its primary business of residential lending
for sale and securitization.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for
the years ended December 31, 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at beginning $ 2,464,000 $ 4,229,000 $ 4,307,000
Provision charged to expense 3,087,000 1,151,000 3,289,000
Transferred to loans held for sale (1,902,000) -- --
Loan charge-offs, net of
recoveries (2,211,000) (2,916,000) (3,367,000)
------------------------------------------------------------------------------
Balance at end $ 1,438,000 $ 2,464,000 $ 4,229,000
------------------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, loans with more
than two monthly payments past due and on
nonaccrual status totaled $1,395,000 and
$2,649,000. If interest on these loans had been
accrued, interest income would have increased
by approximately $175,000 and $235,000 in 1997
and 1996. At December 31, 1997 and 1996, loans
with more than two monthly payments past due
and on accrual status totaled $1,962,000 and
$1,722,000. Interest income recognized on these
loans totaled approximately $402,000 and
$95,000 in 1997 and 1996.
F-33
<PAGE> 98
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS The following information relates to the
RECEIVABLE AND Company's impaired loans which includes
ALLOWANCE FOR troubled debt restructuring that meet the
LOAN LOSSES definition of impaired loans as of and for the
(CONTINUED) years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with a specific allowance $ 852,000 $ 1,648,000
Impaired loans with no specific allowance 813,000 617,000
-------------------------------------------------------------------------------
Total impaired loans $ 1,665,000 $ 2,265,000
Total allowance related to impaired loans $ 337,000 $ 229,000
Average balance of impaired loans for the
period $ 2,191,000 $ 2,951,000
Interest income on impaired loans for
the period recorded on a cash basis $ 104,000 $ 307,000
</TABLE>
LOANS HELD FOR SALE
Loans held for sale at December 31, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans $ 35,280,000 $ 18,148,000
-------------------------------------------------------------------------------
</TABLE>
In December 1993, management developed a loan
securitization program under which the
Corporation or Pacific Thrift could sell
certain loans receivable to a primary buyer
(the Purchaser) on a whole loan basis for a
cash premium.
F-34
<PAGE> 99
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS LOANS HELD FOR SALE (Continued)
RECEIVABLE AND
ALLOWANCE FOR During 1995 and 1996, the Company sold loans
LOAN LOSSES primarily to two purchasers on a whole
(CONTINUED) loan basis. On October 31, 1996, the Company
entered into a new agreement with one of the
Purchasers (Purchaser). For all loans sold
after September 30, 1996, the Company receives
par value; interest payments less a servicing
fee and warehousing fee from the date of sale
until the loans are securitized; certain
premium and/or advance payments upon
securitization; and an interest-only strip
on the loans sold. On December 16, 1996, the
Company entered into a similar agreement with a
Second Purchaser of loans effective for all
loans sold after November 30, 1996.
To the extent that the Company or one of its
subsidiaries originates loans for sale, it
bears an interest rate risk between the loan
approval date and the date that each loan is
securitized. In addition, because subprime
residential loans have a higher interest rate
spread than prime residential loans,
fluctuations in rates which may occur during
the period prior to securitization could reduce
the excess spread anticipated to be retained by
the Company upon securitization, but would not
generally be sufficiently large to eliminate
the excess spread entirely. 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.
During 1997 and 1996, the Company sold an
aggregate of $643 million and $338 million of
pre-approved securitizable loans to the
Purchasers.
On December 18, 1997, the Company securitized
$100 million of loans into Asset-Backed
Securities (ABS), which are secured primarily
of fixed and adjustable rate one- to four-
family, first lien home equity loans, were
issued by the Company pursuant to an indenture
between the Company and Bankers Trust Company
of California, N.A., the Indenture Trustee.
F-35
<PAGE> 100
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to March 31, 1993, Pacific Thrift
originated Title 1 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, Pacific Thrift
sold $1,126,000 of these loans and recorded no
losses. As of March 31, 1993, Pacific Thrift
discontinued the origination and sale of Title
I and other similar loans.
F-36
<PAGE> 101
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INTEREST-ONLY Interest-only strips receivable consist of
STRIP assets generated from loan sales and
RECEIVABLES securitization as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Interest-only strip, certificated $13,417,000 $ --
Interest-only strip, non-certificated 13,417,000 11,698,000
----------- -----------
$94,424,000 $11,698,000
=========== ===========
</TABLE>
The interest-only strips receivable are
recorded as a result of the Company's sale and
securitization of real estate loans. Interest-
only strips receivables are recorded at their
estimated fair value. The fair value is based
on the present value of the expected future
cash flows. The Company estimates future cash
flows from the interest-only strip receivable
and values them utilizing assumptions that it
believes are consistent with those that would
be utilized by an unaffiliated third party
purchaser. To the Company's knowledge, there is
no active market for the sale of the
interest-only strips receivable.
The fair value of an interest-only strip
receivable is determined by computing the
present value of the excess cash flows based on
the weighted average coupon on the loans sold
over the sum of: (1) the coupon on the senior
interests, (2) the contracted servicing fee,
(3) expected losses to be incurred on the
portfolio of loans sold over the lives of the
loans, (4) overcollateralization and (5) fees
payable to the trustee and the monoline
insurer. The cash flow model uses prepayment
and default assumptions that market
participants would be expected to use for
similar financial instruments that are subject
to prepayment, credit and interest rate risk.
The cash flows are then discounted at an
interest rate that the Company believes an
unaffiliated third-party purchaser would
require as a rate of return on such a financial
instrument. To the extent that actual future
excess cash flows are different from estimated
excess cash flows, the fair value of the
Company's interest-only strip will be adjusted
quarterly with corresponding adjustments made
to earnings in that period.
The Company builds overcollateralization from
the excess cash flows. The current amount of
such overcollateralization built through cash
flows is part of the interest-only strip
receivable and earns a market rate of interest.
The amount held by the Trust, as restricted
cash, at December 31, 1997 was approximately
$10.5 million.
As of December 31, 1997, the Company adjusted
the fair value of its interest-only strip
receivable by approximately $2.3 million,
which reflected the use of the "cash out"
method of estimating future cash flows from
the various mortgage trusts. The Company
believes the "cash out" method is a preferred
methodology for estimating ultimate residual
cash flows used to determine the fair value of
its interest-only strips receivable at each
reporting period in accordance with the
requirements of SFAS No. 115. The "cash out"
method assumes that the cash flows placed by
the mortgage pool trustee in an
overcollateralization account are not
considered available until they are received
by the Company. The impact of this change in
estimate on the December 31, 1997 fair value
relates primarily to loans sold and/or
securitized in the fourth quarter of 1997.
During 1997, the Company utilized a modified
"cash in" method of modeling the cash flows
which included some accelerated amortization
of the interest-only strip receivable asset on
loans sold and securitized. In March 1998, the
Company obtained an independent valuation and
report of the interest-only strips receivable,
as of December 31, 1997, which, using the
"cash out" method of modeling cash flows,
determined fair values of the interest-only
strip receivable. The fair value of the
interest-only strips receivable reflected on
the Statement of Financial Condition at
December 31, 1997 is consistent with the
results of the report.
The fair value at December 31, 1997 can be
calculated with a constant prepayment rate
assumption on the Aames 1996-4 pool of 36%,
and constant prepayment rate assumptions on
the Advanta 1997-1, 1997-2, 1997-3 and 1997-4
and PacificAmerica 1997-1 pools of 26% to 27%;
a 50 basis point annual loss rate on each of
its pools (after the first six months) with a
three month ramp up period; and an 11%
discount rate on estimated cash flows from
each of its pools.
It is possible that these assumptions could
change in the near future, due to changes
required by future accounting pronouncements,
the general economy, adverse changes in the
securitization market, and actual prepayment
and default experience which vary from the
assumed rates, which would require adjustments
in the reported fair value of the
interest-only strips receivable. As a result
the actual cash flows received by the Company
could differ significantly from the modeled
cash flows using current assumptions. The
estimated fair value of the Company's
interest-only strips receivable is reviewed
quarterly with required adjustments, if
necessary, made to earnings in that period.
5. OTHER REAL ESTATE Other real estate consisted of the following at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Foreclosed real estate $ 3,132,000 $ 6,570,000
</TABLE>
F-37
<PAGE> 102
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Allowance for losses on other real estate (1,104,000) (2,285,000)
-------------------------------------------------------------------------------
$ 2,028,000 $ 4,285,000
===============================================================================
</TABLE>
Changes in the allowance for losses on other
real estate for the years ended December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at beginning $ 2,285,000 $ 2,434,000 $ 402,000
Provision for losses 26,000 337,000 1,188,000
Net (charge offs) recoveries (1,207,000) (486,000) 844,000
-------------------------------------------------------------------------------
Balance at end $ 1,104,000 $ 2,285,000 $ 2,434,000
===============================================================================
</TABLE>
Operations of other real estate for the years
ended December 31, 1997, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for losses $ 26,000 $ 337,000 $ 1,188,000
Net (gain) loss on sales (181,000) (224,000) (469,000)
Other expenses 599,000 568,000 493,000
-------------------------------------------------------------------------------
$ 444,000 $ 681,000 $ 1,212,000
===============================================================================
</TABLE>
Upon foreclosure of a junior lien, the Company
takes title to the real estate, subject to
existing senior liens. These mortgage notes
payable totaled $-0- and $1,557,000 at December
31, 1997 and 1996.
F-38
<PAGE> 103
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT Property and equipment consisted of the
following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Computer and office equipment $ 3,738,000 $ 2,157,000
Furniture and fixtures 1,235,000 897,000
Leasehold improvements 676,000 621,000
-------------------------------------------------------------------------------
5,649,000 3,675,000
Accumulated depreciation and amortization (2,053,000) (1,315,000)
-------------------------------------------------------------------------------
$ 3,596,000 $ 2,360,000
===============================================================================
</TABLE>
7. THRIFT CERTIFICATES Thrift certificates are comprised of fully-paid
PAYABLE certificates and installment certificates. The
approximate weighted average interest rate of
fully-paid and installment certificate accounts
at December 31, 1997 was 6.11% and 5.01% and at
December 31, 1996 was 5.89% and 5.06%. The
interest payable on the thrift certificates
totaled $370,000, $185,000 and $103,000 at
December 31, 1997, 1996 and 1995.
At December 31, 1997 and 1996, fully-paid
thrift certificates consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Certificates equal or greater than $100,000 $ 4,180,000 $ -
Certificates less than $100,000 109,551,000 56,343,000
--------------------------------------------------------------------------------
$ 113,731,000 $ 56,343,000
===============================================================================
</TABLE>
F-39
<PAGE> 104
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. THRIFT CERTIFICATES At December 31, 1997, scheduled maturities
PAYABLE of fully-paid thrift certificates were
(CONTINUED) as follows:
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------
<S> <C> <C>
Less than 3 months $ 20,988,000
3 to 6 months 32,649,000
6 to 12 months 59,999,000
1 to 5 years 95,000
----------------------------------------------------------
$ 113,731,000
==========================================================
</TABLE>
8. NOTES PAYABLE Notes payable consisted of the following at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Bank loan, repaid January 1997 (a) $ -- $ 745,000
Interest-strip only advances(b)(c) 28,318,000 2,545,000
--------------------------------------------------------------------------------
$ 28,318,000 $ 3,290,000
================================================================================
</TABLE>
(a) The loan interest rate was prime plus 1.5%,
which was 9.75% at December 31, 1996.
(b) The interest-only strip advances received
in 1997 and 1996 are from the Purchasers
secured by the Company's interest-only strips
receivable. Agreements provide for advances
ranging from 3.00% to 4.75% of the par value
of loans sold and are made by the Purchasers
when the loans are securitized. The advances
are reduced by any monthly payments to be made
against the interest-only strips receivable
until the advances are fully repaid. The
advances bear an annual interest rate ranging
from LIBOR plus 1.00% to LIBOR plus 2.0%.
(c) In connection with the advances received
under the Master Assignment Agreement, dated as
of December 18, 1997 (the "Master Assignment
Agreement"), with Merrill Lynch Mortgage
Capital, Inc., each advance is due one year
from the date of the advance, and the Company
is required to make mandatory prepayments under
the Master Assignment Agreement in the event
that the residual interests assigned to Merrill
Lynch experience a
F-40
<PAGE> 105
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
decline in value from the levels established at
the time of the advance.
F-41
<PAGE> 106
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES The Partnership was not subject to income taxes.
However, the Partnership was 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.
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 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------------------------
<S> <C>
Total partners' capital for financial reporting purposes $ 8,727,000
Investment in Pacific Thrift, syndication costs, bad debt
and real estate reserves, and various other
differences 14,083,000
-------------------------------------------------------------------------------
Total partners' capital for federal income tax purposes $ 22,810,000
===============================================================================
</TABLE>
Subsequent to the restructuring (Note 1) the
Corporation became subject to federal income
and California franchise taxes. Pacific Thrift,
the major operating subsidiary, was always
subject to income taxes because it has been a
taxable corporation from its inception.
Significant components of the provision for
income taxes (benefits) from continuing
operations included in the consolidated
statements of operations are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 26,000 $ 727,000 $ --
Deferred 12,442,000 931,000 (1,223,000)
-------------------------------------------------------------------------------
$ 12,468,000 $ 1,658,000 $ (1,223,000)
===============================================================================
</TABLE>
F-42
<PAGE> 107
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
(CONTINUED) The tax effects of temporary differences that
give rise to the deferred tax assets and
liabilities at December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward $ 18,321,000 $ 2,547,000
State tax deduction 2,050,000 435,000
Loan loss reserves 805,000 488,000
Bonus accrued 731,000 --
Capital loss carryforward 402,000 402,000
Reserve for delinquent interest 240,000 334,000
Alternate minimum tax credit carryforward 196,000 214,000
Deferred rent 117,000 137,000
Reserve for other real estate owned 112,000 370,000
Organization costs 46,000 159,000
Other 17,000 18,000
Loans held for sale -- 253,000
Depreciation -- 40,000
--------------------------------------------------------------------------------
Total gross deferred tax assets 23,037,000 5,397,000
Valuation allowance (402,000) (402,000)
--------------------------------------------------------------------------------
Deferred tax liabilities
Interest-only strip receivable $ (33,628,000) $ (4,157,000)
Loans held for sale (726,000) --
Deferred loan costs (230,000) (415,000)
Depreciation (198,000) (127,000)
--------------------------------------------------------------------------------
Total deferred tax liabilities $ (34,782,000) $ (4,699,000)
-------------------------------------------------------------------------------
Total deferred tax asset (liability), net (12,147,000) $ 296,000
================================================================================
</TABLE>
Included in the deferred tax asset at December
31, 1997 and 1996 is a capital loss
carryforward of $402,000 which is fully
reserved (Note 15). During 1996 the beginning
of year valuation allowance of $857,000 was
reversed. On June 27, 1996 when the Company
went from a non-taxable entity to a taxable
entity a valuation allowance of $1,207,000 was
F-43
<PAGE> 108
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
(CONTINUED) recorded against the resulting deferred tax
asset of $1,207,000 as management felt it was
more likely than not the asset was not
realizable at that time. In the fourth quarter
of 1996, this valuation allowance of $1,207,000
was reversed because of new contracts entered
into with the Purchaser in October 1996 and the
Second Purchaser in December 1996 (Note 3). As
a result of these contracts management expects
sufficient revenue will be generated in the
future to use these future temporary deductible
differences, therefore management believes it
is more likely than not that the deferred tax
asset will be realized.
At December 31, 1997, the Company has net
operating loss carryforwards for federal income
tax purposes of approximately $48,061,000 that
are available to offset future federal taxable
income. These federal net operating losses
expire in the years 2010 through 2012. Net
operating loss carryforwards for California
franchise tax purposes are approximately
$21,272,000. These California carryforwards
expire in the years 2001 and 2002. 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.
The following summarizes the difference between
the 1997, 1996 and 1995 provision for income
taxes (benefit) from continuing operations and
the federal statutory tax rate:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35 % 34 % (34 )%
Utilization of net operating loss -- -- 34
Reversal of valuation allowance -- (19 ) (32 )
Loss of benefit of former partnership
losses -- 11 --
State taxes net of federal benefit 7.0 -- --
--------------------------------------------------------------------------------
Effective tax rate (benefit) 42 % 26 % (32 )%
================================================================================
</TABLE>
F-44
<PAGE> 109
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTIES The Partnership had various related party
AND AFFILIATES transactions with the following entities:
- PRESIDENTIAL MANAGEMENT COMPANY - Prior
to the restructuring (Note 1) the former
general partner received specified fees
for serviced performed and reimbursements
of certain expenses. Under the Partnership
Agreement, the general partner received a
base fee of up to 35% of the loan
origination fees paid by borrowers to the
Partnership or Pacific Thrift. The base
fee was 35% of loan origination fees for
the Company in 1995. 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 former general partner
for services performed and overhead-related
expenses for the years ended December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995
------------------------------------------------------------
<S> <C> <C>
Base fee $ 834,000 $ 767,000
Loan servicing fee 125,000 245,000
------------------------------------------------------------
Total fees $ 959,000 $ 1,012,000
============================================================
Salaries and overhead
reimbursements $ 100,000 $ 82,000
============================================================
</TABLE>
- In connection with an amendment to the
loan agreement with a bank lender, in 1992
the general partner loaned the Partnership
$600,000 in subordinated debt, with
interest at the prime rate and only
repayable upon consent by the lender or at
such time as the Partnership repaid all of
its outstanding indebtedness to the
lender. The general partner was repaid in
1996.
F-45
<PAGE> 110
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTIES - PRESIDENTIAL MANAGEMENT COMPANY (Continued)
AND AFFILIATES
(CONTINUED) During 1995, Pacific Thrift paid and
allocated certain salaries and overhead for
the Partnership, the Corporation, PAMC, CRC,
LPPC and the general partner totaling
$386,000, $251,000, $8,000 and $597,000, and
was reimbursed on a monthly basis.
During 1996, Pacific Thrift paid and
allocated certain salaries and overhead for
the Partnership, Corporation, PAL, CRC, LPPC
and the general partner totaling $159,000,
$753,000, $212,000, $6,000 and $174,000 and
was reimbursed on a monthly basis.
- OTHER - Prior to the Restructuring, a
managing officer of the Partnership and
stockholder provided legal services in
connection with the loan accounts of the
Partnership and Pacific Thrift, for which he
received $100 from the fees paid by each
borrower for legal services related to each
loan origination. Total fees of $212,000 and
$175,000 were paid by the Partnership to the
managing officer for the years ended
December 31, 1996 and 1995.
A partner with a law firm that provides
legal services to the Company is a
stockholder of the Company and formerly a
partner of the Partnership. Total fees for
the services provided to the Company by the
law firm were approximately $785,000,
$424,000, and $689,000 for the years ended
December 31, 1997, 1996 and 1995.
F-46
<PAGE> 111
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTIES - OTHER (Continued)
AND AFFILIATES
(CONTINUED) Former officers of the Company had loans
payable to the Company, secured by real
estate, totaling approximately $74,000 as of
December 31, 1996. These loans are included
in loans receivable.
Thrift certificates purchased by members of
management totaled approximately and $34,000
and $174,000 at December 31, 1997 and 1996,
on terms slightly more favorable than the
terms for unrelated parties. Interest
expense on these certificates totaled
approximately $2,000 and $8,000 for the
years ended December 31, 1997 and 1996.
F-47
<PAGE> 112
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS In January and February 1993, the
AND Partnership and Pacific Thrift foreclosed on
CONTINGENCIES two loans secured by real estate that
contained toxic substances. The real estate
was used by the former owners for
metal-plating purposes. Remediation was
completed on one property in 1995 and on the
second property in 1996. Both properties
were sold in 1996 for cash and without
recourse.
The Company conducts its operations from
leased facilities. Rental expenses of
approximately $1,724,000, $1,129,000 and
$905,000 for the years ended December 31,
1997, 1996 and 1995 have been charged to
general and administrative expenses in the
consolidated statements of operations. At
December 31, 1997, 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>
1998 $ 1,752,000
1999 1,252,000
2000 1,117,000
2001 789,000
Thereafter 1,108,000
------------------------------------------------------------
</TABLE>
F-48
<PAGE> 113
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
$ 6,018,000
============================================================
</TABLE>
At December 31, 1997 and 1996, the Company
was servicing Title I loans for others
totaling approximately $6,352,000, and
$8,743,000. In addition, the Company had
filed claims with the Federal Housing
Administration that depleted the insurance
on these loans during 1994.
The Corporation entered into employment
agreements with five of its officers
effective as of the closing date of the
Restructuring on June 27, 1996 (Note 1). One
employment agreement with the President of
CRC, LPPC and CRCWA was terminated effective
December 31, 1996 upon the sale of those
subsidiaries (Note 18). On January 1, 1997,
the Corporation entered into an employment
agreement with its Chief Financial Officer.
F-49
<PAGE> 114
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS The agreements provide for initial terms
AND ranging from one to three years and all
CONTINGENCIES extend automatically for additional one year
(CONTINUED) terms thereafter unless either party gives
at least six months written notice of their
intentions not to renew. The agreements
provide for annual salaries adjusted
annually to the cost of living index. The
agreements also provide for two of the
officers to receive annual bonuses based on
a calculation of net pre-tax profits subject
to a minimum return on equity.
Effective January 1, 1996 Pacific Thrift
entered into an employment agreement with an
executive vice president for a term of two
years and automatically renewing for
additional one year terms thereafter unless
either party gives at least six months
written notice of his intention not to
renew. The agreement provides for an annual
salary adjusted annually to the cost of
living index and an annual bonus based upon
net profits earned from wholesale loans
originated for sale.
FORECLOSURE SERVICES ACTIONS
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 an unfair
business practices 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
sought 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.
CRC and LPPC, along with all other
defendants in the action brought by Consumer
Action and two consumers alleging excessive
trustee publication fees, entered into a
global settlement with the plaintiffs in
this action, and the action was dismissed on
July 28, 1997. The settlement amount paid by
the Company on behalf of CRC under the terms
of the settlement agreement was immaterial
to the Company as a whole.
F-50
<PAGE> 115
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS FORECLOSURE SERVICES ACTIONS (Continued)
AND
CONTINGENCIES In 1996, CRC was served with a complaint by
(CONTINUED) seven individuals suing both individually
and on behalf of the general public in a
purported class action filed on the Superior
Court of Los Angeles, California. The
complaint named over 50 defendants,
including numerous title insurance companies
and trust deed companies, generally alleging
that the title insurance companies did not
make certain refunds of certain trustee sale
guarantee fees ("TSGs") which they were
required to make under the terms of a
settlement of a previous case (in which CRC
was not named), and that the trust deed
services companies failed to purchase less
costly alternative products, to request and
remit refunds in the cost of TSGs or to
advise the members of the class of their
right to a refund from the title insurance
companies. In 1997, a global settlement of
the action was reached, pursuant to which
the Company paid a nominal amount to the
plaintiffs on behalf of CRC.
The Company and Pacific Thrift and
PacificAmerica Money Centers 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, results of operations or cash
flows of the Company.
SALES OF LOANS AND SERVICING RIGHTS
In the ordinary course of business, the
Company is exposed to liability from
industry standard representations and
warranties made to purchasers and insurers
of mortgage loans and the purchasers of
servicing rights. Under certain
circumstances, the Company is required to
repurchase mortgage loans if there has been
a breach of a representation or warranty.
For loans which have been securitized, the
Company includes an estimate of defaults in
its assumptions to determine fair value. On
a periodic basis, the Company reviews its
assumptions in light of historical
experience and economic trends to evaluate
their reasonableness in measuring the fair
value of recorded assets.
F-51
<PAGE> 116
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS LOAN SERVICING
AND
CONTINGENCIES As of December 31, 1997 the Company's servicing
(CONTINUED) portfolio (inclusive of securitized loans
where the Company has ongoing risk of loss but
has no remaining servicing rights or
obligations) was $744 million. All of the
Company's loan servicing has either been
outsourced or subcontracted to Advanta.
12. RETIREMENT The Company implemented a retirement savings
PLANS 1994. plan (defined contribution plan) in 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 matches the first 6% of employee
contributions to the plan at the rate of $.50
on the dollar. During the years ended 1997,
1996 and December 31, 1995, the Company's
contributions to the plan totaled $231,000,
$241,000 and $266,000.
The PacificAmerica Money Center, Inc.
Supplemental Executive Retirement Plan,
effective from June 27, 1996 forward, is an
unfunded plan to provide benefits to certain
long-term executives officers of the Company.
The yearly benefit that a participant will
receive at normal retirement (as defined) is
based on a formula which takes into account his
highest average annual compensation for three
consecutive years multiplied by the actual
number of years of service (as defined), not to
exceed 30 years. Benefits are reduced by
participants' estimated social security and
401(k) benefits.
Net period pension cost for 1997 includes the
following components:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------
<S> <C>
Service cost $ 216,000 $26,000
Interest cost 218,000 42,000
Prior service cost 226,000 32,000
-------------------------------------------------------------
$ 660,000 $100,000
=============================================================
</TABLE>
The net pension liability at December 31,
1997 and 1996 was $760,000 and $100,000.
Actuarial assumptions are a weighted average
discount rate of 7% and a salary progression
rate of 3%.
F-52
<PAGE> 117
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCKHOLDERS' The changes in general and limited partnership
EQUITY/PARTNERS' interests for 1995 are as follows:
CAPITAL, STOCK
OPTIONS AND
WARRANTS
<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 (1,698,000)
------------------------------------------------------------------------------
Capital (deficit) - December
31, 1995 $ (84,000) $ 8,811,000 $ 8,727,000
==============================================================================
</TABLE>
The Company has a 1995 Stock Option Plan and a
1995 Stock Purchase Plan pursuant to which
options to purchase shares of the Company's
common stock may be granted to employees. The
plans provide that the option price shall not
be less than the fair market value of the
shares on the date of grant. Under the 1995
Stock Option Plan, the maximum number of
shares of Common Stock in respect of which
Options may be granted under the Plan (the
"Plan Maximum") is 500,000 with an increase of
two percent (2%) of the total issued and
outstanding shares of the Common Stock on the
first day of each subsequent calendar year, up
to a maximum 660,000 shares, commencing
January 1, 1997. Under the 1995 Stock Purchase
Plan a total of 100,000 options may be issued.
Options vest ratably over four or five year
periods as provided for in each employee's
option agreement. At December 31, 1997, there
were 472,382 shares reserved for options to be
granted under the plans. The following
summarizes stock option transactions:
<TABLE>
<CAPTION>
Weighted
Average
Price
Shares Per Share
-------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 27, 1996 -- --
Granted 480,000 $5.51
Exercised -- --
Cancelled (13,200 ) 5.42
-------------------------------------------------------------------------------
Outstanding at December 31, 1996 466,800 5.52
===============================================================================
Granted 119,300 17.55
Exercised 187,838 5.18
Cancelled 125,880 8.27
-------------------------------------------------------------------------------
Outstanding at December 31, 1997 472,382 $8.45
===============================================================================
</TABLE>
F-53
<PAGE> 118
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCKHOLDERS' At December 31, 1996 the Corporation
EQUITY/PARTNERS' had 1,106,754 general partner warrants
CAPITAL, STOCK outstanding each exercisable for one share of
OPTIONS AND common stock at any time until December 27,
WARRANTS 1997 at an exercise price of $7.50 per share.
(CONTINUED) During the years ended December 31, 1997 and
1996, 1,105,078 and 19,912 general partner
warrants were exercised. As of December 31,
1997, all unexercised general partner warrants
were cancelled.
At December 31, 1997 and 1996 the Corporation
had 52,052 and 127,788 subscriber warrants
outstanding each exercisable for one share of
common stock at any time until June 27, 1998
at an exercise price of $6.25 per share.
During the years ended December 31, 1997 and
1996, 75,730 and 2,004 subscriber warrants
were exercised.
Information relating to stock options is
summarized by exercise price as follows
(thousands of shares):
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------------------------
Outstanding Exercisable
----------------------------------- -----------------------------
Exercise Price Weighted Average Weighted Average
-------------------------- -----------------------------
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.00 to $5.00 313,882 8.30 $5.00 60,572 $5.00
$6.25 to $14.25 55,150 8.56 $9.98 6,075 8.33
$14.50 to $15.00 50,850 8.49 $14.73 3,216 14.95
$15.50 to $23.75 50,100 8.95 $21.14 -- --
$24.50 to $25.75 1,200 9.73 $25.31 -- --
$26.00 to $26.00 100 9.62 $26.00 -- --
$26.50 to $26.50 300 9.77 $26.50 -- --
$26.75 to $26.75 100 9.84 $26.75 -- --
$27.00 to $27.00 200 9.79 $27.00 -- --
$28.75 to $28.75 500 9.81 $28.75 --
------------------------------------------------------------------------------------
$5.00 to $28.75 472,382 8.43 $8.45 69,863 $5.75
====================================================================================
</TABLE>
F-54
<PAGE> 119
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCKHOLDERS' All stock options issued to employees have an
EQUITY/PARTNERS' exercise price not less than the fair market
CAPITAL, STOCK value of the Company's common stock on the
OPTIONS AND date of grant, and in accordance with
WARRANTS accounting for such options utilizing the
(CONTINUED) intrinsic value method there is no related
compensation expense recorded in the Company's
financial statements. Had compensation cost
for stock-based compensation been determined
based on the fair value at the grant dates
consistent with the method of SFAS 123, the
Company's net income and earnings per share
for the year ended December 31, 1997 and
1996 would have been reduced to the pro
forma amounts presented below:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Net Income
As reported $ 17,095,000 $ 4,162,000
Pro forma 16,794,000 4,062,000
Earnings per share
As reported
Basic $ 4.10 $ 1.21
Diluted 3.48 1.01
Pro forma
Primary 4.10 1.17
Fully diluted 3.42 .97
</TABLE>
The fair value of option grants is estimated
on the date of grants utilizing the
Black-Scholes option-pricing model with the
following weighted average assumptions for
grants in 1997 and 1996: expected life of
options of 5 years for both years, expected
volatility of 50% and 25%, risk-free interest
rates of 5.74% and 6.2%, and a 0% dividend
yield for both years. The weighted average
fair value at date of grant for options
granted during 1997 and 1996 approximated
$9.56 and $3.70 per option.
F-55
<PAGE> 120
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY The unaudited quarterly results of operations
RESULTS OF for 1997 and 1996 are as follows
OPERATIONS (in $000's):
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------
Mar. June Sept. Dec.
31, 30, 30, 31
1997 1997 1997 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 2,742 $ 2,761 $ 3,241 $ 2,986
Interest expense 1,073 1,100 2,000 2,367
-------------------------------------------------------------------------------
Net interest income 1,669 1,661 1,241 619
Provision for loan losses 309 738 225 1,815
Other income 13,425 18,308 22,605 27,717*
Other expense 9,561 12,331 14,093 18,610
Income tax benefit (expense) (2,195) (2,897) (4,002) (3,374)
-------------------------------------------------------------------------------
Net income $ 3,029 $ 4,003 $ 5,526 4,537
===============================================================================
Net income per share:
Basic $ .80 $ 1.06 $ 1.36 $ .96
Diluted .64 .86 1.10 .86
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------
Mar. June Sept. Dec.
31, 30, 30, 31
1996 1996 1996 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 2,408 $ 2,512 $ 2,788 $ 3,794
Interest expense 1,227 1,190 1,189 1,360
--------------------------------------------------------------------------------
Net interest income 1,181 1,322 1,599 2,434
Provision for loan losses 725 (469) 11 884
Other income 4,813 6,177 7,068 11,936
Other expense 4,879 7,292 7,383 9,354
Income tax benefit (expense) (348 (727) (578) (5)**
-------------------------------------------------------------------------------
Income (loss) from continuing 42 (51) 695 4,127
operations
Income (loss) from discontinued 237 62 103 (15)
operations
Loss on disposal of - - - (1,038)
discontinued operations
-------------------------------------------------------------------------------
Net income $ 279 $ 11 $ 798 $ 3,074
===============================================================================
Net income per share:
Basic $ .30 $ .33 $ .23 $ .37
Diluted .30 .31 .18 .29
</TABLE>
F-56
<PAGE> 121
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY * In the quarter ended December 31, 1997 as
RESULTS OF a result of a change in estimate the
OPERATIONS interest-only strip receivable was
(UNAUDITED) adjusted. The Company also completed its
(CONTINUED) first direct securitization offering in
the fourth quarter.
** In the quarter ended December 31, 1996
as a result of continued improved
earnings, especially in this quarter, a
valuation allowance was reversed as
management believed it was more likely
than not that the related deferred tax
asset will be realized in the near
future.
15. DISCONTINUED Effective December 31, 1996 the Company's
OPERATIONS trustee and foreclosure services were
discontinued when the assets and liabilities
of CRC and LPPC and all of the stock of CRCWA
were sold. Accordingly, the operations have
been reclassified to present the trustee and
foreclosure services as discontinued
operations in the Statement of Operations. The
Company recorded a fourth quarter 1996 pre-tax
and after-tax charge of $1,038,000 for
disposition of this segment which comprises a
$926,000 loss on the measurement date plus a
loss from discontinued operations from the
measurement date until the disposal date. The
tax benefit of approximately $402,000 from the
loss on disposition was fully reserved for as
such loss is capital in nature and the Company
is unable to quantify the portion of such
capital loss benefit which may be ultimately
realizable.
F-57
<PAGE> 122
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. DISCONTINUED Net assets disposed of were $2,674,000 against
OPERATIONS proceeds of $1,748,000 resulting in a loss
(CONTINUED) of approximately $926,000. The $1,748,000 is
included in accounts receivable at December
31, 1996 and $450,000 was received by early
February 1997. The remaining $1,298,000
represents a secured promissory note which
bears interest at 7% per annum, payable
$25,000 per month from April 1, 1997 through
March 31, 1999 and thereafter at $9,328.93 per
month (includes principal and interest) from
April 1, 1999 through March 1, 2012. The
outstanding balance at December 31, 1997 of
$996,675 was fully repaid in February 1998.
Prior to sale of these subsidiaries, the
Company operated 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 for 1995 is as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1995
-------------------------------------------------------------------------------
<S> <C>
Revenues
Interest and other income from real estate secured
lending $ 19,016,000
Fees from trustee 3,826,000
-------------------------------------------------------------------------------
Total revenues $ 22,842,000
===============================================================================
Operating profit (loss)
Real estate secured lending $ (3,148,000)
Trustee and foreclosure services 747,000
General expenses (519,000)
-------------------------------------------------------------------------------
Loss before income taxes $ (2,920,000)
===============================================================================
December 31, 1995
-------------------------------------------------------------------------------
Identifiable assets
Real estate secured lending $ 76,896,000
Trustee and foreclosure services 5,532,000
General assets 129,000
-------------------------------------------------------------------------------
Total assets $ 82,557,000
===============================================================================
</TABLE>
F-58
<PAGE> 123
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. REGULATORY MATTERS AND MEMORANDUM OF UNDERSTANDING WITH THE FEDERAL
CAPITAL DEPOSIT INSURANCE CORPORATION AND CALIFORNIA
ADEQUACY AND DEPARTMENT OF CORPORATIONS
SUBSEQUENT EVENT
On April 1, 1996, the Company entered into a
Memorandum of Understanding (MOU) with the
FDIC and DOC. The MOU contained provisions
requiring various operating restrictions and
requirements.
On March 9, 1998, the 1996 MOU was replaced
with a new MOU between the Company and the
FDIC. This informal agreement provides that
the Company shall: (i) on the effective date
of the MOU have, and thereafter maintain, Tier
1 capital equal to 8.0% of its total assets;
(ii) by June 7, 1998, have, and thereafter
maintain, risk-based capital equal to 10.0% of
its total assets; (iii) maintain a fully
funded loan loss reserve; (iv) by March 19,
1998, eliminate assets classified "loss" as of
June 30, 1997, and by September 5, 1998,
reduce assets classified "substandard" as of
June 30, 1997 to not more than $4 million; (v)
by June 7, 1998, reduce and thereafter
maintain the amount of interest-only strip
receivables, net of tax liabilities, to no
more than 100% of total capital; (vi) by June
7, 1998, obtain an independent valuation of
interest-only strip receivables, and
thereafter obtain an annual independent
valuation of such receivables until they
represent 50% or less of Tier 1 capital; (vii)
by June 7, 1998, and thereafter quarterly,
perform valuations and cash flow analyses on
the interest-only strip receivables; (viii) by
May 8, 1998, eliminate and/or correct certain
transactions between the Company and its
parent and develop, adopt and implement a
written policy governing the relationship
between the Company and its parent; (ix) by
June 7, 1998, revise, adopt and implement a
written asset/liability management policy to
include risk tolerance levels for income and
annual independent audits of the Company's
interest rate risk process; (xi) pay no cash
dividends without prior written FDIC approval;
(xii) pay no executive or director bonuses
without prior written FDIC approval; (xiii) by
June 7, 1998, submit a strategic plan
reflecting the restriction on interest-only
strip receivables to a level consistent with
prudent banking standards; and (xiv) by May
15, 1998, and thereafter at the end of each
quarter, furnish written progress reports to
the FDIC detailing actions taken to comply
with the MOU.
F-59
<PAGE> 124
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. REGULATORY MATTERS AND MEMORANDUM OF UNDERSTANDING WITH THE FEDERAL
CAPITAL ADEQUACY DEPOSIT INSURANCE CORPORATION AND CALIFORNIA
AND DEPARTMENT OF CORPORATIONS (Continued)
SUBSEQUENT EVENT
(CONTINUED) Management believes it has complied with (i),
(iii), (iv), (v), and is in the process of
complying with (vi). Management believes to
the extent required that it will correct or
eliminate any transactions as described in
(viii). Management also believes that it will
be able to fully comply with the MOU without
any material adverse effect on its operations.
CAPITAL ADEQUACY
The Company 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 the Company's financial statements.
The regulations require the Company to meet
specific capital adequacy guidelines that
involve quantitative measures of the Company's
assets, liabilities, and certain
off-balance-sheet items as calculated under
regulatory accounting practices. The Company's
capital classification is also subject to
qualitative judgments by the regulators about
components, risk weightings, and other
factors.
Quantitative measures established by
regulation to ensure capital adequacy require
the Company to maintain minimum amounts and
ratios of Tier 1 capital (as defined in the
regulations) to average assets (as defined),
and Tier 1 capital (as defined) to
risk-weighted assets (as defined) 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.
F-60
<PAGE> 125
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. REGULATORY MATTERS AND CAPITAL ADEQUACY (Continued)
CAPITAL ADEQUACY AND
SUBSEQUENT EVENT The following table provides information on
(CONTINUED) regulatory capital as of December 31, 1997
and 1996:
<TABLE>
<CAPTION>
(Dollar Amount in Thousands)
------------------------------------------
For Required Capital
Actual Adequacy Purposes
------------------ ----------------------
Amount Ratio Amount Ratio
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total capital (to risk weighted
assets) $ 21,697 8.1 % $ 21,479 8.0 %
Tier 1 capital (to risk
weighted assets) $ 18,925 7.1 % $ 10,740 4.0 %
Tier 1 capital (to average $ 18,967 12.8 % $ 5,907 4.0 %
assets)
AS OF DECEMBER 31, 1996
Total capital (to risk weighted
assets) $ 9,833 11.9 % $ 6,638 8.0 %
Tier 1 capital (to risk
weighted assets) $ 8,808 10.6 % $ 3,319 4.0 %
Tier 1 capital (to average $ 8,808 8.7 % $ 4,061 4.0 %
assets)
--------------------------------------------------------------------------------
</TABLE>
F-61
<PAGE> 126
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. BUSINESS During 1997, the Company's loan origination
CONCENTRATIONS and purchase volume was concentrated in
California, Washington, New York, New Jersey
and Florida. Upon securitization, an estimate
of credit loss is computed based on the
estimated default rate.
The Company currently contracts for the
servicing of all loans it originates,
purchases and holds for sale with Advanta.
This arrangement allows the Company to
increase the volume of loans it originates and
purchases without incurring the overhead
investment in servicing operations. As with
any external service provider, the Company is
subject to risks associated with inadequate or
untimely services. The Company regularly
reviews the delinquency of its servicing
portfolio. Many of the Company's borrowers
require notices and reminders to keep their
loans current and to prevent delinquencies and
foreclosures. A substantial increase in the
Company's delinquency rate or foreclosure rate
could adversely affect its ability to
profitably access the capital markets for its
financing needs, including future
securitizations. Although the Company
periodically reviews the cost associated with
establishing servicing operations to service
the loans it originates and purchases, it has
no plans to establish and perform servicing
operations at this time.
F-62
<PAGE> 127
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE I
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific-
America Thrift America America Reclassifying and
Money and Loan Money Securities, Eliminating Entries
Center, Inc. Company Centers, Inc. Inc. Dr Cr Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 4,020,000 $ 61,137,000 $ 933,000 $ -- $-- $ -- $ 66,090,000
Receivable 140,000 1,305,000 164,000 -- -- 77,000 1,532,000
Note receivable 1,015,000 -- -- -- -- -- 1,015,000
Accrued interest receivable -- 1,174,000 100,000 -- -- -- 1,274,000
Loans receivable 542,000 19,646,000 441,000 -- -- -- 20,629,000
Loans held for sale -- 35,280,000 -- -- -- -- 35,280,000
Receivable from related party 198,000 1,885,000 7,000 1,000 -- 2,091,000 --
Interest-only strip receivable 60,364,000 33,292,000 768,000 -- -- -- 94,424,000
Other real estate -- 1,718,000 310,000 -- -- -- 2,028,000
Property and equipment 50,000 3,543,000 3,000 -- -- -- 3,596,000
Deferred income taxes, net -- -- --
Refundable income taxes -- 222,000 -- -- -- -- 222,000
Other assets 481,000 1,233,000 62,000 -- -- -- 1,776,000
Investments in subsidiaries 21,378,000 -- -- -- -- 21,378,000 --
- ---------------------------------------------------------------------------------------------------------------------------------
$ 88,188,000 $160,435,000 $ 2,788,000 $1,000 $-- $ 23,546,000 $227,866,000
=================================================================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-63
<PAGE> 128
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE I
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific-
America Thrift America America Reclassifying and
Money and Loan Money Securities, Eliminating Entries
Center, Inc. Company Centers, Inc. Inc. Dr Cr Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities and Stockholders'
Equity
Thrift certificates payable
Fully-paid certificates $ -- $113,731,000 $ -- $- $- $- $113,731,000
Installment certificates -- 18,793,000 -- -- -- -- 18,793,000
-- 132,524,000 -- -- -- -- 132,524,000
Accounts payable and accrued
expenses 3,309,000 2,237,000 575,000 -- -- -- 6,121,000
Accrued interest payable -- 370,000 -- -- -- -- 370,000
Payable to related party 1,728,000 -- 440,000 -- 2,168,000 -- --
Notes payable 28,318,000 -- -- -- -- -- 28,318,000
Deferred income taxes 6,447,000 6,379,000 (679,000 -- -- -- 12,147,000
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 39,802,000 141,510,000 336,000 -- 2,168,000 -- 179,480,000
- ---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock 50,000 3,000,000 2,920,000 1,000 5,921,000 -- 50,000
Additional paid-in capital 27,079,000 10,104,000 -- -- 10,104,000 -- 27,078,000
Accumulated earnings 21,257,000 5,821,000 (468,000 -- 10,551,000 5,198,000 21,257,000
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 43,386,000 18,925,000 2,452,000 1,000 26,576,000 5,198,000 48,386,000
- ---------------------------------------------------------------------------------------------------------------------------------
$ 88,188,000 $160,435,000 $ 2,788,000 $1,000 $ 28,744,000 $ 5,198,000 $227,866,000
=================================================================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-64
<PAGE> 129
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATING SCHEDULE - OPERATIONS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific-
America Thrift America America Reclassifying and
Money and Loan Money Securities, Eliminating Entries
Center, Inc. Company Centers, Inc. Inc. Dr Cr Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Loans receivable $ 800,000 $ 10,165,000 $ 368,000 $ -- $ -- $ -- $ 11,333,000
Deposits with financial position -- 397,000 -- -- -- -- 397,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 800,000 10,562,000 368,000 -- -- -- 11,730,000
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Thrift certificates greater
than $100,000 -- 50,000 -- -- -- -- 50,000
Other thrift certificates -- 5,457,000 -- -- -- -- 5,457,000
Notes payable 1,023,000 -- 10,000 -- -- -- 1,033,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,023,000 5,507,000 10,000 -- -- -- 6,540,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest expense (223,000) 5,055,000 358,000 -- -- -- 5,190,000
Provision for loan losses 41,000 3,429,000 (383,000) -- -- -- 3,087,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income (loss) after
provision for loan losses (264,000) 1,626,000 741,000 -- -- -- 2,103,000
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest income
Other income 7,000 263,000 75,000 -- -- -- 345,000
Gain on sale of loans 26,958,000 53,984,000 768,000 -- -- -- 81,710,000
Loan servicing fees -- 145,000 -- -- 145,000 -- --
Equity in income of subsidiaries 11,820,000 -- -- -- 11,820,000 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 38,785,000 54,392,000 843,000 -- 11,965,000 -- 82,055,000
==================================================================================================================================
</TABLE>
F-65
<PAGE> 130
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATING SCHEDULE - OPERATIONS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific-
America Thrift America America Reclassifying and
Money and Loan Money Securities, Eliminating Entries
Center Inc. Company Centers, Inc. Inc. Dr Cr Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest expense
Salaries and employee benefits 4,022,000 24,303,000 1,132,000 -- -- -- 29,457,000
General and administrative 4,911,000 18,952,000 421,000 -- -- 145,000 24,139,000
expenses
Operations of other real estate -- 303,000 141,000 -- -- -- 444,000
Depreciation and amortization 25,000 530,000 -- -- -- -- 555,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 8,958,000 44,088,000 1,694,000 -- -- 145,000 54,595,000
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 29,563,000 11,930,000 (110,000) -- 11,965,000 145,000 29,563,000
Income taxes (benefit) 12,468,000 5,053,000 (46,000) -- 46,000 5,053,000 12,468,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 17,095,000 $ 6,877,000 $ (64,000) $ -- $ 12,011,000 $ 5,198,000 $ 17,095,000
==================================================================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-66
<PAGE> 131
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE III
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pacific- Pacific Lenders Consolidated Pacific-
America Thrift Consolidated Posting and Reconveyance America
Money and Loan Reconveyance Publishing Corporation, Money
Center, Inc. Company Company Company WA Centers, Inc.
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $650,000 $7,947,000 $ - $ - $ - $43,000
Receivables 40,000 482,000 - - - 81,000
Receivable for mortgage loan
shipped 24,310,000 - - - - -
Notes receivable 1,746,000 - - - - -
Accrued interest receivable - 933,000 - - - 211,000
Loans receivable 555,000 31,750,000 - - - 1,210,000
Loans held for sale - 15,687,000 - - - 2,461,000
Receivable from related party 1,296,000 24,887,000 - - - -
Premium receivable for loans sold - 1,195,000 - - - -
Interest-only strips receivable 3,982,000 7,716,000 - - - -
Other real estate - 1,839,000 - - - 2,446,000
Property and equipment 39,000 2,321,000 - - - -
Deferred income taxes, net 1,014,000 - - - 633,000
Refundable income taxes - 730,000 - - - -
Other assets 581,000 922,000 - - - 62,000
Investment in subsidiaries 16,564,000 - - - - -
- -----------------------------------------------------------------------------------------------------------------------
$50,777,000 $96,409,000 $ - $ - $ - $7,147,000
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION> Reclassifying and
Eliminating Entries
Dr Cr Consolidated
- ----------------------------------------------------------------------------
Assets
<S> <C> <C> <C>
Cash and cash equivalents $ - $ - $8,640,000
Receivables - - 603,000
Receivable for mortgage loan
shipped - - 24,310,000
Notes receivable - - 1,746,000
Accrued interest receivable - - 1,144,000
Loans receivable - - 33,515,000
Loans held for sale - - 18,148,000
Receivable from related party - 26,183,000 -
Premium receivable for loan
sales - - 1,195,000
Interest-only strip receivable - - 11,698,000
Other real estate - - 4,285,000
Property and equipment - - 2,360,000
Deferred income taxes - 1,351,000 296,000
Refundable income taxes - - 730,000
Other assets - - 1,565,000
Investment in subsidiaries - 16,564,000 -
- ----------------------------------------------------------------------------
$ - $44,098,000 $110,235,000
============================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-67
<PAGE> 132
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE III
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pacific- Pacific Lenders Consolidated Pacific-
America Thrift Consolidated Posting and Reconveyance America
Money and Loan Reconveyance Publishing Corporation, Money
Center,Inc. Company Company Company WA Centers, Inc.
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Liabilities and Stockholders' Equity
Thrift certificates payable
Fully-paid certificates $ - $ 56,343,000 $ - $ - $ - $ -
Installment certificates - 24,659,000 - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total thrift certificates payable - 81,002,000 - - - -
Accounts payable and accrued
expenses 1,276,000 934,000 - - - 31,000
Accrued interest payable - 185,000 - - - -
Payable to related party 24,990,000 - - - - 1,187,000
Mortgage notes payable - 189,000 - - - 1,368,000
Notes payable 2,545,000 - - - - 745,000
Deferred income taxes, net - 1,351,000 - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 28,811,000 83,661,000 - - - 3,331,000
=====================================================================================================================
Commitments and contingencies
Stockholders' equity
Common stock 19,000 3,000,000 - - - 2,920,000
Additional paid-in capital 17,400,000 8,304,000 - - - -
General Partner Warrants 385,000 - - - - -
Retained earnings 4,162,000 1,444,000 - - - 896,000
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 21,966,000 12,748,000 - - - 3,816,000
- ---------------------------------------------------------------------------------------------------------------------
$ 50,777,000 $96,409,000 $ - $ - $ - $ 7,147,000
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION> Reclassifying and
Eliminating Entries
Dr Cr Consolidated
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Thrift certificates payable
<S> <C> <C> <C>
Fully-paid certificates $ - $ - $ 56,343,000
Installment certificates - - 24,659,000
- -----------------------------------------------------------------------------
Total thrift certificates payable - - 81,002,000
Accounts payable and accrued
expenses 6,000 - 2,235,000
Accrued interest payable - - 185,000
Payable to related party 26,177,000 - -
Mortgage notes payable - - 1,557,000
Notes payable - - 3,290,000
Deferred income taxes, net 1,351,000 - -
- -----------------------------------------------------------------------------
Total liabilities 27,534,000 - 88,269,000
- -----------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity
Common stock 5,920,000 - 19,000
Additional paid-in capital 8,304,000 - 17,400,000
General Partner Warrants - - 385,000
Retained earnings 2,340,000 - 4,162,000
- -----------------------------------------------------------------------------
Total stockholders' equity 16,564,000 - 21,966,000
- -----------------------------------------------------------------------------
$ 44,098,000 $ - $ 110,235,000
==============================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-68
<PAGE> 133
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE IV
CONSOLIDATING SCHEDULE - OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pacific- Pacific Lenders Consolidated Pacific-
America Thrift Consolidated Posting and Reconveyance America
Money and Loan Reconveyance Publishing Corporation, Money
Center, Inc. Company Company Company WA Centers, Inc.
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans receivable
Deposits with financial $ 614,000 $ 10,256,000 $ - $ - $ - $ 304,000
institutions 4,000 324,000 - - - -
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 618,000 10,580,000 - - - 304,000
- -----------------------------------------------------------------------------------------------------------------------
Interest expense
Thrift certificates greater
than $100,000 - 23,000 - - - -
Other thrift certificates - 4,391,000 - - - -
Notes payable 418,000 - - - - 134,433
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 418,000 4,414,000 - - - 134,000
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 200,000 6,166,000 - - - 170,000
Provision for loan losses 150,000 1,277,000 - - - (276,000)
- -----------------------------------------------------------------------------------------------------------------------
Net interest income (loss) after
provision for loan losses 50,000 4,889,000 - - - 446,000
Noninterest income
Trust and reconveyance fees - - 2,844,000 - 11,000 -
Other income 63,000 614,000 - 410,000 - 100,000
Gain on sale of loan 925,000 28,292,000 - - - -
Loan servicing fees - 199,000 - - - -
Equity in income of subsidiaries 8,226,000 - - - - -
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 9,214,000 29,105,000 2,844,000 410,000 11,000 100,000
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION> Reclassifying and
Eliminating Entries
Dr Cr Consolidated
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans receivable
Deposits with financial $ - $ - $ 11,174,000
institutions - - 328,000
- -----------------------------------------------------------------------------
Total interest income - - 11,502,000
- -----------------------------------------------------------------------------
Interest expense
Thrift certificates greater
than $100,000 - - 23,000
Other thrift certificates - - 4,391,000
Notes payable - - 552,000
- -----------------------------------------------------------------------------
Total interest expense - - 4,966,000
- -----------------------------------------------------------------------------
Net interest income 6,536,000
Provision for loan losses - - 1,151,000
- -----------------------------------------------------------------------------
Net interest income (loss) after
provision for loan losses - - 5,385,000
Noninterest income
Trust and reconveyance fees 2,855,000 - -
Other income 410,000 - 777,000
Gain on sale of loans - - 29,217,000
Loan servicing fees 199,000 - -
Equity in income of subsidiaries 8,226,000 - -
- -----------------------------------------------------------------------------
Total noninterest income 11,690,000 - 29,994,000
=============================================================================
</TABLE>
F-69
<PAGE> 134
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE IV
CONSOLIDATING SCHEDULE - OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(CONTINUED)
<TABLE>
<CAPTION>
Pacific- Pacific Lenders Consolidated Pacific-
America Thrift Consolidated Posting and Reconveyance America
Money and Loan Reconveyance Publishing Corporation, Money
Center, Inc. Company Company Company WA Centers, Inc.
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest expense
Salaries and employee benefits 672,000 13,929,000 1,715,000 151,000 - 21,000
General and administrative 3,004,000 8,867,000 947,000 142,000 1,000 148,000
Related party fees 1,071,000 - - - - -
Operations of other real estate 102,000 465,000 - - - 114,000
Depreciation 339,000 375,000 29,000 - - -
Loss on disposal of business
segment 928,000 - - - - -
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 6,116,000 23,636,000 2,691,000 293,000 1,000 283,000
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,148,000 10,358,000 153,000 117,000 10,000 263,000
Income tax expense (benefit) (1,014,000) 3,304,000 2,000 2,000 - (633,000)
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 4,162,000 7,054,000 151,000 115,000 10,000 896,000
Loss from discontinued operations - - - - - -
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 4,162,000 $ 7,054,000 $ 151,000 $ 115,000 $ 10,000 $ 896,000
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Reclassifying and
Eliminating Entries
Dr Cr Consolidated
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense
Salaries and employee benefits - 1,866,000 14,622,000
General and administrative - 1,090,000 12,019,000
Related party fees - 199,000 872,000
Operations of other real estate - - 681,000
Depreciation - 29,000 714,000
Loss on disposal of business
segment - 928,000 -
- -----------------------------------------------------------------------------
Total noninterest expense - 4,112,000 28,908,000
- -----------------------------------------------------------------------------
Income before income taxes 11,690,000 4,112,000 6,471,000
Income taxes (benefit) - 3,000 1,658,000
- -----------------------------------------------------------------------------
Income from continuing operations 11,690,000 4,115,000 4,813,000
Loss from discontinued operations,
net 3,917,000 3,266,000 (651,000)
- -----------------------------------------------------------------------------
Net income $ 15,607,000 $ 7,381,000 $ 4,162,000
=============================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-70
<PAGE> 135
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE V
CONSOLIDATING SCHEDULE - OPERATIONS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Pacific Lenders Pacific-
Presidential Thrift Consolidated Posting and America
Mortgage and Loan Reconveyance Publishing Money
Company Company Company Company Center, Inc.
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income
Loans receivable $ 1,872,000 $ 7,013,000 $ - $ - $ -
Deposits with financial institutions 10,000 682,000 - - -
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 1,882,000 7,695,000 - - -
- ----------------------------------------------------------------------------------------------------------------------
Interest expense
Thrift certificates greater than $100,000 - 7,000 - - -
Other thrift certificates - 3,813,000 - - -
Notes payable 1,379,000 - - - -
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 1,379,000 3,820,000 - - -
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 503,000 3,875,000 - - -
Provision for loan losses 1,894,000 1,395,000 - - -
- ----------------------------------------------------------------------------------------------------------------------
Net interest income (expense) after provision for (1,391,000) 2,480,000 - - -
loan losses
- ----------------------------------------------------------------------------------------------------------------------
Noninterest income
Trust and reconveyance fees - - 3,248,000 - -
Other income 139,000 353,000 - 577,000 -
Gain on sale of loans - 8,895,000 - - -
Loan servicing fees - 351,000 - - -
Equity in income of subsidiaries 4,016,000 - - - -
- ----------------------------------------------------------------------------------------------------------------------
4,155,000 9,599,000 3,248,000 577,000 -
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Reclassifying and
Eliminating Entries
Dr Cr Consolidated
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans receivable $ - $ - $ 8,885,000
Deposits with financial institutions - - 692,000
- --------------------------------------------------------------------------------------------
Total interest income - - 9,577,000
- --------------------------------------------------------------------------------------------
Interest expense
Thrift certificates greater than $100,000 - - 7,000
Other thrift certificates - - 3,813,000
Notes payable - - 1,379,000
- --------------------------------------------------------------------------------------------
Total interest expense - - 5,199,000
- --------------------------------------------------------------------------------------------
Net interest income - - 4,378,000
Provision for loan losses - - 3,289,000
- --------------------------------------------------------------------------------------------
Net interest income (expense) after provision for - - 1,089,000
loan losses
- --------------------------------------------------------------------------------------------
Noninterest income
Trust and reconveyance fees 3,248,000 - -
Other income 577,000 53,000 545,000
Gain on sale of loans - - 8,895,000
Loan servicing fees 351,000 - -
Equity in income of subsidiaries 4,016,000 - -
- --------------------------------------------------------------------------------------------
8,192,000 53,000 9,440,000
============================================================================================
</TABLE>
F-71
<PAGE> 136
PACIFICAMERICA MONEY CENTER, INC.
AND SUBSIDIARIES
SCHEDULE V
CONSOLIDATING SCHEDULE - OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(CONTINUED)
<TABLE>
<CAPTION>
Pacific Lenders Pacific-
Presidential Thrift Consolidated Posting and America
Mortgage and Loan Reconveyance Publishing Money
Company Company Company Company Center, Inc.
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest expense
Salaries and employee benefits 392,000 5,608,000 1,712,000 146,000 -
General and administrative 1,192,000 4,002,000 927,000 152,000 -
Related party fees 1,363,000 - - - -
Operations of other real estate 1,120,000 92,000 - - -
Depreciation 529,000 446,000 26,000 - -
- ---------------------------------------------------------------------------------------------------------------------
4,596,000 10,148,000 2,665,000 298,000 -
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) (1,832,000) 1,931,000 583,000 279,000 -
Income taxes (benefit) 1,000 (1,224,000) 1,000 1,000 -
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (1,833,000) 3,155,000 582,000 278,000 -
Income from discontinued operations - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,833,000) $3,155,000 $ 582,000 $ 278,000 $ -
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Reclassifying and
Eliminating Entries
Dr Cr Consolidated
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense
Salaries and employee benefits - 1,858,000 6,000,000
General and administrative - 1,079,000 5,194,000
Related party fees - 351,000 1,012,000
Operations of other real estate - - 1,212,000
Depreciation - 108,000 893,000
- --------------------------------------------------------------------------------------
- 3,396,000 14,311,000
- --------------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) 8,192,000 3,449,000 (3,782,000)
Income taxes (benefit) - 2,000 (1,223,000)
- --------------------------------------------------------------------------------------
Income (loss) from continuing operations 8,192,000 3,451,000 (2,559,000)
Income from discontinued operations 2,965,000 3,826,000 861,000
- --------------------------------------------------------------------------------------
Net income (loss) $ 11,157,000 $ 7,277,000 $ (1,698,000)
======================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-72
<PAGE> 137
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement
on Form S-4, as filed with the Securities and Exchange Commission on
December 22, 1995, as amended and declared effective on May 14, 1996
(the "Registration Statement").
3.2 Bylaws of the Registrant, incorporated by reference to the Exhibit
3.2 of the Registration Statement.
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.1 of the Registration Statement.
4.2 General Partner Warrant Agreement and Warrant, incorporated by
reference to Exhibit 4.2 of the Registration Statement.
4.3 Subscriber Warrant and Warrant Agreement, incorporated by reference
to Exhibit 4.3 of the Registration Statement.
10.1 Employment Agreement by and between the Registrant and Joel R.
Schultz, incorporated by reference to Exhibit 10.1 of the
Registration Statement; as amended by the First Amendment thereto
dated as of April 17, 1997, and the Second Amendment thereto dated as
of February 3, 1998.
10.2 Employment Agreement by and between the Registrant and Richard D.
Young, incorporated by reference to Exhibit 10.2 of the Registration
Statement; as amended by the First Amendment thereto dated as of
February 3, 1998.
10.3 Employment Agreement by and between the Registrant and Norman A.
Markiewicz, incorporated by reference to Exhibit 10.4 of the
Registration Statement.
10.4 Employment Agreement by and between the Registrant and Richard B.
Fremed, incorporated by reference to Exhibit 10.5 of the
Registration Statement.
10.5 Employment Agreement by and between Pacific Thrift and Loan Company,
Inc. and Frank Landini, incorporated by reference to Exhibit 10.6 of
the Registration Statement.
10.6 Employment Agreement by and between the Registrant and Charles J.
Siegel, incorporated by reference to Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996 ("1996 10-K").
</TABLE>
S-1
<PAGE> 138
<TABLE>
<S> <C>
10.7 Form of Indemnification Agreement by and between the Registrant and
each of its directors and executive officers, incorporated by
reference to Exhibit 10.7 of the Registration Statement.
10.8 Stock Option Plan of the Registrant, dated January 1, 1996,
incorporated by reference to Exhibit 10.8 of the Registration
Statement.
10.9 Stock Purchase Plan of the Registrant, dated January 1, 1996,
incorporated by reference to Exhibit 10.9 of the Registration
Statement.
10.10 Supplemental Executive Retirement Plan of the Registrant, dated
January 1, 1996, incorporated by reference to Exhibit 10.10 of the
Registration Statement.
10.11 Master Loan Purchase Agreement dated as of October 31, 1996, by and
between the Registrant and Aames Capital Corporation, incorporated
by reference to Exhibit 10.1 of the Registrant's Report on Form 10-Q
for the quarter ended September 30, 1996.
10.12 First and Second Amendments to Master Loan Purchase Agreement by and
between the Registrant and Aames Capital Corporation, incorporated
by reference to Exhibit 10.13 to 1996 10-K.
10.13 Amended and Restated Corporate Finance Agreement, dated as of
January 27, 1997, by and among the Registrant, Advanta Mortgage
Conduit Services, Inc. and Advanta Mortgage Corp. USA, incorporated
by reference to Exhibit 10.14 of the 1996 10-K.
10.14 Asset and Stock Purchase and Sale and Assumption of Liabilities
Agreement, Secured Promissory Note and Security Agreement, all dated
as of December 15, 1996, among the Registrant, Consolidated
Reconveyance Company, Lenders Posting and Publishing Company,
Consolidated Reconveyance Corporation, Consolidated Reconveyance
Company, LLC and Lenders Posting and Publishing Company, LLC,
incorporated by reference to Exhibit 10.1 of the Registrant's Report
on Form 8-K for December 31, 1996.
10.15 Mortgage Loan Purchase and Sale Agreement dated as of December 27,
1996, by and between the Company and Pacific Crest Investment and
Loan, incorporated by reference to Exhibit 10.2 of the Registrant's
Report on Form 8-K for December 31, 1996.
10.16 Home Equity Loan Purchase Agreement, dated as of December 11, 1997,
by and among the Company, Merrill Lynch Mortgage Investors, Inc., as
depositor, PacificAmerica Home Equity Loan Trust Series 1997-1, as
issuer, and Bankers Trust Company of California, N.A., as indenture
trustee, incorporated by reference to Exhibit 10.1 of the
Registrant's Report on Form 8-K for December 18, 1997 (the "1997
8-K")
</TABLE>
S-2
<PAGE> 139
<TABLE>
<S> <C>
10.17 Master Assignment Agreement, dated as of December 18, 1997, by and
between the Company and Merrill Lynch Mortgage Capital, Inc.,
incorporated by reference to Exhibit 10.2 of the 1997 8-K.
10.18 Master Repurchase Agreement, dated as of October 31, 1997, by and
between the Company, on the one hand, and Merrill Lynch Mortgage
Capital, Inc. and Merrill Lynch Credit Corporation on the other,
which Agreement includes, without limitation, the Supplemental Terms
and Conditions attached to and incorporated into the Master
Repurchase Agreement, incorporated by reference to Exhibit 10.3 of
the 1997 8-K.
21.1 Subsidiaries of the Registrant
</TABLE>
S-3
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. ONE TO
EMPLOYMENT AGREEMENT
OF
JOEL R. SCHULTZ
This AMENDMENT NO. ONE TO EMPLOYMENT AGREEMENT is entered into
as of April 17, 1997, subject to the approval of the stockholders of
PacificAmerica Money Center, Inc. ("Employer"), effective for all periods
beginning January 1, 1997, by and between Employer and Joel R. Schultz
("Schultz"), with reference to the following facts:
A. Employer and Schultz are parties to an Employment Agreement
dated as of June 27, 1996 (the "Agreement"), pursuant to which Employer has
engaged Schultz as President of Employer. Capitalized terms not defined herein
have the meanings ascribed to them in the Agreement.
B. Employer and Schultz now desire to amend certain provisions
of the Agreement as set forth herein.
NOW, THEREFORE, the parties hereby agree as follows:
1. Section 1(a) of the Agreement is hereby amended to extend
the initial term of this Agreement until December 31, 2000 which shall
thereafter be extended for additional one year terms unless either Employer or
Schultz gives notice of its or his intention not to extend the Agreement at
least six months prior to the end of the initial term or any renewal term
thereof.
2. Section 2(a)(ii) of the Agreement is hereby amended to
provide that the Bonus payable to Schultz shall be equal to the applicable
percentage specified in the Agreement of the annual net pre-tax profits of
Employer, as determined before deduction of the Bonus payable to Schultz and the
bonus payable to Richard D. Young.
3. Section 2(a)(ii) is further amended to provide that up to
80% of each year's annual bonus will be payable in quarterly installments during
the applicable year for which the bonus is earned, determined by annualizing the
quarterly net pre-tax profits, net after-tax profits and return on equity for
each of the first three quarters of the year. To the extent that a quarterly
bonus amount is paid for any quarter, and the annualized return on equity for
the year-to-date, as determined in the following quarter, results in an
overpayment of bonus for the prior quarter, the overpayment amount shall be
repaid by Schultz in the following quarter, or in the discretion of the
Executive Compensation Committee of the Board of Directors of Employer, deducted
from the Base Salary and other amounts due to Schultz under the Agreement or
repaid pursuant to a schedule of repayment determined appropriate by such
Committee.
4. Section 7(b) is hereby amended in its entirety to read as
follows:
<PAGE> 2
"Upon termination of employment pursuant to this Section 7,
Schultz shall be entitled to use of an automobile or
automobile allowance, full automobile insurance coverage, and
health insurance coverage under any health insurance policies
maintained by Employer for its other senior executive
officers, all of which shall be provided pursuant to the terms
of Section 2 (a) (v) herein and shall continue to be provided
without interruption for eighteen (18) months following the
effective date of termination pursuant to this Section 7. Upon
termination pursuant to this Section, Employer shall
additionally pay to Schultz a lump sum payment, to be paid
within five (5) days after the date of Schultz's notice
pursuant to Section 7(a) herein, which shall consist of: (i)
one and one-half times the full annual Base Salary; (ii) an
amount equal to one and one-half times the greater of (a) the
annual Bonus compensation earned by Schultz at the end of the
prior year or (b) the annualized Bonus compensation earned by
Schultz for the year in which the Corporate Change takes
place, determined by annualizing the net pre-tax profits, net
after-tax profits and return on equity of Employer from
January 1 of the year of the Corporate Change through the last
full month prior to the effective date of the Corporate
Change, not reduced by any quarterly bonus payments previously
paid or accrued for the applicable year, which shall be deemed
earned through the last day of the month prior to the
termination of employment pursuant to this Section 7; and
(iii) the cash value of all vacation, holiday and sick days
which have accrued up to the date of termination and which
would have accrued for eighteen (18) months following
termination pursuant to this Section 7. (The sum of all
amounts and benefits to be provided by Employer to Schultz
pursuant to this Section 7 (b) is collectively referred to
herein as the "Corporate Changes Termination Payment").
Notwithstanding the foregoing, if Schultz gives notice of
termination pursuant to this Section 7 prior to the closing of
a transaction referred to in Section 7(a)(i), (ii) or (iii)
hereof, the Corporate Changes Termination Payment must be made
a condition to and must be paid concurrently with the closing
of such a transaction."
5. Except as amended by the terms of this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and effect,
and this Amendment shall be deemed a part of the Agreement, subject to all of
the general terms and conditions of the Agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first written above.
PACIFICAMERICA MONEY CENTER, INC.
_________________________ By:______________________
JOEL R. SCHULTZ Charles J. Siegel, Chief Financial Officer
<PAGE> 3
AMENDMENT NO. TWO TO
EMPLOYMENT AGREEMENT
OF
JOEL R. SCHULTZ
This AMENDMENT NO. TWO TO EMPLOYMENT AGREEMENT is entered into
as of February 3, 1998, by and between PACIFICAMERICA MONEY CENTER, INC., a
Delaware corporation (hereinafter referred to as "Employer"), and JOEL R.
SCHULTZ (hereinafter referred to as "Schultz"), with reference to the following
facts:
A. Employer and Schultz are parties to an Employment Agreement
dated as of June 27, 1996 (the "Agreement"), as amended by Amendment No. One
thereto dated as of April 17, 1997, pursuant to which Employer has engaged
Schultz as President and Chief Executive Officer of Employer. Capitalized terms
not defined herein have the meanings ascribed to them in the Agreement.
B. Employer and Schultz now desire to amend certain provisions
of the Agreement as set forth herein.
NOW, THEREFORE, the parties hereby agree as follows:
1. Section 2(a)(ii) of the Agreement is hereby amended to
provide that, with respect to the portion of the Bonus earned for the year ended
December 31, 1997 (the "Deferred 1997 Bonus") which has not been advanced as of
the date hereof, Employer shall pay such Deferred 1997 Bonus as provided herein.
Employer shall use its best efforts to determine the amount of the Deferred 1997
Bonus (the "Determination Date") on or before March 15, 1998, and shall pay the
Deferred 1997 Bonus by the fifth business day following the Determination Date
(the "Deferred 1997 Bonus Payment Date") in the following manner:
a. $450,000 shall be paid in cash; and
b. the balance of the Deferred 1997 Bonus shall be paid in
shares of common stock of Employer ("Common Stock") equal to the fair market
value of such balance, which shall be determined as the number of shares equal
to the nearest whole number derived from dividing such balance by the highest
of: (i) the closing price per share of the Common Stock on the Determination
Date, as reported on the Nasdaq National Market ("NNM"); (ii) the average
closing price per share of the Common Stock for the 10 trading days preceding
the Determination Date as reported on the NNM; or (iii) $10.00 per share, with
any fractional amount paid in cash.
2. Except as amended by this Amendment, all of the terms and
conditions of the Agreement shall remain in full force and effect, and this
Amendment shall be deemed a part of the Agreement, subject to all of the general
terms and conditions of the Agreement.
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first written above
PACIFICAMERICA MONEY CENTER, INC.
_________________ By:______________________
JOEL R. SCHULTZ Charles J. Siegel, Chief Financial Officer
Attest:
By:_______________________
Richard B. Fremed, Corporate Secretary
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. ONE TO
EMPLOYMENT AGREEMENT
OF
RICHARD D. YOUNG
This AMENDMENT NO. ONE TO EMPLOYMENT AGREEMENT is entered into
as of February 3, 1998, by and between PACIFICAMERICA MONEY CENTER, INC., a
Delaware corporation (hereinafter referred to as "Employer"), and RICHARD D.
YOUNG (hereinafter referred to as "Young"), with reference to the following
facts:
A. Employer and Young are parties to an Employment Agreement
dated as of June 27, 1996 (the "Agreement"), pursuant to which Employer has
engaged Young as Senior Vice President and Chief Operating Officer of Employer
and President and Chief Operating Officer of Pacific Thrift and Loan Company, a
wholly-owned subsidiary of Employer. Capitalized terms not defined herein have
the meanings ascribed to them in the Agreement.
B. Employer and Young now desire to amend certain provisions
of the Agreement as set forth herein.
NOW, THEREFORE, the parties hereby agree as follows:
1. Section 2(a)(ii) of the Agreement is hereby amended to
provide that, with respect to the portion of the Bonus earned for the year ended
December 31, 1997 (the "Deferred 1997 Bonus") which has not been advanced as of
the date hereof, Employer shall pay such Deferred 1997 Bonus as provided herein.
Employer shall use its best efforts to determine the amount of the Deferred 1997
Bonus (the "Determination Date") on or before March 15, 1998, and shall pay the
Deferred 1997 Bonus by the fifth business day following the Determination Date
(the "Deferred 1997 Bonus Payment Date") in the following manner:
a. $250,000 shall be paid in cash;
b. $500,000 shall be paid in shares of common stock of
Employer ("Common Stock") equal to a fair market value of $500,000, which shall
be determined as the number of shares equal to the nearest whole number derived
from dividing $500,000 by the highest of: (i) the closing price per share of the
Common Stock on the Determination Date, as reported on the Nasdaq National
Market ("NNM"); (ii) the average closing price per share of the Common Stock for
the 10 trading days preceding the Determination Date as reported on the NNM; or
(iii) $10.00 per share, with any fractional amount paid in cash; and
c. The remaining amount of the Deferred 1997 Bonus shall be
paid in the form of an unsecured promissory note payable in two equal
installments, one due on August 1, 1997 and one due on the date which is one
year after the Deferred 1997 Bonus Payment Date, bearing interest at the rate
announced from time to time by Bank of America as its reference rate for prime
borrowers.
<PAGE> 2
2. Except as amended by this Amendment, all of the terms and
conditions of the Agreement shall remain in full force and effect, and this
Amendment shall be deemed a part of the Agreement, subject to all of the general
terms and conditions of the Agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first written above.
PACIFICAMERICA MONEY CENTER, INC.
____________________________ By:______________________________
RICHARD D. YOUNG Joel R. Schultz, President and
Chief Executive Officer
Attest:
By:_________________________________
Richard B. Fremed, Corporate Secretary
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 65,852
<INT-BEARING-DEPOSITS> 238
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 94,424
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 57,347<F1>
<ALLOWANCE> 1,438
<TOTAL-ASSETS> 227,866
<DEPOSITS> 132,524
<SHORT-TERM> 0
<LIABILITIES-OTHER> 18,638
<LONG-TERM> 28,318
50
0
<COMMON> 0
<OTHER-SE> 48,336
<TOTAL-LIABILITIES-AND-EQUITY> 227,866
<INTEREST-LOAN> 11,333
<INTEREST-INVEST> 397
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,730
<INTEREST-DEPOSIT> 5,507
<INTEREST-EXPENSE> 6,540
<INTEREST-INCOME-NET> 5,190
<LOAN-LOSSES> 3,087
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 55,474
<INCOME-PRETAX> 29,563
<INCOME-PRE-EXTRAORDINARY> 29,563
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,095
<EPS-PRIMARY> 4.18
<EPS-DILUTED> 3.48
<YIELD-ACTUAL> 6.26
<LOANS-NON> 1,083
<LOANS-PAST> 1,242
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,464
<CHARGE-OFFS> 2,211
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,438
<ALLOWANCE-DOMESTIC> 1,438
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>$1,902 of loan loss allowance transferred to loans held for sale which are
included in loans net of this amount.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1995 MAR-31-1997 JUN-30-1997
<CASH> 3,153 2,552 (232) 4,999
<INT-BEARING-DEPOSITS> 237 237 26 237
<FED-FUNDS-SOLD> 5,250 7,700 4,000 3,500
<TRADING-ASSETS> 11,698 0 24,864 32,134
<INVESTMENTS-HELD-FOR-SALE> 0 0 0 0
<INVESTMENTS-CARRYING> 0 0 0 0
<INVESTMENTS-MARKET> 0 0 0 0
<LOANS> 54,127 60,714 58,376 80,255
<ALLOWANCE> 2,464 4,229 1,789 1,877
<TOTAL-ASSETS> 114,934 82,557 112,340 136,110
<DEPOSITS> 81,002 60,156 73,644 87,123
<SHORT-TERM> 745 6,771 0 0
<LIABILITIES-OTHER> 8,676 5,183 9,316 16,345
<LONG-TERM> 2,545 1,720 4,183 3,287
0 0 0 0
0 0 0 0
<COMMON> 19 0 18 19
<OTHER-SE> 21,947 8,727 25,179 29,336
<TOTAL-LIABILITIES-AND-EQUITY> 114,934 82,557 112,340 136,110
<INTEREST-LOAN> 11,174 8,885 2,650 5,321
<INTEREST-INVEST> 328 692 92 181
<INTEREST-OTHER> 0 0 0 0
<INTEREST-TOTAL> 11,502 9,577 2,742 5,502
<INTEREST-DEPOSIT> 4,414 3,820 1,063 2,162
<INTEREST-EXPENSE> 4,966 5,199 1,073 2,173
<INTEREST-INCOME-NET> 6,536 4,378 1,669 3,329
<LOAN-LOSSES> 1,151 3,289 309 1,047
<SECURITIES-GAINS> 0 0 0 0
<EXPENSE-OTHER> 28,908 17,274 9,561 21,903
<INCOME-PRETAX> 6,471 (2,920) 5,224 12,126
<INCOME-PRE-EXTRAORDINARY> 6,471 (2,920) 5,224 12,126
<EXTRAORDINARY> (651) 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 4,162 (1,698) 3,029 7,032
<EPS-PRIMARY> 1.21 1.41 .80 1.86
<EPS-DILUTED> 1.01 1.41 .64 1.50
<YIELD-ACTUAL> 7.46 5.79 8.56 7.75
<LOANS-NON> 1,394 793 1,260 1,973
<LOANS-PAST> 1,625 1,317 1,303 2,830
<LOANS-TROUBLED> 357 948 0 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 4,229 4,307 2,464 2,464
<CHARGE-OFFS> 3,187 3,369 984 1,634
<RECOVERIES> 271 2 0 0
<ALLOWANCE-CLOSE> 2,464 4,229 1,789 1,877
<ALLOWANCE-DOMESTIC> 2,464 4,229 1,789 1,877
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0<F1> 0 0 0
<FN>
<F1>INCOME ON DISCONTINUED OPERATIONS OF 387 AND LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS OF 1038 ARE SHOWN UNDER EXTRAORDINARY ITEM.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1997 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 36,739 3,121 7,902 14,332
<INT-BEARING-DEPOSITS> 238 237 237 236
<FED-FUNDS-SOLD> 0 6,800 11,420 0
<TRADING-ASSETS> 68,427 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0 0
<INVESTMENTS-CARRYING> 0 0 0 0
<INVESTMENTS-MARKET> 0 0 0 0
<LOANS> 58,066 61,362 60,628 73,850
<ALLOWANCE> 1,874 4,725 3,875 3,266
<TOTAL-ASSETS> 178,667 95,030 105,468 113,543
<DEPOSITS> 100,605 72,781 79,819 84,791
<SHORT-TERM> 0 6,500 3,220 5,231
<LIABILITIES-OTHER> 19,097 5,023 4,759 5,319
<LONG-TERM> 20,518 1,720 0 0
0 0 0 0
0 0 0 0
<COMMON> 43 0 18 18
<OTHER-SE> 38,404 9,006 17,652 18,184
<TOTAL-LIABILITIES-AND-EQUITY> 178,667 95,030 105,468 113,543
<INTEREST-LOAN> 8,395 2,278 4,724 7,406
<INTEREST-INVEST> 348 130 196 302
<INTEREST-OTHER> 0 0 0 0
<INTEREST-TOTAL> 8,743 2,408 4,920 7,708
<INTEREST-DEPOSIT> 3,654 1,010 2,010 3,119
<INTEREST-EXPENSE> 4,173 1,227 2,417 3,606
<INTEREST-INCOME-NET> 4,570 1,181 2,503 4,102
<LOAN-LOSSES> 1,272 725 256 267
<SECURITIES-GAINS> 0 0 0 0
<EXPENSE-OTHER> 35,983 5,636 13,703 21,767
<INCOME-PRETAX> 21,654 627 1,365 2,741
<INCOME-PRE-EXTRAORDINARY> 21,654 627 1,365 2,741
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 12,558 279 290 1,088
<EPS-PRIMARY> 3.24 .30 .63 .80
<EPS-DILUTED> 2.62 .30 .61 .68
<YIELD-ACTUAL> 6.53 6.18 6.40 6.85
<LOANS-NON> 1,162 781 1,246 1,620
<LOANS-PAST> 603 722 1,022 1,537
<LOANS-TROUBLED> 0 950 950 591
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 2,464 4,229 4,229 4,229
<CHARGE-OFFS> 1,862 229 610 1,274
<RECOVERIES> 0 0 0 44
<ALLOWANCE-CLOSE> 1,874 4,725 3,875 3,266
<ALLOWANCE-DOMESTIC> 1,874 4,725 3,875 3,266
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
</TABLE>
