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, 1998
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 0-20897
PACIFICAMERICA MONEY CENTER, INC.
(Exact name of Registrant as specified in its charter)
Delaware 6162 95-4465729
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or organization) Classification Code Number) Number)
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 15, 1999: 5,168,395 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 15, 1999 was approximately $2,342,521.
<PAGE>
PACIFICAMERICA MONEY CENTER, INC.
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, concentration
of interest-only strips receivable, 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.
PART I
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 and selling 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.
In the third quarter of 1998, a chain reaction of events occurred which
caused significant and sudden changes in the subprime lending industry, and
significantly and adversely affected the Company's business for the third and
fourth quarters of 1998. These events began with the Asia economic crisis and
the substantial losses incurred by several large U.S. hedge funds. These losses
led to a general stock market decline in September 1998 as institutional
investors decreased their holdings of a variety of securities in favor of U.S.
Treasury securities, along with a sharp drop in buyers for the subordinated
interests in mortgage securitization pools. Since mortgage prices are based on
comparable maturity Treasuries, yields on mortgages plummeted to lows not seen
in decades, causing an increase in prepayments on existing mortgage loans.
Simultaneously, the lack of buyers for subordinated interests in mortgage
securitization pools caused a reduction in the number of securitization pools
completed in the third quarter of 1998. As a result of both the reduced value of
existing securitization pools caused by increased prepayments and the inability
to complete new securitizations, Wall Street investment banks, one of the
primary sources of funding to subprime lenders, made margin calls on loans to
subprime lenders and reduced warehouse loan funding availability. This caused a
number of asset-backed and mortgage-backed securitization sponsors in September
1998, particularly subprime lenders, to experience significant liquidity
shortages due to their reduced ability to obtain financing on loans and
interest-only strips receivable. In order to relieve the liquidity shortages, a
number of subprime lenders announced that they would begin selling their loans
on a cash basis, creating an increase in supply of mortgage loans being sold for
cash. These factors led to an oversupply of loans for sale in the secondary loan
market, which has continued into the fourth quarter of 1998.
As a result of these significant adverse changes in the subprime lending
industry, the Company experienced a sudden loss of ready purchasers for its
loans, as well as a substantial reduction in loan sale prices, beginning in the
third quarter of 1998. Loan sale prices available to the Company in the
secondary loan market were reduced from approximately 105% to 106% of par value,
the price at which the Company sold loans in September 1998, to 101% to 102% of
par value. The Company, along with many other subprime lenders, found it
necessary to substantially reduce its loan origination volume and its loan
origination costs, which it did by discontinuing its wholesale loan division
effective as of October 28, 1998. The Company notes that several other large
subprime lenders took similar actions to close or reduce their wholesale loan
production units as a result of the reduction in loan sale prices. Over the
first nine months of 1998, the wholesale loan division had produced
approximately 75% of the Company's lending volume, and the retail loan division
had produced the remaining approximately 25% of the lending volume. The closure
of the
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<PAGE>
wholesale loan division therefore had the effect of reducing by approximately
75% the total loans the Company expected to originate during the fourth quarter
of 1998.
Since October 27, 1998, the Company has continued originating loans
exclusively through its retail loan division, where origination costs, net of
fees, are approximately 23% lower than origination costs of wholesale loan
origination. The retail division is able to offset costs of loan origination
against loan fees charged to borrowers, which are retained by the Company upon
sale of loans, and may be taken into income immediately upon sale of loans. In
order to further reduce operating costs, between November 1, 1998 and March 18,
1999, the retail division has closed 7 of its 47 offices which were in operation
at October 27, 1998, and the Company now has 40 retail offices operating in 21
states and the District of Columbia.
Loan sale prices have partially recovered since the third quarter, as the
Company's February and March loan sales have been at prices ranging from 102.5%
to 103.5%. In addition, the Company has experienced an increase in the number of
potential purchasers for its loans, and has sold loans to six different third
party purchasers during the first quarter of 1999. However, neither prices nor
demand levels have stabilized as of March 31, 1999. The Company has operated at
a loss for the first three months of 1999, primarily because it has been unable
to sell a sufficient amount of loans at currently available prices to cover its
operating expenses.
Management believes that the Company may return to profitable operations at
current loan sale price levels, provided that it increases the monthly volume of
loans originated by approximately $2 million and the monthly volume of loans
sold by approximately $5 million from levels reached in the first three months
of 1999. The Company is devoting all of its efforts towards these goals. In
addition, the Company is continuing to seek strategic partners and strategic
opportunities to improve its financial condition and its operations. During the
second and third quarters of 1998, the Company held discussions with several
potential purchasers of the Company, but the severe adverse conditions affecting
the subprime lending industry in the third quarter caused the potential
purchasers to terminate discussions with the Company. As conditions in the
industry improve, the Company believes that more strategic opportunities will
become available, although there can be no assurance that the Company will be
able to complete a transaction with a strategic partner.
The Company sells substantially all of its loans on a servicing released
basis, so that the purchasers of the loans acquire all servicing rights. The
Company is named as master servicer on three securitization pools which the
Company securitized in 1997 and 1998, but the actual servicing is performed by a
subservicer. The Company retains a small servicing department to service its
loans held for sale and a small amount of loans held for investment.
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 sale,
services the Company's loans held for sale and investment, 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"). In the fourth quarter of 1998, the FDIC
and the DFI issued regulatory orders requiring Pacific Thrift to limit its
lending volume to an amount which could readily be sold, to cease securitization
of loans and to raise additional capital, among other things. (See
"--Supervision and Regulation -- Regulatory Orders.")
The Company also conducts business through PacificAmerica Money Centers,
Inc. ("PAMC"), a Delaware corporation which currently originates loans under
appropriate state licenses in four states in which Pacific Thrift cannot operate
under state laws.
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.
3
<PAGE>
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 warrants
to the general partner of the Partnership (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.
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").
Revised Business Strategy
Because of the sudden and severe changes in the secondary loan market which
occurred in the third and fourth quarters of 1998 and the continued instability
of the market through the first quarter of 1999, the Company has been required
to substantially alter its business strategy from that followed prior to October
1998. The Company believes that borrower demand for subprime residential loans
remains strong, and that the secondary loan market will eventually stabilize at
prices higher than were generally available in the first quarter of 1999. During
the current period of uncertainty, however, it is necessary to reduce expenses
to the greatest extent possible without sacrificing loan quality or the
franchise value of the existing retail operations. The Company has succeeded in
reducing expenses over 48%, by closing five wholesale loan offices and 15 retail
loan offices and reducing the number of its employees from 599 at September 30,
1998 to 215 at March 31, 1999. The Company now seeks to maximize its loan
origination volume using its remaining 40 loan offices, through more focused
direct mailing and telemarketing and renewed emphasis on self-generated loan
originations through its existing loan representatives. In addition, the Company
seeks to increase its revenues by increasing fee income on loans originated for
sale.
The Company believes that the value of its operations is enhanced because
of its ability to operate through Pacific Thrift. As an FDIC insured financial
institution, Pacific Thrift can generate funds for lending activity by issuing
FDIC-insured deposits and take advantage of favorable federal laws in the states
in which it operates. However, because of the adverse changes in the secondary
loan market, the Company has been unable to meet the capital requirements of the
FDIC for "adequately capitalized" institutions, and is required to raise
additional capital under the terms of a Cease and Desist Order issued by the
FDIC on December 14, 1998 (the "1998 Order"). (See Item 1. Business --
Supervision and Regulation -- Regulatory Actions.) Under the terms of the 1998
Order, the Company has agreed to raise approximately $20 million, which is the
amount of additional capital necessary for Pacific Thrift to become "well
capitalized" by June 30, 1999. The Company is currently seeking to raise the
additional capital necessary to meet the requirements of the Order, but there
can be no assurance that the Company will be successful in raising additional
capital. The 1998 Order also limits Pacific Thrift's lending volume to an amount
which may readily be sold and prohibits securitization of loans, among other
things.
The Company is also continuing to work with its financial adviser,
Friedman, Billings, Ramsey & Co., Inc., to assist it in locating strategic
partners or other opportunities. The Company intends to actively pursue
strategic opportunities in 1999. There can be no assurance that any transactions
will be completed by the Company either as a result of its engagement of
Friedman, Billings, Ramsey & Co., Inc. or any other efforts to raise additional
capital or enter into agreements with strategic partners.
4
<PAGE>
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. In the third quarter of 1998, the Company substantially
discontinued loan securitization, and a majority of its loans have been sold for
cash only since that time.
The Company historically originated the substantial majority of its loans
through independent loan brokers. In 1996, the Company began developing a retail
division, which had expanded to 47 offices by October 1998. Since closing of the
wholesale division in October 1998, substantially all loans have been originated
through the retail division. The retail division has averaged total loan
originations of approximately $25 million per month since November 1, 1998. The
following table sets forth the combined loan originations by category and
purchases, sales and repayments for the past two years:
At or At or At or
For the for the for the
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
----------- ----------- -----------
(Dollars in Thousands)
Beginning Balance $ 55,909 $ 51,662 $ 56,485
Loans Originated for Sale .
Wholesale ............ 662,006 584,527 292,116
Retail ............... 273,084 183,699 43,355
Junior loans .............. 21,651 -0- -0-
Portfolio Loans originated -0- -0- 37,987
Loans purchased ........... -0- -0- -0-
----------- ----------- -----------
Total (1).................. 1,012,650 819,888 429,943
Less:
Principal repayments ............. (2,326) (1,053) (12,388)
Sales of loans originated for sale (917,318) (742,776) (337,563)
Sales of portfolio loans ......... (8,530) (17,063) (26,176)
Transfers of REO net of reserves . (904) (2,936) (3,945)
Other net changes(2) ............. (1,314) (151) 1,791
----------- ----------- -----------
Total loans(1) ............ $ 82,258 $ 55,909 $ 51,662
=========== =========== ===========
(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.
Geographic Diversity
Prior to 1994, the Company conducted lending operations exclusively in
California. For the last four years, the Company has steadily expanded
operations throughout the United States. At March 15, 1998, the Company operated
40 retail loan offices in 21 states and the District of Columbia, including 6 in
California; 8 in the western states of Colorado, Nevada, Arizona, Utah,
Washington and Minnesota; 12 in the mid-Atlantic states of Pennsylvania,
Maryland, Virginia,
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Delaware, New Jersey and the District of Columbia; 3 in the northeastern states
of New York, Connecticut and New Hampshire; and 11 in the mid-western states of
Ohio, Michigan, Wisconsin, Kentucky, Illinois and Indiana.
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 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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<PAGE>
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)(4) 80% 70% 80% 70% 80% 70%
- --------------------
Maximum (2) Debt Ratio 45% 50% 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 credit.
- ------- Minimum of 3 accounts Minimum of 3 accounts 12 mo. "B" or better
open/active for 6 months. open/active for 6 months. 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
- ------------ items derogatory. No items derogatory. No items derogatory.
(Accounts with no activity in 60 day derogatory credit. 90 day derogatory credit.
the last 24 months are not to
be 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 for accounts (open/active for (open/active for at least
at least 6 months). at least 6 months). 6 mos.) or 18 mos. since
discharge/dismissal with no
re-established credit.
<CAPTION>
Credit
Classification C C- D
- -------------- -------------------------------------------------------------------------------
*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% 70% 65% 65% 60%#
Condo/PUD 80% 70% 70% 65% 65% 60%#
2/3-4 Unit 80% 70% 70% 65% 65% 60%#
Alt Doc
SFR 75%(5) 70% 70% 65% 65% 60%#
Condo/PUD 75% 70% 70% 65% 65% 60%#
2/3-4 Unit 75% 70% 70% 65% 65% 60%#
No Doc
(1003 Stated Income)(4) 75-%(5) 65% N/A N/A N/A N/A
- --------------------
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
than 3 open/active delinquent accounts. derogatory.
accounts).
Credit Items less than 50% of Credit less than 60% of Credit % of Credit items
- ------------ items derogatory. items derogatory. derogatory not a factor.
(Accounts with no activity in
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 24 application for loan.
mos. ago & evidence
provided that plan & mtg.
paid as agreed. BK must
be paid off thru loan.
</TABLE>
Charge-offs, Collections and Judgments. 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. The date of
the original occurrence of the collection is to be used in all credit.
- --------------------
(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 90%.
(4) Not available for "fixed" income borrowers or wage earners with less than
"B" final grade.
* For 2nd homes & vacation properties reduce maximum LTV by 5%. Maximum CLTV
for second mortgages may not exceed 85%.
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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 generally amortize over a period not to exceed 30 years. In addition
to adjustable rate loans with interest rates that adjust on a quarterly basis
throughout the term of the loans, the Company offers loans with fixed rates for
the first two or three years, which automatically convert to adjustable rates
after the initial fixed rate period. These loans are generally referred to as
2/28 or 3/27 loans. 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 1998
was approximately $98,000.
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) 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 department reviews each appraisal for reasonableness, completeness,
conformity with the Company's guidelines and acceptable property condition. If
the internal review department believes there is insufficient information or
data to perform the review internally, the appraisal is outsourced to an
independent review appraisal company. 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 (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%.
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<PAGE>
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, 1998 (portfolio loans which are not originated for sale and "piggyback
loans" which are held for sale are not included):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Principal balance of loans $938,276,000 $768,226,000 $335,471,000
Average principal balance per loan $98,074 $93,867 $91,993
Percent of first mortgage loans (based on 96.1% 95.6% 95.1%
principal dollar amount of all loans
originated)
Weighted average interest rate 10.62% 11.08% 11.57%
Weighted average initial loan-to value 78.37% 76.65% 66.92%
ratio
</TABLE>
Quality Control
The Company's quality control program monitors and improves the overall
quality of loan production. 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 began
retaining an interest-only strip receivable in the securitization trusts to
which its loans were sold, under agreements with Aames Capital Corporation
("Aames") and Advanta Mortgage Conduit Services, Inc. ("Advanta"). In the fourth
quarter of 1997 and the first and second quarters of 1998, the Company sponsored
three of its own securitizations through Merrill Lynch, Pierce, Fenner & Smith
("Merrill"). In the third quarter of 1998, the Company determined to resume
selling loans for cash only. In the later half of 1998, the Company has sold all
loans for cash except for approximately $60 million of loans which were
securitized under the Company's existing agreement with Advanta in October and
November 1998. In the aggregate, the Company securitized $551 million of loans
and sold $366 million of loans for cash in 1998, compared to $727 million of
loans securitized and $16.0 million sold for cash in 1997.Gain on sale of loans
was $32.8 million, $81.7 million and $29.2 million for 1998, 1997 and 1996.
As of March 31, 1999, the Company held interest-only strips receivable in
thirteen securitization trusts (the "Securitization Trusts"), including one
formed by Aames in the fourth quarter of 1996, nine formed by Advanta in 1997,
1998 and the first quarter of 1999 and three sponsored by the Company (the "PAMM
Trusts") in 1997 and 1998. Securities issued by each Securitization Trust are
credit enhanced either through an insurance policy issued by a monoline
9
<PAGE>
insurer or through over-collateralization. The securities issued to investors in
each of the Securitization Trusts were rated "AAA" by Standard & Poor's Ratings
Group and "AAA" by Moody's Investor Service, Inc. Each of the Aames and Advanta
Securitization Trusts holds loans sold by the Company as well as loans
originated or purchased by Aames or Advanta. However, the Company's
interest-only strip receivable in each of these Securitization Trusts is
dependent primarily upon the performance of the loans originated by the Company
and held by each of these Securitization Trust. All loans sold for cash or
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. The Company is named as master
servicer for loans held by the PAMM Trusts, and Advanta has been appointed
Sub-Servicer. Advanta provides substantially all servicing related to the loans
in the PAMM Trusts. Aames and Advanta are the servicers of the loans in the
Securitization Trusts each of them has sponsored.
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 sold. However, loans are generally sold on a monthly
basis, which reduces the risk of interest rate fluctuations. 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.
In 1998 and 1997 the Company adjusted the fair value of interest-only
strips receivable down by $38,300,000 and $2,306,000 (see Note 6 to Financial
Statements included under Item 14 of Part IV).
Loan Portfolio
Until Pacific Thrift began originating loans for sale in 1994, both the
Partnership and Pacific Thrift originated loans primarily for their own loan
portfolios, and generally held and serviced those loans until payoff or
refinancing. In 1995, the Company stopped all portfolio lending. The Company
does currently originate small second trust deed loans made to facilitate
marketing of loans originated for sale (referred to as "piggy-back loans").
While a majority of these loans are sold in bulk loan sales, a portion of these
loans are held and serviced by the Company. As of December 31, 1998, the
aggregate balance of all portfolio loans held by the Company was approximately
$9.4 million, net of loan loss reserves. All portfolio loans are secured
primarily by one-to-four family residential, multi-family residential and
commercial real property. The characteristics of the Company's remaining loan
portfolio at December 31, 1998, are described below.
Geographic Concentration. At December 31, 1998, the Company's loan
portfolio included loans geographically distributed, based on principal loan
balances, approximately 81% in Southern California (south of San Luis Obispo),
13% in Northern California and the remaining 6% 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:
10
<PAGE>
PORTFOLIO COLLATERAL
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
Dec. 31, 1998 Percentage of Dec. 31, 1997 Percentage of Dec. 31, 1996 Percentage of
Loan Balances Total Portfolio Loan Balances Total Portfolio Loan Balances Total Portfolio
<S> <C> <C> <C> <C> <C> <C>
One-to-four family
residential property
1st TDs $ 2,738,000 26.07% $ 2,539,000 11.39% $ 2,629,000 7.19%
2nd TDs 1,199,000 11.41 3,037,000 13.62 11,148,000 30.48
3rd TDs 101,000 0.96 452,000 2.03 701,000 1.92
Home Imp. Loans 827,000 7.88 1,090,000 4.89 1,322,000 3.61
----------- ------ ----------- ------ ----------- ------
TOTAL 4,865,000 46.32 7,118,000 31.93 15,800,000 43.20
=========== ====== =========== ====== =========== ======
Five and Over
Multi-Family
residential property
1st TDs 1,679,000 15.98 5,425,000 24.34 8,468,000 23.15
2nd TDs 90,000 0.86 747,000 3.35 840,000 2.30
3rd TDs -0- -0- -0- -0- -0- -0-
----------- ------ ----------- ------ ----------- ------
TOTAL 1,769,000 16.84 6,172,000 27.69 9,308,000 25.45
=========== ====== =========== ====== =========== ======
Commercial
Property
1st TDs 3,850,000 36.65 8,528,000 38.26 9,761,000 26.69
2nd TDs 20,000 0.19 445,000 2.00 869,000 2.38
3rd TDs -0- -0- 28,000 0.12 102,000 0.28
----------- ------ ----------- ------ ----------- ------
TOTAL 3,870,000 36.84 9,001,000 40.38 10,732,000 29.35
=========== ====== =========== ====== =========== ======
Undeveloped
Property
1st TDs -0- -0- -0- -0- 733,000 2.00
2nd TDs -0- -0- -0- -0- -0- -0-
3rd TDs -0- -0- -0- -0- -0- -0-
----------- ------ ----------- ------ ----------- ------
TOTAL -0- -0- -0- -0- 733,000 2.00
=========== ====== =========== ====== =========== ======
TOTAL
PORTFOLIO
1st TDs 8,267,000 78.70 16,492,000 73.99 21,591,000 59.04
2nd TDs 1,309,000 12.46 4,229,000 18.97 12,857,000 35.16
3rd TDs 101,000 0.96 480,000 2.15 803,000 2.19
Home Imp. Loans 827,000 7.88 1,090,000 4.89 1,322,000 3.61
----------- ------ ----------- ------ ----------- ------
TOTAL $10,504,000 100.00% $22,291,000 100.00% $36,573,000 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
11
<PAGE>
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.
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 1998, the
Company sold $28 million of piggyback loans at 79.4% of par value. 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, 1998, the Company held 604 piggyback loans, with
an aggregate principal balance of $4.3 million.
Maturities and Rate Sensitivities of Loan Portfolio. The following table
sets forth the contractual maturities of the loan portfolio at December 31,
1998.
PORTFOLIO LOAN MATURITIES
<TABLE>
<CAPTION>
At December 31, 1998
-------------------------------------------------------------------------------------------------------
More
More More More than 10 More
One than than than 5 years than
Year 1 year to 3 years years to to 20 20 Total
or Less 3 years to 5 years 10 years years years Loans
------------- --------------- --------------- -------------- ------------ ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.......... $474 $392 $96 $576 $989 $1,511 $4,038
Multi-family................. -- -- 136 1,280 176 177 1,769
Commercial................... 247 902 383 2,169 130 39 3,870
Home improvement............. 15 33 5 759 15 -- 827
---- ---- ---- ---- ---- ---- -----
Total amount due............. $736 $1,327 $620 $4,784 $1,310 $1,727 $10,504
==== ====== ==== ====== ====== ====== =======
</TABLE>
The following table sets forth, as of December 31, 1998, the dollar amounts
of loans receivable (not including loans held for sale) that are contractually
due after December 31, 1999 and whether such loans have fixed or adjustable
interest rates:
12
<PAGE>
PORTFOLIO LOANS
Due after December 31, 1999
------------------------------------
Fixed Adjustable Total
------------------------------------
(In thousands)
One- to four-family ............... $1,292 $2,272 $3,564
Multi-family ...................... -- 1,769 1,769
Commercial ........................ 884 2,739 3,623
Home improvement .................. 812 -0- 812
------ ------ ------
Total loans
receivable ............... $2,988 $6,780 $9,768
====== ====== ======
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 28% of all loans bearing fixed rates
at December 31, 1998, 1% were due in one year or less. Based upon these facts,
over 72% of the loan portfolio at December 31, 1998, consisted of either
variable rate loans or fixed rate loans which mature within one year. Management
therefore expects that within one year, approximately 72% 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 two or more payments
contractually past due and the current estimated loan-to-value ratio is 80% 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.
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
13
<PAGE>
past due 90 days or more to total portfolio loans was 21.83% at December 31,
1998, 4.96% at December 31, 1997, and 3.81% at December 31, 1996. The ratio of
the allowance for loan losses to nonaccrual loans past due 90 days or more was
37.68% at December 31, 1998, 130.14% at December 31, 1997 and 176.76% at
December 31, 1996.
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, 1998, 1997 and 1996.
PORTFOLIO LOAN
Delinquencies
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
------------------------- ---------------------------- -----------------------------
Loan Loans Percent of Loans Percent of Loans Percent of
Delinquencies Delinquent Total Loans Delinquent Total Loans Delinquent Total Loans
------------- ----------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 1,782,000 16.96% $ 150,000 .67% $1,428,000 3.91%
60 to 89 days 870,000 8.28% 321,000 1.44% 1,431,000 3.91%
90 days or more 2,705,000 25.75% 1,913,000 8.58% 3,019,000 8.25%
---------- ------- ---------- ------ ---------- ------
TOTAL $ 5,357,000 50.99% $2,384,000 10.69% $5,878,000 16.07%
=========== ======= ========== ====== ========== ======
</TABLE>
Nonaccrual and Restructured Loans. The following table sets forth the
aggregate amount of loans at December 31, 1998, 1997 and 1996 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
<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, 1998 $412 $2,293 0 $2,705
At December 31, 1997 $808 $1,105 0 $1,913
At December 31, 1996 $1,625 $1,394 $357 $3,376
</TABLE>
14
<PAGE>
The following table sets forth information concerning interest accruals and
interest on nonaccrual loans past due 90 days as of December 31, 1998, 1997 and
1996.
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, 1998 $299 $ 30 $269
At December 31, 1997 $323 $119 $204
At December 31, 1996 $886 $133 $753
</TABLE>
Upon request of a borrower, the Company generally grants one to two month
extensions of payments during the term of a loan. In 1998, one loan with a
principal balance of approximately $60,000 was extended for a term not exceeding
six months, and two loans with an aggregate principal balance of approximately
$300,000 were modified. There were no delinquent loans 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, 1998, the Company held REO (net of specific reserves) of
approximately $200,000. 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, 1998 were two commercial properties
with an aggregate net book value of approximately $200,000. For the year ended
December 31, 1998, total expenses on operation, including valuation allowances,
and losses on sale of REO were $0.3 million and gains on sale of REO and REO
income were $0.2 million, for a total expense of $0.1 million. There can be no
assurance that net losses on the sale of REO will not be experienced in the
future.
Allowance for Loan Losses. The following is a summary of the changes in the
consolidated allowance for loan losses of the Company for each of the years
ended December 31, 1998, 1997 and 1996:
PORTFOLIO LOANS
Reserve for Loan Losses
At or for the Years Ended December 31,
----------------------------------------
1998 1997 1996
(In thousands)
----------------------------------------
Balance at beginning of period........ $1,438 $ 2,464 $ 4,229
Provision for loan losses............. 1,314 3,087 1,151
Transferred to loans held for sale.... -0- (1,902) -0-
Chargeoffs............................ (1,888) (2,211) (3,187)
Recoveries............................ -0- -0- 271
-------- --------- ---------
Balance at end of period.............. $ 864 $ 1,438 $ 2,464
======== ======== ========
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
15
<PAGE>
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 Money 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.
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, 1998,
Pacific Thrift held $38 million in federal funds sold due in an overnight
federal reserve account and approximately $3.6 million in deposits with a bank.
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 had no brokered deposits
as of December 31, 1998. Management believes its deposits are a stable and
reliable funding source. At December 31, 1998, Pacific Thrift had outstanding
3,373 deposit accounts of approximately $162 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, 1998.
Deposit Analysis
<TABLE>
<CAPTION>
Averages for 1998 Averages for 1997 Averages for 1996
----------------- ----------------- -----------------
(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 $ 22,738 5.31% $ 21,516 5.11% $ 31,300 5.20%
Investment Certificates 116,058 5.93% 74,184 5.87% 47,582 5.86%
under $100,000
Investment Certificates 2,115 6.00% 823 6.08% -0- -0-
over $100,000 -------- ---- -------- ---- -------- ----
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total $140,911 5.83% $ 96,523 5.71% $ 78,882 5.60%
======== ==== ======== ==== ======== ====
</TABLE>
The following schedule sets forth the time remaining until maturity for all
certificates at December 31, 1998, 1997 and 1996.
Deposit Maturities
<TABLE>
<CAPTION>
At At At
December 31, December 31, December 31,
1998 1997 1996
(Dollars in (Dollars in (Dollars in
Thousands) Thousands) Thousands)
<S> <C> <C> <C>
Passbook/Money Market $ 29,692 $ 18,793 $ 24,659
-------- -------- --------
Accounts under $100,000
3 months or less $ 19,560 $ 20,588 $ 14,451
Over 3 months through 6 months 35,852 32,649 19,745
Over 6 months through 12 months 71,967 56,219 22,147
Over 12 months 4,741 95 -0-
-------- -------- --------
Total $132,120 $109,551 $ 56,343
-------- -------- --------
Accounts over $100,000
3 months or less -0- $ 400 $ -0-
Over 3 months through 6 months -0- -0- -0-
Over 6 months through 12 months 498 3,780 -0-
Over 12 months -0- -0- -0-
-------- -------- --------
Total $ 498 $ 4,180 $ -0-
-------- -------- --------
Total Deposits $162,310 $132,524 $ 81,002
======== ======== ========
</TABLE>
Other Borrowings
The Company has in the past utilized lines of credit and warehouse
financing to finance its lending operations. In 1996 and the first part of 1997,
the Company completed the final pay off of a bank credit line which in 1990
reached a peak borrowing of $82 million. In October 1997, the Company began
using warehouse financing provided by Merrill Lynch pending securitization of
loans by the Company through Merrill Lynch. This warehouse financing was paid
off by December 31, 1998, and the Company is not currently using warehouse
financing.
The Company has also obtained advances from Aames, Advanta and Merrill
Lynch on the interest-only strips receivable held by the Company in each of the
Securitization Trusts, as further described below.
The Company obtained an advance from Aames secured by the Company's
interest in the Aames 1996- D Trust. The advance is repaid from cash flow on the
Company's interest-only strips receivable. As of December 31, 1998, the Company
owed a balance of approximately $1.9 million on the advance from Aames, which
bears interest at 12.5% per annum. The loan is due in December 1999. The Company
currently anticipates that a portion of the advance will be repaid with cash
flow from the Aames 1996-D Trust by the maturity date of the advance, but that
additional cash flow anticipated in 2000 will be necessary to fully repay the
advance. No arrangements have yet been made with Aames for extension of the
maturity date. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Accounting Considerations.").
17
<PAGE>
Until the advance is fully repaid, the Company will not be entitled to receive
cash flow for its interest in the Aames 1996-D Trust.
The Company obtained advances from Advanta on each of the nine Advanta
Trusts. All of these advances are non-recourse, and are payable solely from cash
flow on the Company's interests in each of the Advanta Trusts. Cash flow is
applied to repay advances from Advanta in accordance with the terms of an
amortization schedule of between 36 and 48 months, as applicable to each Advanta
Trust. As of December 31, 1998, the Company owed an aggregate balance of
approximately $30 million (excluding accrued interest of $2.5 million), on the
advances from Advanta, which bear interest at rates of between LIBOR plus 1% and
LIBOR plus 2% per annum. Any advance which has not been fully repaid after 48
months from cash flow on the applicable Advanta Trust may be paid from cash flow
from any other Advanta Trust.
The Company obtained warehouse financing for loans sold to the PAMM Trusts
in 1997 and 1998 under a Master Repurchase Agreement with affiliates of Merrill
Lynch. The full remaining balance owed by the Company under this agreement was
repaid as of December 31, 1998. Because of the reduction of its lending
activities in the third quarter of 1998, the Company currently has no need for
warehouse loan financing.
The Company obtained advances from Merrill Lynch on each of the three PAMM
Trusts under the terms of a Master Assignment Agreement with an affiliate of
Merrill Lynch. The advances are secured by the Company's interest-only strips in
the PAMM Trusts. At December 31, 1998, the Company owed a principal amount of
$18.4 million under this agreement, bearing interest at a weighted average rate
of approximately 7.5% (LIBOR plus 2.5% as of that date). Under the terms of the
Master Assignment Agreement, each advance is due in one year unless extended
pursuant to the mutual agreement of the Company and Merrill Lynch. In addition,
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. Merrill Lynch requested the Company to make a payment of $2
million in October 1998 on the total amount owed under the Master Assignment
Agreement. The initial advance of $4.8 million under the agreement matured in
December 1998, $6.1 million matured in March 1999, and $7.5 million is scheduled
to mature in June 1999. The Company notified Merrill Lynch in November 1998 that
it would be unable to make principal or interest payments as they became due,
and proposed a debt repayment schedule, with payments derived from anticipated
cash flow on the Company's interest-only strips receivable in the PAMM Trusts.
This plan was based on anticipated cash flows beginning in January 1999 and
continuing without interruption. Merrill Lynch advised the Company in December
1998 that it did not at that time intend to exercise any of its rights other
than to require that cash flow payments on the PAMM Trust interest-only strips
receivable be made directly to Merrill Lynch. Merrill Lynch further indicated at
that time a general willingness to discuss a repayment plan; however, in March
1999, the Company and Merrill Lynch were advised that cash flow payments would
be suspended on the one PAMM Trust which had begun distributions of cash flow,
because loan delinquencies had exceeded certain trigger levels provided for in
the indenture agreement for that PAMM Trust. Until the loan delinquency levels
on that PAMM Trust are reduced, all distributions that would otherwise be made
on the interest-only strip receivable will be deposited into the reserve account
for that PAMM Trust. As a result, no cash flow is currently being paid to
Merrill Lynch. The Company and Merrill Lynch are currently reviewing possible
actions to reduce the delinquency level on the PAMM 1997-1 Trust which would
allow a resumption of cash flow distributions to Merrill Lynch. Until Merrill
Lynch and the Company have some assurance as to the level of cash flow that can
be expected over the near term, it is doubtful that a mutually acceptable
payment plan can be agreed to between the parties. The Company has not received
any further indication from Merrill Lynch of its intended course of action with
respect to the debt owed, but there can be no assurance that Merrill Lynch will
not exercise one or more of its rights, including a sale of the interest-only
strips in the PAMM Trusts, unless an agreement can be reached on a repayment
plan and distributions of cash flow on the interest-only strips in the PAMM
Trusts are resumed as a source of payment to Merrill Lynch.
In October 1998, while the Company was engaged in acquisition discussions
with Fremont General Corporation ("Fremont"), the Company received a $3.0
million loan from Fremont. The proceeds of the loan were used to repay Merrill
Lynch $2.0 million under the Master Assignment Agreement and $1.0 million to pay
operating and other expenses of the Company. The loan was originally due and
payable six months after
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termination of merger discussions with Fremont, but Fremont has extended the
loan maturity until January 8, 2000. The loan is secured by a pledge of 100% of
the stock of Pacific Thrift.
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
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 Company also faces competition in connection with the sale of its loans
in the secondary loan market. Prior to the third quarter of 1998, the Company
had not experienced difficulty in selling its loans, but recent market changes
has reduced the number of loan purchasers, as well as a reduction in the prices
offered for loans sold. Many of the companies selling loans are substantially
larger and have greater financial resources than the Company. The Company
believes that its record of loan quality is a positive factor in attracting
purchasers of its loans. However, the adverse conditions currently affecting the
Company, including regulatory actions and the status of its loan with Merrill
Lynch, have had an adverse effect on the Company's ability to sell loans to some
purchasers.
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, which are not, however, higher than prevailing rates at other
small savings and loan associations and thrift and loans.
Employees
During 1998, the Company and its subsidiaries reached a peak of 640
full-time employees, including 261 commission-based loan representatives. As a
result of the closure of the wholesale loan division in October 1998 and
additional layoffs, as of December 31, 1998 the Company and its subsidiaries had
234 full-time employees, including 83 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 PAMC. 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 PAMC 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
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certain disclosures be made to borrowers and loan applicants, regulate the
credit application and evaluation process and regulate certain servicing and
collection practices. These laws and regulations impose specific liability upon
lenders who fail to comply with their provisions, and may give rise to defense
to payment of a borrower's obligation in the event of a failure to comply with
certain applicable laws. Pacific Thrift and PAMC 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 PAMC.
State Law
PAMC
PAMC is currently a licensed lender in 11 states, and currently operates in
four 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. PAMC 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.
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, 1998, Pacific Thrift's deposit ratio was 12.7:1.
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, 1998.
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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.
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, 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 FDICIA 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
("MOU") with the FDIC and DOC. The 1996 MOU provided that Pacific Thrift was
required to (i) maintain Tier I capital of not less than 8% of total assets (ii)
maintain an adequate reserve for loan losses (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 net interest margin on
portfolio loans and develop procedures to implement those strategies; and (vi)
furnish written quarterly progress reports.
On March 9, 1998, the 1996 MOU was replaced with a new MOU (the "1998 MOU")
between Pacific Thrift and the FDIC. The 1998 MOU required Pacific Thrift: (i)
continue to maintain Tier 1 capital of not less than 8.0% of total assets; (ii)
by July 7, 1998, have and thereafter maintain risk-based capital of not less
than 10.0% of 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" to $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
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thereafter obtain an annual independent valuation of such receivables until they
represent no more than 50% 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 Pacific Thrift and develop, adopt,
and implement a written policy governing the relationship between the Company &
Pacific Thrift (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 Pacific Thrift's interest rate risk process;
(x) pay no cash dividends without prior written FDIC approval; (xi) pay no
executive or director bonuses without prior written FDIC approval; (xii) by June
7, 1998, submit a strategic plan covering the period 1998 through 2000
reflecting restricted growth of the interest-only strip receivable; and (xiii)
by May 15, 1998, and thereafter at the end of each quarter, furnish written
progress reports.
On November 6, 1998, Pacific Thrift entered into a stipulation and consent
to an order issued by the California Department of Financial Institutions (the
"DFI"), under which Pacific Thrift agreed: (i) that it will not issue loan
commitments without having a clearly identified and reasonably assured source of
funds, such as deposits, loan sale commitments or other financing, with which to
fund its loans; (ii) that it will not make any shareholder distributions except
with the prior written approval of the DFI; and (iii) that it will discontinue
selling loans under conduit loan sale arrangements through its parent company.
The DFI Order is currently in effect, and management believes that Pacific
Thrift is currently in compliance with all of the terms of the DFI order.
On November 23, 1998, the Federal Deposit Insurance Corporation ("FDIC")
issued a prompt corrective action directive against Pacific Thrift (the "PCA
Directive"). The PCA Directive required that: (i) Pacific Thrift sell enough
voting shares or obligations on or before December 31, 1998 to be adequately
capitalized after the sale; (ii) that Pacific Thrift accept an offer to be
acquired by a depository institution holding company or to combine with another
insured depository institution if notified in writing by the FDIC that one or
more grounds exist for appointing a conservator or receiver for Pacific Thrift;
(iii) that Pacific Thrift restrict the interest rates that it pays on deposits
to the prevailing rates of interest on deposits of comparable amounts and
maturities; (iv) that Pacific Thrift comply with Section 23A of the Federal
Reserve Act as if subsection (d) (1) of that section did not apply; (v) that
Pacific Thrift not commit to fund any loan until such time as Pacific Thrift or
its parent has in place a formal written committed loan production warehousing
line of credit; (vi) that Pacific Thrift not permit its average total assets, or
its average total deposits, during any calendar month to exceed its average
total assets, or its average total deposits, during the preceding calendar
month; (vii) that Pacific Thrift shall not establish or operate any branch
without FDIC approval or any loan production office without prior approval of
the DFI; (viii) that Pacific Thrift not make any distributions to its parent or
any affiliate or pay any bonuses or increase the compensation of any director or
officer of Pacific Thrift. Certain provisions of the PCA Directive are not
consistent with the 1998 Order (as described below), but the FDIC has advised
that it does not intend to seek enforcement of the PCA Directive as long as the
provisions of the 1998 Order are complied with.
On December 14, 1998, Pacific Thrift entered into a stipulation and consent
to an order issued by the FDIC (the "1998 Order") which replaced the 1998 MOU.
Under the 1998 Order, Pacific Thrift has agreed: (i) to have and retain
qualified management to operate its regulated business; (ii) to achieve, by
January 31, 1999, and thereafter maintain, Tier 1 capital equal to or in excess
of 8.0 percent of its total assets, and to achieve, by June 30, 1999, and
thereafter maintain, Tier 1 risk-based capital of no less than 6.0 percent and
total risk-based capital of no less than 10.0 percent; (iii) to maintain an
adequate allowance for loan losses; (iv) to take the following steps with regard
to its interest-only strips receivables: (a) by June 30, 1999, reduce the amount
of the receivable as a percentage of total capital to no more than 100%; (b) not
acquire or book any additional interest-only strips receivable without the
consent of the FDIC; and (c) obtain quarterly and annual independent valuations
of the existing interest-only strips receivable; (v) to prepare and submit a
written two-year business/strategic plan; (vi) to discontinue selling loans
under conduit loan sale arrangements through its parent company and, by February
27, 1999, to develop a plan for Pacific Thrift to directly achieve all of the
benefits of prior intercompany conduit loan sales; (vii) by February 27, 1999,
to develop a revised written asset/liability management policy specifically
addressing interest rate risks associated with the mortgage banking business;
(viii) not to pay cash dividends or distributions without the prior written
consent of the FDIC; (ix) not to enter into any executive compensation and/or
bonus agreements without prior approval of the FDIC; (x) to develop and
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implement a written policy for all intercompany transactions with affiliates;
(xi) to furnish a description of the Order to its shareholder; and (xii) to
furnish written quarterly progress reports detailing actions taken to comply
with the Order. The 1998 Order is currently in effect, and Pacific Thrift is
taking action to comply with the terms of the Order by the dates specified.
On March 1, 1999, Pacific Thrift entered into a stipulation and consent to
an order issued by the FDIC related to Year 2000 readiness (the "Year 2000
Order"). Under the Year 2000 Order, Pacific Thrift has agreed: (i) to designate
an executive officer as the institution's Year 2000 Officer, who shall have
authority to engage the services of a consultant who possesses the experience
and qualifications necessary to achieve Year 2000 readiness and prepare the
institution for contingencies that may arise relating to the Year 2000; (ii) by
March 26, 1999, develop and adopt a plan for achieving Year 2000 readiness;
(iii) by April 15, 1999, develop and implement a remediation contingency plan
setting forth the institution's alternative plans to assure continuity of
operations in the event the institution must retain Year 2000 ready replacement
mission-critical systems, suppliers, hardware or software from other alternate
sources; (iv) by June 30, 1999, develop a business resumption contingency plan
setting forth the institution's plans to mitigate risks associated with the
failure of its systems at critical dates; (v) by no later than June 30, 1999,
have in place mission-critical systems that are Year 2000 ready, including a
written determination by the institution that the mission-critical systems have
been tested successfully; (vi) for as long as the order is in effect, acquire or
contract for the use of electronic information systems, hardware, operating
systems, and applications software only if such hardware, systems, and software
have been successfully tested for Year 2000 readiness prior to use by the
institution; (vii) by April 10, 1999, perform due diligence reviews to determine
whether the Year 2000 readiness procedures of its service providers and software
vendors, and the time frames for implementation of those procedures, are
adequate and by March 31, 1999, implement an internal testing or verification
process, and complete such testing by June 30, 1999; (viii) by March 21, 1999,
amend the institution's internal and external audit policies to require periodic
audits of the institution's Year 2000 Plan and its implementation; (ix) provide
monthly status reports to the Board of Directors and the FDIC detailing the
institution's progress in implementing the Year 2000 Plan.
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 thrift and loans from engaging in
what, in the FDIC's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the FDIC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the FDIC has established guidelines with
respect to the maintenance of appropriate levels of capital by banks under their
jurisdiction. Compliance with the standards set forth in such guidelines and the
restrictions that are or may be
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imposed under the prompt corrective action provisions of the FDICIA 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.
Thrift and loans are 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 thrift and loans, under the
prompt corrective action provisions of FDICIA.
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 stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require depository institutions to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a depository institution
rated in the highest of the five categories used by regulators to rate
depository institutions, the minimum leverage ratio of Tier 1 capital to total
assets is 3%. For all depository institutions not rated in the highest category,
the minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines
and leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In 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.
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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% of assets classified doubtful;
(c) 15% of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies 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
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.
The following table presents the capital ratios for Pacific Thrift, as of
December 31, 1998, compared to the regulatory capital requirements for
adequately capitalized and well capitalized institutions.
December 31, 1998
---------------------------------------
Well
Actual Adequately Capitalized
Ratio Capitalized Requirement
----- ----------- -----------
Leverage ratio................ 6.9% 4.0% 5.0%(1)
Tier 1 risk-based ratio....... 3.2% 4.0% 6.0%
Total risk-based ratio........ 3.6% 8.0% 10.0%(1)
(1) Pursuant to the 1998 Order, Pacific Thrift is required to maintain a
minimum 8.0% leverage ratio and by June 30, 1999, 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:
"Well capitalized" "Adequately capitalized"
------------------ ------------------------
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"
------------------ --------------------------------
Total risk-based capital less Total risk-based capital less
than 8%; than 6%;
Tier 1 risk-based capital less Tier 1 risk-based capital less
than 4%; or than 3%;
Leverage ratio less than 4% (3% if or Leverage ratio less than 3%.
the institution receives the highest
rating from its primary regulator)
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"Critically undercapitalized"
-----------------------------
Tangible equity to total assets less than 2%.
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 leverage 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 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
26
<PAGE>
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.
Safety and Soundness Standards
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
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. 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
27
<PAGE>
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.
Community Reinvestment Act and Fair Lending Developments
Pacific Thrift, just as all other federally regulated banking institutions,
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 rated Pacific Thrift "satisfactory" in
complying with its CRA obligations as of the most recent examination date of
November 1995.
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 DFI for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by either agency or any written
agreement with either 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 prompt corrective action provisions of FDICIA.
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 was 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 28,000 square feet of office space in Irvine,
California, where the Company's Retail Loan operations are headquartered, under
a lease which expires on January 31, 2004. The Company also leases offices for
its 40 current and 11 former retail branch offices which are located in 24
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 has subleased
approximately 12,500 square feet of office space in its Walnut Creek facility
and is seeking to sublease an additional 9,500 square feet of the Walnut Creek
facility, approximately 14,000 square feet of the Irvine facility and the 11
offices that it has closed since October 1998 as a result of the closing of the
Wholesale Lending division and additional cost reduction actions. The Company
believes its existing facilities are sufficient to support its current and
planned levels of operations.
Item 3. Legal Proceedings
Except as described below, the Company is not currently a party to any
litigation other than legal proceedings related to collection actions on loans
receivable. The Company and its subsidiaries are regularly involved in
collection actions incidental to the 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
28
<PAGE>
pending against the Company would have a material adverse impact on the
Company's business, financial condition, results of operations or cash flows.
On March 12, 1999, Pacific Thrift and Loan was served with a lawsuit filed
by Aames Financial Corporation in Los Angeles Superior Court concerning loans
sold to Aames on a whole loan basis between December 1993 and September 1996.
The complaint alleges very generally, and without specific reference to any
particular loans, that the loans sold by Pacific Thrift did not meet various
representations and warranties made by Pacific Thrift at the time the loans were
sold. The complaint further alleges that Aames has lost more than $15 million as
a result of the failure of these unspecified loans to meet unspecified
representations and warranties. As of the date of this report, Pacific Thrift
has not filed a response to the complaint or conducted any discovery regarding
the allegations made in the complaint.
Management believes that there is no basis for any of the allegations for
several reasons. First, in spite of the provisions of the loan sale agreements
which allow Aames to demand that Pacific Thrift repurchase loans which did not
meet representations and warranties, Aames has previously requested that Pacific
Thrift repurchase only $1.1 million of loans in five years, which is less than
one-half of 1% of the total amount of loans sold to Aames. Second, Aames has
never previously identified to Pacific Thrift any problem loans other than those
few loans Aames has previously requested be repurchased. Third, substantially
all of the loans sold to Aames were written to Aames' own underwriting
guidelines specifically for sale to Aames. Fourth, Aames reviewed in detail and
approved every loan file for every loan originated for sale to Aames prior to
loan funding. Fifth, Pacific Thrift had an independent review appraiser,
selected from a list of appraisers approved by Aames, review every appraisal for
every loan originated for sale to Aames. For these reasons, management of
Pacific Thrift has no reason to believe that there is any merit to the
complaint.
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 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
From June 1996 until February 26, 1999, the Company's Common Stock traded
under the symbol PAMM on the Nasdaq National Market. The Common Stock was
delisted from the Nasdaq National Market on February 26, 1999 because the
trading price of the Common Stock was less than $1 per share and the market
value of public float was less than $5 million. The Common Stock is currently
traded on the OTC Bulletin Board. 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.
High Low
---- ---
1996
----
Third Quarter $ 11.125 $ 6.500
Fourth Quarter 16.000 10.875
1997
----
First Quarter 17.000 14.000
Second Quarter 16.375 12.000
Third Quarter 27.250 15.500
Fourth Quarter 29.500 15.000
29
<PAGE>
1998
----
First Quarter 26.000 16.000
Second Quarter 23.000 14.500
Third Quarter 14.875 3.500
Fourth Quarter 7.500 0.4375
On March 31, 1999, the closing sale price for the Common Stock reported
on the OTC Bulletin Board was $0.50 per share.
As of March 22, 1999, there were approximately 2,150 shareholders of
the Common Stock, including beneficial holders whose shares are held of record
by brokerage firms and clearing agencies.
Dividend Policy
The Company 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 General 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.
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 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 exceed 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.
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<PAGE>
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, 1998. 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,
1998 1997 1996 1995 1994
(Dollars In Thousands)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total interest income ......................................... $ 16,660 $ 11,730 $ 11,502 $ 9,577 $ 11,404
Total interest expense ........................................ 15,214 6,540 4,966 5,199 4,927
Net interest income ......................................... 1,446 5,190 6,536 4,378 6,477
Total noninterest income ...................................... 33,788 82,055 29,994 9,440 2,071
Provision for loan losses ..................................... 1,314 3,087 1,151 3,289 6,096
Other real estate owned expense ............................... 124 444 681 1,212 732
General and administrative expense ............................ 69,274 54,151 28,227 13,099 12,140
Provision (benefit) for income taxes .......................... (10,990) 12,468 1,658 (1,223) 1
--------- --------- --------- --------- ---------
Income (loss) from continuing operations ...................... (24,488) 17,095 4,813 (2,559) (10,421)
Income from discontinued operations ........................... -0- -0- 387 861 907
Loss on disposal of discontinued operations ................... -0- -0- (1,038) -0- -0-
Net income (loss) ............................................. $ (24,488) $ 17,095 $ 4,162 $ (1,698) $ (9,514)
--------- ========= ========= ========= =========
Distributions paid ............................................ -0- -0- -0- -0- -0-
Basic earnings (loss) per share(1)
Continuing operations ...................................... (4.82) 4.18 1.53 (1.82)
Discontinued operations .................................... -0- -0- (0.32) 0.41
Net income ................................................. (4.82) 4.18 1.21 (1.41)
Diluted earnings (loss) per share(1)
Continuing operations ...................................... (4.82) 3.48 1.27 (1.82)
Discontinued operations .................................... -0- -0- (0.26) 0.41
Net income ................................................. (4.82) 3.48 1.01 (1.41)
Statement of Financial Condition Data:
Total assets .................................................. $ 250,214 $ 227,866 $ 110,235 $ 82,994 $ 103,747
Interest-only strip receivable ................................ 116,628 94,424 11,698 -0- -0-
Loans held for sale ........................................... 72,814 35,280 18,148 12,577 12,011
Portfolio loans(2) ............................................ 9,444 20,629 33,515 43,908 53,045
Total deposits ................................................ 162,310 132,524 81,002 60,156 69,501
Equity ........................................................ 25,281 48,386 21,966 8,727 10,425
Selected Ratios (%)
Return on average assets ...................................... (10.24)% 9.95% 4.21% (1.82)% (8.73)%
Return on average equity ...................................... (66.48)% 48.60% 27.12% (17.73)% (62.67)%
Net interest margin(3) ........................................ .89% 5.24% 7.46% 5.79% 6.82%
Noninterest expense to average assets ......................... 29.03% 31.85% 29.21% 15.33% 11.81%
Efficiency ratio(4) ........................................... 196.96% 62.58% 79.13% 103.57% 150.58%
Efficiency ratio excluding REO expense(4) ..................... 196.61% 62.07% 77.27% 94.80% 142.02%
General and administrative expense to average assets .......... 28.98% 31.59% 28.52% 14.03% 11.13%
Average equity to average assets .............................. 15.41% 20.52% 15.51% 10.26% 13.92%
Loan originations ............................................. $ 938,065 $ 768,226 $ 373,457 $ 170,961 $ 76,838
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
As of and for the Years Ended
December 31,
1998 1997 1996 1995 1994
(Dollars In Thousands)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Quality Data:
Nonaccrual loans .............................................. 2,293 1,105 $1,394 $ 793 $3,146
REO (net of senior liens) ..................................... 219 2,028 2,728 2,545 5,308
Total nonperforming assets .................................... 2,512 3,133 4,122 3,338 8,454
Troubled debt restructurings .................................. -0- -0- 357 948 -0-
Allowance for credit losses on portfolio loans ................ 864 1,438 2,464 4,229 4,307
Net portfolio loan charge offs ................................ 1,888 2,211 $2,916 3,367 4,912
Asset Quality Ratios:
Nonperforming assets to total assets .......................... 1.00% 1.37% 3.59% 4.02% 8.15%
Allowance for credit losses to net portfolio loans ............ 9.15% 6.97% 7.35% 9.63% 8.12%
Allowance for credit losses to nonaccrual portfolio loans ..... 37.68% 130.14% 176.76% 533.29% 136.94%
Net portfolio loan charge offs to average portfolio loans ..... 12.56% 8.17% 7.53% 6.95% 7.16%
====================================================================================================================================
</TABLE>
(1) 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.
(2) Net of allowances for loan loss and deferred loan fees and costs, including
loans held for sale.
(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.
32
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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."
General
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 PAMC, 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. Between the fourth quarter of 1996 and the fourth quarter
of 1998, the Company sold its loans for securitization under agreements
providing that it would retain an interest-only strip receivable in each
securitization pool in which the Company's loans were sold. The Company
recognized gain from the sale of these loans as the present value of the
interest-only strips receivable. See "Certain Accounting Considerations," below.
Since December 1998, the Company has sold all of its loans on a cash-only, whole
loan sale basis. The Company currently intends to continue selling loans for
cash only.
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
Between the fourth quarter of 1996 and the fourth quarter of 1998, the
Company sold loans for consideration consisting partly of interest-only strips
receivable in securitization trusts. Interest-only strips receivable are
recorded at their estimated fair value at the time of sale, based on the present
value of the expected future cash flows. The Company estimates future cash flows
from interest-only strips receivable utilizing assumptions that it believes are
consistent with those that would be utilized by an unaffiliated third party
purchaser. There is no active market for the sale of interest-only strips
receivable, however, and there can be no assurance that the interest-only strips
receivable could be sold to a third party purchaser for the fair value
determined by the Company. In 1998 and 1997 the Company wrote down the fair
value of interest-only strips receivable by $38,300,000 and $2,306,000 (see Note
6 to Financial Statements included under item 14 of Part IV).
The fair value of the Company's interest-only strips receivable is
determined by using estimated discounted future cash flows taking into
consideration current and estimated future prepayment rates and default
experience. Future cash flows are computed as the excess of 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, the loan servicer or
subservicer and the monoline insurer. The present value calculation 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 expected to be received by the Company 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. The carrying amount is considered to be a reasonable estimate of
fair value. To the extent that actual future excess cash flows are different
from
33
<PAGE>
estimated excess cash flows, the fair value of the Company's interest-only
strips receivable is adjusted quarterly with corresponding adjustments made to
operations in that period.
In September 1998, the Company made a $19.2 million (net of tax benefit of $14.4
million) adjustment to the valuation of its interest-only strips receivable,
reflecting the adoption of more conservative prepayment assumptions and a higher
discount rate. The adjustment of the valuation in the interest-only strips
receivable in part, due to the delay in the sale of the Company's loans during
the third quarter 1998 was primarily due, to a chain reaction of events which
caused significant and sudden changes in the securitization market late in the
quarter. See "Item 1 -- Business".
During the third quarter of 1998, there was a moderate change in the
performance of the Company's securitization pools, affecting primarily the
Company's three oldest pools formed during the last quarter of 1996 and the
first two quarters of 1997. That fact, coupled with the current unsettled nature
of the securitization markets in general, led the Company to determine that it
was necessary to adopt more conservative prepayment assumptions and a more
conservative discount rate in the valuation of its interest-only strips
receivable to reflect the higher risks perceived by the market for these types
of assets. At the end of the third quarter of 1998, the Company increased its
discount rate from 11% to 15% which it believes to be consistent with others in
the industry.
The fair value of the Company's interest-only strips receivable is
calculated using the "cash out" method of estimating future cash flows from the
various mortgage trusts. The "cash out" method assumes that the cash flows
deposited in the overcollateralization reserve for each securitization trust are
not available until they are actually distributed to the Company.
In March 1999, the Company obtained an independent valuation and report of
the interest-only strips receivable as of December 31, 1998, which determined
fair values of the interest-only strips receivable using the discounted cash
flow method of valuation. The fair value of the interest-only strips receivable
reflected on the Statement of Financial Condition at December 31, 1998 is
consistent with the results of that report. The following table compares the
actual constant prepayment rates ("CPRs") through December 31, 1998 of each of
the Company's Securitization Trusts with the model CPRs used to value
interest-only strips recievable in those pools. Model CPRs are generally ramped
up over a specified numeber of months after formation of each Securization
Trust, and the later Trusts have not reached their full ramped-up CPR rate
assumptions. The model CPRs astrisked below are the fully-ramped CPR rates for
those pools which are currently in the ramp-up phase. CPR amounts are based on
the models from the independent valuation.
COMPARISON OF ACTUAL CONSTANT PREPAYMENT RATES
WITH MODEL CONSTANT PREPAYMENT RATES
Pool Securitization Actual Life- Model
Description Date To-Date CPRs CPR
- ------------- -------------- ------------- ------
AAMES 96-4 NOV 96 31.0% 29%
ADVANTA 97-1 FEB 97 25.6% 29%
ADVANTA 97-2 MAY 97 23.7% 30%
ADVANTA 97-3 AUG 97 22.8% 30%
ADVANTA 97-4 NOV 97 22.2% 29%
ADVANTA 98-1 MARCH 98 18.1% 29%
ADVANTA 98-2 JUNE 98 11.7% 29%*
ADVANTA 98-3 SEPT 98 10.2% 29%*
ADVANTA 98-4 NOV 98 N/A 29%*
ADVANTA 99-1 MARCH 99 N/A 29%*
PAMM 97-1 DEC 97 18.0% 29%*
PAMM 98-1 MARCH 98 15.3% 29%*
PAMM 98-2 JUNE 98 7.3% 29%*
* RAMPS TO THESE CPRs
The following table compares the actual annualized loan losses through
December 31, 1998 for each of the Company's Securitization Trusts with the
annual loss rate assumption used by the Company to value its interest-only
strips receivable in those pools.
COMPARISON OF ACTUAL ANNUALIZED LOSSES
WITH ANNUAL LOAN LOSS RESERVES
Actual Annual
Pool Securitization Annualized Loan Loss
Description Date Losses Reserve
- ----------- -------------- ---------- ---------
Aames 96-4 Nov 96 1.15% 1.00%
Advanta 97-1 Feb 97 0.40% 1.00%
Advanta 97-2 May 97 0.20% 1.00%
Advanta 97-3 Aug 97 0.13% 1.00%
Advanta 97-4 Nov 97 0.09% 1.00%
Advanta 98-1 March 98 0.00% 1.00%
Advanta 98-2 June 98 0.00% 1.00%
Advanta 98-3 Sept 98 0.00% 1.00%
Advanta 98-4 Nov 98 0.00% 1.00%
Advanta 99-1 March 99 n/a 1.00%
PAMM 97-1 Dec 97 0.05% 1.00%
PAMM 98-1 March 98 0.02% 1.00%
PAMM 98-2 June 98 0.00% 0.50%
It is possible that the assumptions used to determine fair value of the
Company's interest-only strips receivable could change in the 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 strips receivable are reviewed quarterly with required
adjustments, if necessary, made to earnings in that period. The Company intends
to obtain a quarterly third party valuation of its interest-only strips
receivable as further assurance regarding the Company's valuation methodology.
34
<PAGE>
The interest-only strips receivable held 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 strips receivable as trading securities. Based on this
classification, the Company is required to mark these securities to estimated
fair value with the accompanying increases or decreases in fair value being
recorded as a component of 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 discounts anticipated cash flows
to determine the present value of the interest-only strips receivable, if the
prepayment and loss rate assumptions prove to be accurate (which cannot be
predicted with certainty), the cash flow actually received over the lives of the
loans would exceed the gain on sale recognized at the time the loans were sold.
Any additional unrealized gain on sale of loans would be recognized over the
life of the loans securitized.
There can be no assurance that future performance of the above identified
Securitization Trusts will be consistent relative to the Company's assumptions.
Financial Condition
At December 31, 1998 compared with December 31, 1997.
Total consolidated assets of the Company increased $22.3 million (9.8%) to
$250.2 million at December 31, 1998 from $227.9 million at December 31, 1997.
The increase resulted primarily from the increase in interest-only strips
receivable and loans held for sale, partially offset by decreases in cash and
cash equivalents, loans receivable and REO. Interest-only strips receivable,
after a $34 million valuation writedown in fair value during 1998, increased
$22.2 million (23.55%), to $116.6 million at December 31, 1998, from $94.4
million at December 31, 1997, reflecting securitization transactions done
primarily in the first half of 1998. The valuation adjustment reflects the
adoption of a more conservative prepayment assumption and a higher discount
rate. See "Business -- Lending Activities - Loan Sales and Securitizations."
Loans held for sale increased $37.5 million (106.4%), to $72.8 million at
December 31, 1998, from $35.3 million at December 31, 1997. Cash and cash
equivalents decreased $24.1 million (36.6%) to $41.8 million at December 31,
1998, from $65.9 million at December 31, 1997, due primarily to the increase in
loans held for sale. Loans receivable decreased $11.2 million (54.2%) to $9.4
million from $20.6 million, due to the Company's decision to continue to sell
portfolio loans throughout 1998. REO decreased $1.8 million (89.2%) to $0.2
million at December 31, 1997, from $2.0 million at December 31, 1997, due to the
reduction in the Company's loan portfolio and sales of REO held during 1998.
Total liabilities increased $45.4 million (25.37%) to $224.9 million at
December 31, 1998, from $179.5 million at December 31, 1997. The increase
resulted from an increase in total thrift certificates payable and notes
payable, partially offset by a decrease in the net deferred income tax
liability. Total thrift certificates payable increased $29.8 million (22.5%), to
$162.3 million from $132.5 million, reflecting increased issuance of thrift
certificates to fund Pacific Thrift's lending operations. Notes payable
increased $24.8 million (87.6%) to $53.1 million at December 31, 1998 from $28.3
million at December 31, 1997, reflecting advances received by the Company on
interest-only strips receivable under arrangements with Advanta and Merrill
Lynch, and a $3.0 million loan from Fremont Financial Corporation. (See
"BUSINESS -- Lending Activities - Loan Sales and Securitizations. and "-- Other
Borrowings.") The net deferred income tax liability decreased by $10.9 million
to $1.2 million at December 31, 1998, from $12.1 million at December 31, 1997,
primarily from the deferred income tax effect of the $34 million interest-only
strips receivable valuation writedown.
Total stockholders' equity decreased $23.1 million, to $25.3 million at
December 31, 1998, from $48.4 million at December 31, 1997, due to the
consolidated net loss of $24.5 million in 1998 partially offset by the issuance
of additional common stock of $1.4 million.
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 strips
receivable, 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 strips receivable increased $82.7 million (706.8%), to $94.4
million
35
<PAGE>
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
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 strips receivable under arrangements
with Advanta and Merrill Lynch. See "BUSINESS -- Lending Activities - Loan Sales
and Securitizations." The deferred income tax liability increased by $12.1
million to $12.1 million at December 31, 1997, from $0 million at December 31,
1996, reflecting the deferral of the gains on sale. 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.
Results of Operations
Year Ended December 31, 1998 compared with Year Ended December 31, 1997
General
The Company reported a consolidated net loss of $24.5 million for 1998, a
decrease of $41.6 million (243.3%) from net income of $17.1 million in 1997. The
decrease from net income in 1997 to a net loss in 1998 is due primarily to a
substantial decrease in gain on sale of loans in 1998, resulting from a $34
million writedown in interest-only strips receivable in the third quarter of
1998.
Interest Income and Expense
Net interest income before provision for loan losses decreased $3.8 million
(73.1%), to $1.4 million for 1998 from $5.2 million for 1997. Total interest
income increased $4.6 million (38.0%), to $16.7 million for 1998 from $12.1
million for 1997. Interest expense increased $8.3 million (120.3%), to $15.2
million for 1998 from $6.9 for 1997, due to increases in total outstanding
thrift certificates and notes payable.
Provision for Loan Losses
The provision for loan losses decreased $1.8 million (57.4%), to $1.3
million for 1998 from $3.1 million for 1997. The decrease in the provision
reflected the decrease in loans receivable.
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."
36
<PAGE>
Noninterest Income and Expense
Total noninterest income decreased $48.3 million (58.8%), to $33.8 million
for 1998 from $82.1 million for 1997, reflecting a decrease in gain on sale of
loans. Gain on sale of loans decreased $48.9 million (59.9%) to $32.8 million
for 1998 from $81.7 million for 1997 due to a substantial write down in the
interest-only strips receivable at the end of the third quarter of 1998. Total
noninterest expense increased $14.8 million (27.1%) to $69.4 million for 1998
from $54.6 million for 1997. Salary and related benefits increased $4.7 million
(15.9%) to $34.2 million in 1998 from $29.5 million in 1997, and general and
administrative expenses increased $5.3 million (23.7%), to $27.7 million in 1998
from $22.4 million in 1997, because of expanded mortgage banking activities in
the first three quarters of 1998. In the fourth quarter of 1998, the Company
also incurred a restructuring charge of $3.5 million due to the closure of the
wholesale loan division resulting in a workforce reduction of approxmately 300
employees and the impairment of certain long-lived assets. Occupancy expense
increased $1.2 million (70.6%) to $2.9 million in 1998 from $1.7 million in 1997
due to increase in the number of wholesale and retail offices opened in 1998.
Income Taxes (Benefit)
Income tax benefit from continuing operations was $11.0 million for 1998,
compared to a tax expense of $12.5 million for 1997, as a result of the $65
million decrease in income before income taxes, to a loss of $35.5 million for
1998 from income of $29.5 million for 1997.
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."
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.
37
<PAGE>
Income Taxes (Benefit)
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.
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 0, $.2 million and $.3 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
38
<PAGE>
Yields and Rates on Interest-earning Assets and Interest-bearing Liabilities
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
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 $147,895 $16,039 10.84% $90,958 $11,332 12.46%
Interest-bearing deposits in
other financial institutions
and securities purchased under
agreements to sell 14,201 621 4.37% 8,026 398 4.96%
------- ------ ------ ------ ------ ------
Total interest-earning assets 162,096 16,660 10.28% 98,984 11,730 11.85%
======= ====== ====== ------ ====== ======
Noninterest-earning assets:
Cash and due from banks 6,574 7,864
Premises & equipment, net 4,783 2,868
Real estate acquired in settlement
of loans 1,091 3,173
Other Assets 157,224 62,714
------- -------
Total noninterest-earning assets 169,672 76,619
------- -------
Less allowance for loan losses 1,922 -0- 2,001 -0-
------- ------ ------- ------
329,846 16,660 173,602 11,730
======= ====== ======= ======
Liabilities & Stockholders'
Equity/Partners' Capital
Interest-bearing liabilities:
Borrowings 101,786 6,996 6.87% 20,495 1,033 5.04%
Savings deposits 22,738 1,209 5.31% 21,516 1,099 5.11%
Time CDs 118,173 7,009 5.93% 75,007 4,408 5.88%
------- ----- ----- ------ ----- -----
Total interest-bearing liabilities 242,697 15,214 6.27% 117,018 6,540 5.59%
======= ====== ===== ======= ===== =====
Noninterest-bearing liabilities:
Accounts payable & accrued
expenses 18,904 14,923
------
Total liabilities
Stockholders' Equity/Partners'
Capital 46,576 32,554 ______
------- ------
308,177 15,214 164,495 6,540
======= ======= ======= ======
Net interest income/spread 1,446 4.01% 5,190 6.26%
======= ===== ====== =====
Net interest margin .89% 5.24%
Net Income (loss) (24,488) 17,095
======= ======
Average interest earning assets to
average interest bearing liabilities .67 .85
</TABLE>
39
<PAGE>
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.
<TABLE>
<CAPTION>
Rate Volume Analysis
--------------------
(Dollars in Thousands)
1998 compared to 1997 1997 compared to 1996
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 $ 6,174 $(1,467) $4,707 $1,179 $(1,021) $ 158
Interest-bearing deposits
in other financial
institutions and securities
purchased under
agreements to sell 270 (47) 223 93 (23) 70
------- ------- ------- ------ ------- -------
Total interest-earning
assets 6,444 (1,514) 4,930 1,272 (1,044) 228
======= ======= ======= ====== ======= =======
Interest-bearing liabilities:
Borrowings 5,587 376 5,963 840 (360) 480
Savings deposits 65 45 110 (500) (28) (528)
Time CDs 2,560 41 2,601 1,612 9 1,621
------- ------- ------- ------ ------- -------
Total interest-bearing
liabilities 8,212 462 8,674 1,952 (379) 1,573
======= ======= ======= ====== ======= =======
Change in net interest
income $(1,768) $(1,976) $(3,744) $ (680) $ (665) $(1,345)
======= ======= ======= ====== ======= =======
</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 loan sales; (iii) income taxes; (iv) capital expenditures; and (v) other
operating and administrative expenses. The Company generates cash flow from loan
sales, and loans sold for
40
<PAGE>
securitization, advances on interest-only strips receivable, deposits issued by
Pacific Thrift used to fund its lending operations, whole loan sales, principal
payments and interest income on portfolio loans, and sale of REO.
The Company obtained advances on interest-only strips receivable from Aames
and Advanta as part of the securitization transactions with those entities,
which are payable from the cash flow payments made on the interest-only strips
receivable. The Company has also obtained advances on interest-only strips
receivable in the PAMM Trusts under a Master Assignment Agreement. The Company
is currently in default under the Master Assignment Agreement. In addition, the
Company obtained a $3.0 million loan from Fremont Financial Corporation in April
1998, secured by all of the stock of Pacific Thrift, the maturity date of which
has been extended to January 8, 2000. (See "Item 1. Business --Other
Borrowings.")
Certificates of deposit which are scheduled to mature in one year or less
from December 31, 1998 totaled $127.9 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 in the past, management of Pacific Thrift intentionally took steps
to reduce deposit renewals in order to reduce the total amount of deposits.
These steps included reducing the interest rates offered on maturing deposits,
declining to renew certain large deposits and redeeming certificates of deposit.
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,
1998 was 70.1%, which exceeded the 10% minimum established by the Board. At
December 31, 1997 and 1996, the liquidity ratio was 68.0% and 49.8%,
respectively.
The Company incurred a net loss of $24,488,000 during the year ended
December 31, 1998 and has an accumulated deficit of $3,231,000 at December 31,
1998. Management believes these losses were reflective of the rapid change in
marketplace demand for the purchase of sub-prime paper by the secondary market
during the latter half of 1998. At December 31, 1998, the Company is in default
of the repayment terms of its obligations related to its interest-only strips
receivable (Note 8c to the financial statements included under item 14 for Part
IV). In addition, Pacific Thrift was not "adequately capitalized" at the end of
1998 or by March 22, 1999 and became subject to certain regulatory mandates and
sanctions (Note 13 to the financial statements included under item 14 for Part
IV). Pacific Thrift also has additional regulatory mandates imposed relating to
its Year 2000 readiness and the related Bank information systems (Notes 13 and
15 to the financial statements included under item 14 for Part IV). Failure to
implement the regulatory mandates would expose Pacific Thrift to various
regulatory actions, including the risk of regulatory takeover.
The Company's independent certified public accountants have included an
explanatory paragraph in their report which indicates that these matters raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans regarding these matters are as follows:
Management has taken and continues to take steps to return the Company to
profitability and improve its financial condition, including such actions as the
closure of Pacific Thrift's wholesale operations (Note 2Q to the financial
statements included under item 14 for Part IV), an emphasis on originating
residential real estate loans for sale under whole loan sale agreements for a
cash premium through its retail division, a reduction in portfolio lending until
targeted capital ratios are achieved, and reducing overhead expenses. Pacific
Thrift has hired a consultant and submitted a revised Year 2000 plan to the
regulators and believes it will be able to meet the guidelines of the order
regarding Year 2000 (Note 13 to the financial statements included under item 14
for Part IV).
Management expects that Pacific Thrift will be profitable in 1999 and will
comply to the greatest extent possible with the regulatory mandates. Management
has submitted a Capital Restoration Plan (the Plan) which was approved by the
FDIC. In addition to a revised business plan, the Plan includes restructuring
debt to provide capital contributions to Pacific Thrift and raising capital
through private or public offerings of debt or equity securities. Management is
negotiating a restructuring of its obligations in default relating to its
interest-only strips receivable. There is no assurance that management's plans
can be achieved. The financial statements do not include any provisions or
adjustments that might result from the outcome of these uncertainties.
Pacific Thrift is subject to certain leverage and risk-based capital
adequacy standards applicable to FDIC-insured institutions. At December 31,
1998, Pacific Thrift was classified by the FDIC as "significantly
undercapitalized." Pacific Thrift has filed a capital plan which has been
approved by the FDIC, under the terms of which Pacific Thrift or the Company
will seek to raise approximately $20 million in new capital, the amount
necessary for Pacific Thrift to meet the capital requirements of the 1998 Order.
See "SUPERVISION AND REGULATION -- Federal Law -- Capital Adequacy Guidelines."
The Company used $91.9 million net cash in operating activities in 1998,
compared to $46.5 million in 1997 and $22.9 million in 1996, reflecting the
funding of loans for securitization in 1998 and 1997. The increase in cash used
in operating activities in 1998 reflects primarily the net loss of $24.5
million, nets increase in interest-only strips receivable of $22.9 million and
an increase of loan originations over loan sales of $39.4 million. The Company
used net cash from investing activities of $11.8 million in 1998, reflecting
primarily sales of $8.5 million in portfolio loans and $2.7 million in sales of
REO. The Company realized net cash from investing activities of $17.2 million in
1997, reflecting primarily a sale of $17.1 million in portfolio loans 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 lending. The Company realized $56.0 million
net cash from financing activities in 1998 reflecting a net increase of $29.8
million in thrift certificates and a $25.4 million net increase in notes
payable. 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 from the Public
Offering and Rights Offering.
At December 31, 1998 the Company had deferred tax liabilities of $1.2
million, 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 that such future taxable income will be sufficient for realization of the
deferred tax assets.
41
<PAGE>
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, 1998, total interest-bearing liabilities maturing or
repricing during each period exceeded total interest-earning assets maturing or
repricing in the same periods by $37.3 million, representing a negative
cumulative interest rate sensitivity gap ratio of 30%. However, because interest
rates for different asset and liability products offered by depository
institutions respond differently to changes in the interest rate environment,
the gap is only a general indicator of interest rate sensitivity.
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, 1998 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 $29.7 million at December 31,
1998 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.
42
<PAGE>
INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
After
Assets or Liabilities Which 1 Day 3 Months Six Months 1-5 5
Mature or Reprice to 3 Months to 6 Months to 1 Year Years Years Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash and Investments ............................ 41,766 -- -- -- -- 41,766
Variable Rate Loans Receivable .................. 7,487 -- -- -- -- 7,487
Fixed Rate Loans Receivable ..................... 15 -- -- 457 2,517 2,989
Loans Held for Sale (1) ......................... 72,814 -- -- -- -- 72,814
-------- -------- -------- -------- -------- --------
Interest-earning assets ....................... 122,082 -- -- 457 2,517 125,056
-------- -------- -------- -------- -------- --------
Certificates of deposit ......................... 19,560 35,852 72,465 4,741 -- 132,618
Savings accounts ................................ 29,692 -- -- -- -- 29,692
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities .................. 49,252 35,852 72,465 4,741 -- 162,310
-------- -------- -------- -------- -------- --------
Interest rate sensitivity gap ................... 72,830 (35,852) (72,465) (4,284) 2517 (37,254)
Cumulative interest rate sensitivity ............ 72,830 36,978 (35,487) (39,771) (37,254) (37,254)
gap
Interest rate sensitivity ratio (2) ............. 2.47 -- -- .10 -- .77
Cumulative interest rate sensitivity ............ .60 .30 (.29) (.32) (.30) (.30)
gap ratio (3) .................................
</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.
Effect of New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS No. 132"), Employers'
Disclosures about Pensions and other Post-retirement Benefits, which stan
dardizes the disclosure requirements for pension and other post-retirement
benefits. The adoption of SFAS No. 132 did not materially impact the Company's
current disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires
43
<PAGE>
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized as income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Based on its current and planned
future activities relative to derivative instruments, the Company believes that
the adoption of SFAS No. 133 on January 1, 2000 will not have a significant
effect on its financial statements.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134 ("SFAS No. 134"), Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This statement effectively
changes the way mortgage banking firms account for certain securities and other
interests they retain after securitizing mortgage loans that were held for sale.
The adoption of SFAS No. 134 is not expected to have a material impact on the
Company's financial position.
In February 1999 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 135 ("SFAS No. 135"), Rescission of
Financial Accounting Standards Board No. 75 ("SFAS No. 75") and Technical
Corrections. SFAS No. 135 rescinds SFAS No. 75 and amends Statement of Financial
Accounting Standards Board No. 35. SFAS No. 135 also amends other existing
authoritative literature to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. SFAS No. 135 is
effective for financial statements issued for fiscal years ending after February
15, 1999. The Company believes that the adoption of SFAS No. 135 will not have a
significant effect on its financial statements.
Year 2000 Compliance Information
Pacific Thrift has prepared a Year 2000 Project Plan which will be used for
all computer-related systems of the Company as a whole. The Plan provides for
four phases of implementation: assessment, renovation, testing and contingency
planning. The Company has completed the assessment phase of the Plan, including
an analysis of mission critical and non-mission critical systems. The renovation
phase of the Company's software systems has also been substantially completed.
The Company's core operating systems have all been upgraded to vendor provided
Year 2000 compliant versions and are running on Year 2000 compliant hardware.
The testing phase of the Year 2000 Project Plan has been partially completed,
with the completion of tests of the most critical systems, including the deposit
system, the loan servicing system, the loan processing system and the general
ledger system as of March 31, 1999. The remaining mission critical systems
should be tested and validated by April 30, 1999. The contingency planning phase
will consist of the creation and validation of a business resumption contingency
plan to address all actions to be taken in the event that any aspect of the
Company's mission critical systems fails to operate properly on or after January
1, 2000. The contingency planning phase should be completed by June 30, 1999.
An independent audit report of the Year 2000 project is expected to be
completed by April 22, 1999 and the Company expects to be Year 2000 compliant by
June 30, 1999.
The Company has budgeted a total of $50,000 to complete its Year 2000
Project Plan, and does not anticipate that total expenses necessary to become
Year 2000 compliant will be material.
On March 1, 1999, Pacific Thrift entered into a stipulation and consent to
an order issued by the FDIC related to Year 2000 readiness (the "Year 2000
Order"), the terms of which are described under the heading Item 1. Business
- --Supervision and Regulation -- Regulatory Actions. The Company believes that
Pacific Thrift has taken actions required
44
<PAGE>
to be in compliance with the Year 2000 Order as of this date, but the FDIC has
not verified such compliance as of this date.
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. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that actual future results could differ
materially from those described in the forward-looking statements as a result of
a variety of factors, including those specifically 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.
The Company incurred a net loss of $24,488,000 during the year ended
December 31, 1998 and has an accumulated deficit of $3,231,000 at December 31,
1998. Management believes these losses were reflective of the rapid change in
marketplace demand for the purchase of sub-prime paper by the secondary market
during the latter half of 1998. At December 31, 1998, the Company is in default
of the repayment terms of its obligations related to its interest-only strips
receivable (Note 8c to the financial statements included under item 14 for Part
IV). In addition, Pacific Thrift was not "adequately capitalized" at the end of
1998 or by March 22, 1999 and became subject to certain regulatory mandates and
sanctions (Note 13 to the financial statements included under item 14 for Part
IV). Pacific Thrift also has additional regulatory mandates imposed relating to
its Year 2000 readiness and the related Bank information systems (Notes 13 and
15 to the financial statements included under item 14 for Part IV). Failure to
implement the regulatory mandates would expose Pacific Thrift to various
regulatory actions, including the risk of regulatory takeover.
The Company's independent certified public accountants have included an
explanatory paragraph in their report which indicates that these matters raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans regarding these matters are as follows:
Management has taken and continues to take steps to return the Company to
profitability and improve its financial condition, including such actions as the
closure of Pacific Thrift's wholesale operations (Note 2Q to the financial
statements included under item 14 for Part IV), an emphasis on originating
residential real estate loans for sale under whole loan sale agreements for a
cash premium through its retail division, a reduction in portfolio lending until
targeted capital ratios are achieved, and reducing overhead expenses. Pacific
Thrift has hired a consultant and submitted a revised Year 2000 plan to the
regulators and believes it will be able to meet the guidelines of the order
regarding Year 2000 (Note 13 to the financial statements included under item 14
for Part IV).
Management expects that Pacific Thrift will be profitable in 1999 and will
comply to the greatest extent possible with the regulatory mandates. Management
has submitted a Capital Restoration Plan (the Plan) which was approved by the
FDIC. In addition to a revised business plan, the Plan includes restructuring
debt to provide capital contributions to Pacific Thrift and raising capital
through private or public offerings of debt or equity securities. Management is
negotiating a restructuring of its obligations in default relating to its
interest-only strips receivable. There is no assurance that management's plans
can be achieved. The financial statements do not include any provisions or
adjustments that might result from the outcome of these uncertainties.
Reliance on Secondary Loan Market. The Company relies upon its ability to
originate loans for immediate resale in the secondary loan market. The Company
does not have the resources to hold a significant amount of loans, and must
therefore be able to sell existing loans in order to have the capacity to
originate new loans. The secondary loan market experienced substantial adverse
changes in the third and fourth quarters of 1998, the effects of which have
continued into 1999. As a result of these events, the Company believes that
there are fewer loan purchasers in the secondary loan market, that these
purchasers are buying fewer loans, and that this has reduced the prices which
buyers are willing to pay for loans. Although there has been some improvement in
the secondary loan market in the first quarter of 1999, as evidenced by some
increase in loan sale prices and sales of loans by Pacific Thrift to several new
loan purchasers, there can be no assurance that either general market factors or
specific factors related to Pacific Thrift will not reduce Pacific Thrift's
ability to sell loans in the future. Any further deterioration in the secondary
loan market could have a substantial negative impact upon the Company.
Need for Additional Capital at Pacific Thrift. The terms of the 1998 Order
issued by the FDIC require Pacific Thrift to raise sufficient additional capital
to become "well capitalized" as defined by FDIC regulations by June 30, 1999.
Pacific Thrift currently estimates that this would require it to raise
approximately $20 million in additional capital. There can be no assurance that
Pacific Thrift or the Company will have the ability to raise sufficient capital
to meet the terms of the 1998 Order, particularly in light of the current
adverse conditions in the secondary loan market and the Company's current
financial condition.
Risk of Additional Regulatory Action. Pacific Thrift is currently subject
to regulatory orders issued by the FDIC and the DFI concerning the raising of
additional capital, the limitation of lending activities, the restriction on
asset growth and new offices, and the reduction of interest-only strips
receivable as a percentage of capital, among other provisions. Pacific Thrift is
also subject to a regulatory order issued by the FDIC concerning actions
required to be taken to become Year 2000 compliant. (See Item 1. Business --
Supervision and Regulation -- Regulatory Action.) There can be no assurance that
Pacific Thrift will have the ability to meet all of the requirements of the
existing regulatory orders, or that additional regulatory orders will not be
issued further restricting Pacific Thrift's business. If Pacific Thrift is
unable to comply with the terms of the orders, the FDIC and the DFI have
authority to take a number of enforcement actions, including appointing a
receiver for Pacific Thrift, withdrawing FDIC insurance, requiring a sale of
Pacific Thrift, or imposing civil money penalties. There can be no assurance of
what action, if any, the FDIC and/or the DFI would deem appropriate in the event
that Pacific Thrift were unable to meet the terms of the existing orders or any
new regulatory orders.
Risk of Inability to Repay Existing Indebtedness to Merrill Lynch and
Fremont. The Company is currently in default on an $18.4 million loan made by
Merrill Lynch under a Master Assignment Agreement. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Sources of Funds -- Other Borrowings." The Company had anticipated that cash
flow from the PAMM Trusts would be used to repay this loan,
45
<PAGE>
but cash flow payments have been interrupted due to the delinquency level of one
of the PAMM Trusts. Although Merrill Lynch indicated in December 1998 that it
did not intend to take any action other than to direct that all cash flow
payments be paid directly to it, because of the interruption in cash flow
payments, the Company is uncertain whether Merrill Lynch will take further
action to collect the loan, including a sale of the interest-only strips
receivable held by the Company in the PAMM Trusts. In the event of such a sale,
the Company may not receive the full carrying value of those assets, which could
result in a substantial loss to the Company. It is also uncertain at this time
whether the Company will have the ability to repay a $3.0 million loan owed to
Fremont which matures on January 8, 2000. The Fremont loan is secured by a
pledge of 100% of the stock of Pacific Thrift, and Fremont would have the right
to sell the stock if the Company cannot repay the loan to Fremont upon its
maturity.
Risks of Holding Interest-Only Strips Receivable. The Company has a
significant investment in interest-only strips receivable from loans sold in
1996 through 1998. While a market does exist for these assets, it is not the
type of market that results in active bid/ask levels, but is a negotiated market
in which interests trade based upon the availability and exchange of information
regarding the asset as well as the purchaser's knowledge of similar assets. The
adverse events in the subprime lending industry which occurred in the third and
fourth quarters of 1998 have also had a negative impact on the market for
interest-only strips receivable. This has reduced the Company's ability to
obtain financing using these receivables as collateral, which could be used as
additional capital at Pacific Thrift or to refinance the Merrill Lynch
indebtedness. In addition, if the Company were to attempt to sell all or a part
of these receivables, there can be no assurance that a purchaser of the
receivables would be willing to pay the amount which the Company estimates to be
their present value, based upon a discounted cash flow analysis. In addition, as
the Company continues to hold the receivables, it is also subject to the risk of
valuation adjustments based upon performance of the loans in each Securitization
Trust, particularly with respect to voluntary and involuntary prepayments.
Actual prepayment and loss rates on each Securitization Trust are affected by a
variety of factors which cannot be predicted with certainty. Therefore, there is
a risk that the value of interest-only strips receivable 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 strips receivable.
Delinquencies and Losses in Securitization Trusts; Negative Impact on Cash
Flow. Each of the Securitization Trusts in which the Company holds an interest
contains specified limits on delinquencies and losses that may be incurred in
each Trust. If, at any measuring date, the delinquencies or losses with respect
to any Securitization Trust were to exceed the limits applicable to such Trust,
provisions of the agreements require increased overcollateralization reserve
levels, thereby deferring the Company's receipt of cash flow by diverting cash
flow from the Company to the reserve. When and if delinquency levels fall back
to acceptable levels, the Company has a right to receive the cash flow which has
been deposited in the reserve in accordance with the terms of the Securitization
Trust documents. Higher delinquency levels leading to higher loss and
involuntary prepayment levels than those estimated by the Company in its
valuation models also adversely influence the Company's anticipated cash flow
from and the valuation of the interest-only strips receivable.
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 Trust and Advanta services all loans in the Advanta Trusts and
subservicers all loans in the PAMM Trusts. The Company is subject to risks
associated with inadequate or untimely service rendered by these loan servicers
with respect to the cash flow it expects to receive on its interest-only strips
receivable. In addition, as master servicer of the PAMM Trusts, the Company is
also liable for any failure to provide adequate servicing by Advanta, which is
the subservicer for the PAMM Trusts. 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.
Risk of Changes in Interest Rate Environment. A substantial sustained
increase in long-term interest rates could, among other things, decrease the
demand for consumer credit and thereby adversely affect the ability of the
Company to originate loans. Conversely, a significant decline in long-term
interest rates could cause an increase in loan prepayments on loans in the
Securitization Trusts, thereby reducing the cash flow to the Company from its
interest-only strips receivable. In addition, changes in interest rates affect
Pacific Thrift's interests costs on deposits.
46
<PAGE>
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.
Year 2000 Risks. The Company believes that it will achieve Year 2000
compliance in advance of January 1, 2000, and that its major service providers
will also achieve compliance. However, there can be no assurance that an
unforeseen problem will not develop which could cause losses to the Company and
disruption to its operations. (See "Year 2000 Compliance Information".)
Government Regulation. The Company's lending 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. (See "Item 1. BUSINESS -- Supervision and
Regulation.")
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company carries interest-sensitive assets on its balance sheet that are
financed by interest-sensitive liabilities. Since the interval for re-pricing of
the assets and liabilities is not matched, the Company is subject to
interest-rate risk. A sudden, sustained increase or decrease in interest rates
would impact the Company's net interest income, as well as the fair value of its
residual interests in securitizations and interest-only strips.
The following table illustrates the timing of the re-pricing of the
Company's interest-sensitive assets and liabilities as of December 31, 1998.
Management has made certain assumptions in determining the timing of repricing
of such assets and liabilities. One of the more significant assumptions is that
all of the Company's loans receivable held for sale will be sold in the first
six months of 1999. In addition, the timing of re-pricing or maturity of the
Company's residual interests in securitizations is based on certain prepayment
and loss assumptions (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations" for further
details).
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY AS OF DECEMBER 31,1998
(DOLLARS IN THOUSANDS)
1 DAY TO 6 MOS. 1 TO 5 AFTER 5
DESCRIPTION 6 MOS. TO 1 YR. YEARS YEARS TOTAL
- ------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE
ASSETS:
Cash and Investments $ 41,811 $ 0 $ 0 $ 0 $ 41,811
Loans Receivable 7,494 0 414 2,394 10,302
Loans Held For Sale 74,998 0 0 0 74,998
Interest-Only Strips Receivable 5,969 13,355 83,577 13,727 116,628
-------------------------------------------------------------------
TOTAL INTEREST-SENSITIVE
ASSETS 130,272 13,355 83,991 16,121 243,739
-------------------------------------------------------------------
INTEREST-SENSITIVE
LIABILITIES:
Certificates Of Deposit 55,297 72,246 4,785 0 132,328
Savihgs Accounts 29,692 0 -- 0 29,692
Notes Payable 4,028 12,313 36,234 557 53,132
-------------------------------------------------------------------
TOTAL INTEREST-SENSITIVE
LIABILITIES 89,017 84,559 41,019 557 215,152
-------------------------------------------------------------------
EXCESS OF INTEREST-
SENSITIVE ASSETS OVER
INTEREST-SENSITIVE
LIABILITIES 41,255 (71,204) 42,972 15,564 28,587
-------------------------------------------------------------------
CUMULATIVE NET INTEREST
SENSITIVE GAP 41,255 (29,949) 13,023 28,587 28,587
-------------------------------------------------------------------
</TABLE>
Significant assumptions are as follows:
Loans Receivable: all variable rate loans are when they reprice and all
fixed rate loans are when they mature.
Loans Held For Sale are assumed to be sold within six months.
Interest-Only Strips Receivable are included based on the present values of
the modeled cash flows.
Certificates of Deposit are included based on when they mature.
Notes Payable related to the Interest-Only Strips Receivable are included
based on the present values of the modeled cash flows. Other notes payable
are based on scheduled maturity.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Net Interest Income Analysis" and "-Certain Accounting
Considerations." [GET ADDITIONAL INFORMATION FROM BDO]
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
Directors
Mr. Joel R. Schultz, age 62, is Chairman of the Board, President and Chief
Executive Officer of the Company and was Chief Managing Officer of Presidential
Mortgage Company, a California limited partnership, which was the Company's
predecessor. Since 1989, Mr. Schultz has been the Chairman of the Board and
Chief Executive Officer of Pacific Thrift. He also served as President of
Pacific Thrift from 1988 to November 1993. He also is President and Chief
Executive Officer of PAMC. Mr. Schultz is an attorney admitted to practice in
California, a certified public accountant, and a California licensed real estate
broker.
Mr. James C. Neuhauser, age 40, has been a non-employee director of the
Company since June 1996 and a non-employee director of Pacific Thrift and Loan
Company, a wholly owned subsidiary of the Company ("Pacific Thrift"), since
August 1996. Since March 1993, he has been employed with Friedman, Billings,
Ramsey & Company, Inc., an investment banking firm headquartered in Arlington,
Virginia, where he is currently a Managing Director. He was
47
<PAGE>
formerly employed with Trident Financial Corporation from 1986 to 1993, where he
last held the position of Senior Vice President. Mr. Neuhauser is a Chartered
Financial Analyst.
Mr. Paul D. Weiser, age 62, has been a non-employee director of the Company
and PAMC since June 1996 and a non-employee director of Pacific Thrift since
August 1996. Since 1968, he has been employed with Dataproducts Corporation, a
manufacturer and seller of computer printers and related products, currently as
its Senior Vice President, Secretary and General Counsel. Mr. Weiser is an
attorney admitted to practice in California and former chairman of the
Securities and Exchange Commission's Advisory Committee on Shareholder
Communications.
Mr. Alan J. Siebler, age 68, was appointed as a director of the Company on
April 21, 1997. Mr. Siebler is also a non-employee director of Pacific Thrift,
on which Board he has served since June 1992. He was a Human Resource Manager of
the Van Nuys, California Plant of General Motors Corporation from August 1956
until September 1992. Mr. Siebler also served as Chairman of the California
Joint Apprenticeship State Advisory Committee for Single Plant Industry from
1986 to 1989; and Member of the Committee for Industrial Training Curriculum of
Pierce College.
The terms of Joel R. Schultz and Paul D. Weiser will expire at the 1999
annual meeting of stockholders, or when their successors are elected and
qualified. The term of Alan J. Siebler will expire at the 2000 annual meeting of
stockholders, or when his successor is elected and qualified. The term of James
C. Neuhauser will expire at the 2001 annual meeting of stockholders, or when his
successor is elected and qualified. Mr. Richard D. Young resigned from the Board
on January 11, 1999, and the Board reduced the number of directors from five to
four on February 24, 1999. The Board of Directors may fill interim vacancies of
directors. Each officer is elected by and serves at the discretion of, the Board
of Directors, subject to the terms of any employment agreement.
Executive Officers
The following table sets forth certain information concerning the Company's
executive officers.
<TABLE>
<CAPTION>
Principal Occupation or Employment and
Name Age Occupation for the Past Five Years
---- --- ----------------------------------
<S> <C> <C>
Joel R. Schultz 62 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 of
Pacific Thrift since 1988; Chief Executive Officer of Pacific
Thrift from 1988 to April 12, 1999; President of Pacific Thrift
from 1988 to December 1993; Chairman of the Board, President and
Chief Executive Officer of PAMC; California licensed
attorney-at-law; Certified Public Accountant; California licensed
real estate broker.
Michael A. Iachelli 48 President and Chief Executive Officer, Pacific Thrift and Loan Company
(subject to approval of FDIC) commencing April 12, 1999; various
positions at Bay View Credit, formerly California Thrift & Loan from
July 1977 until April 7, 1999, including President and Chief Executive
Officer of Bay View Credit from June 1998 to April 7, 1999; President
and Chief Operating Officer of Bay View Credit from June 1996 to
June 1998; Executive Vice President, Real Estate Lending and
Commercial Leasing from January 1993 to June 1996.
Charles J. Siegel 49 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 PAMC 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.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation or Employment and
Name Age Occupation for the Past Five Years
---- --- ----------------------------------
<S> <C> <C>
Norman A. Markiewicz 52 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 PAMC.
Richard B. Fremed 56 Executive Vice President, Human Resources and Investor Relations 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; Secretary
and director of PAMC; Certified Management Accountant and California
licensed real estate sales person.
</TABLE>
Item 11. Executive Compensation
Executive Compensation
Summary of Cash and Certain Other Compensation. The Company is a successor
to the Partnership. On June 27, 1996, the Company and the Partnership completed
the Restructuring, as a result of which all of the assets and liabilities of the
Partnership were transferred to the Company. Prior to the Restructuring, the
executive officers of the Company received compensation from the Partnership,
Presidential Management Company, the general partner of the Partnership (the
"General Partner") and/or Pacific Thrift, under various arrangements with those
entities. The following table sets forth certain summary information concerning
compensation paid or accrued by the Company, the Partnership, the General
Partner and Pacific Thrift to or on behalf of the Chief Executive Officer and
each of the Named Executives for the fiscal years ended December 31, 1998, 1997,
and 1996:
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<PAGE>
Actual Annual Compensation
<TABLE>
<CAPTION>
Securities
Underlying All Other
Name and Principal Position Year Salary($)(1) Bonus($) Options(#)(2) Compensation
- --------------------------- ---- ------------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Joel R. Schultz (3) 1998 $511,834 $133,950 100,000 -0-
Chief Executive Officer of 1997 $235,000 $1,633,728 30,000 $4,750
the Company and Pacific Thrift 1996 $450,704 $222,750 96,000 $4,500
Richard D. Young (4) 1998 $443,509 $133,950 -0- -0-
(Former) President and Chief 1997 $235,000 $1,478,050 6,000 $4,750
Operating Officer of Pacific 1996 $247,583 $354,750 100,000 $4,500
Thrift, and Senior Executive
Vice President of the Company
Frank Landini (5) 1998 $546,133 $318,504 -0- -0-
(Former) Executive Vice 1997 $163,200 $637,008 -0- $4,750
President - Wholesale 1996 $184,600 $207,112 36,000 $4,190
Lending Division of
Pacific Thrift
Charles J. Siegel, 1998 $214,422 -0- -0- -0-
Chief Financial Officer of 1997 $201,798 $125,000 15,000 $4,750
the Company and Pacific Thrift 1996 $163,577 $51,667 26,000 $4,500
Norman A. Markiewicz 1998 $155,072 -0- -0- -0-
Executive Vice President 1997 $146,707 -0- -0- $4,147
of the Company and Pacific 1996 $172,500 -0- 18,000 $4,500
Thrift
</TABLE>
- -----------------------
(1) The amounts specified above include automobile allowances and directors'
fees, but do not include life insurance or medical insurance premiums for
benefits in excess of group benefits provided to employees, the aggregate
amount of which do not exceed the lesser of either $50,000 or 10% of the
total annual salary and bonus reported for each of the above named
executives in each reported year.
(2) All options shown in this column are exercisable at a price equal to the
fair market value of the options on the date of grant.
(3) Salary amounts for 1996 include payments prior to the effective date of the
Restructuring for providing legal services in connection with loan accounts
prior to June 27, 1996. Bonus amount for 1997 includes the value of 10,007
shares of Common Stock paid by the Company in lieu of a portion of the cash
bonus earned under an employment agreement based on the fair market value
of the shares on the date paid. See "--Employment Agreements." Bonus
amounts for each of 1996 and 1997 include amounts earned for the year
reported but paid in the following year.
(4) Mr. Richard Young resigned his positions with the Company and all of its
subsidiaries on January 11, 1999. Bonus amount for 1997 includes the value
of 22,766 shares of Common Stock paid by the Company in lieu of a portion
of the cash bonus earned under an employment agreement, based on the fair
market value of the shares on the date paid, plus a $174,102 promissory
note payable in two semi-annual installments six months and one year after
issuance, bearing interest at the Bank of America prime rate. See
"--Employment Agreements." Bonus amounts for each of 1996 and 1997 include
amounts earned for the year reported but paid in the following year. Bonus
amount for 1996 consists of a bonus of $107,000 paid in 1996 for the period
prior to the Restructuring, a special discretionary bonus of $25,000 paid
after
50
<PAGE>
the Restructuring and a bonus of $222,750 accrued for in 1996 under an
employment agreement entered into effective as of the closing date of the
Restructuring Date and paid in 1997.
(5) Mr. Landini resigned his position with Pacific Thrift on October 27, 1998.
His salary included a severance payment of $200,000, representing six
months salary. Bonus amount for 1997 consisted of a bonus of $637,008
accrued for 1997, of which 75% was paid in January 1998 and 25% is due to
be paid in January 2000 under his employment agreement. Bonus amount for
1996 consists of a bonus of $182,112 accrued for 1996, of which 75% was
paid in January 1997 and 25% is due to be paid in January 1999 under his
employment agreement, and a special discretionary bonus of $25,000 paid
after the Restructuring. See "-- Employment Agreements."
Options
Option Grants During 1998. The Named Executives of the Company received
grants of Incentive Stock Options during the year ended December 31, 1998 for
the following amounts of shares of Common Stock.
<TABLE>
<CAPTION>
Option Grants in 1998 Fiscal Year
Individual Grants
Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options of Stock Price Appreciation
Underlying Granted to Exercise or for Option Term
Options Employees in Base Price Expiration ---------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ----------- -------------- ------------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Joel R. Schultz 100,000 69.83 17.75 6/12/08 -0- -0-
Richard D. Young -0- -- -- -- -0- -0-
Frank P. Landini -0- -- -- -- -0- -0-
Charles J. Siegel -0- -- -- -- -0- -0-
Norman A. Markiewicz -0- -- -- -- -0- -0-
</TABLE>
Option Exercises in 1998 and Current Option Values..
The following table provides certain information concerning options
exercised in 1998 and unexercised options held as of December 31, 1998, by the
executive officers who held options at the end of 1998:
51
<PAGE>
Aggregate Option Exercises in 1998 Fiscal Year
and Fiscal Year End Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Options at 12/31/98 (#) at 12/31/98 ($) (1)
Acquired on Value ----------------------- -------------------
Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joel R. Schultz 19,200 -0- 100,532 67,868 -0- -0-
Richard D. Young 40,000 -0- -0- 66,000 -0- -0-
Frank P. Landini -0- -0- 18,000 -0- -0- -0-
Charles J. Siegel -0- -0- 16,750 24,250 -0- -0-
Norman A. -0- -0- 10,800 7,200 -0- -0-
Markiewicz
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Value of unexercised "in-the-money" options is the difference between the
market price of the Common Stock at December 31, 1998 ($0.4375 per share)
and the exercise price of the option, multiplied by the number of shares
subject to the option.
Employment Agreements
The Company entered into employment agreements with Joel R. Schultz,
Richard D. Young, Norman A. Markiewicz and Richard B. Fremed, effective as of
June 27, 1996, the closing date of the Restructuring (the "Closing Date"). In
addition, Pacific Thrift entered into an employment agreement with Frank P.
Landini which became effective as of January 1, 1996. On January 1, 1997, the
Company entered an employment agreement with Charles J. Siegel. On April 9,
1999, the Pacific Thrift entered into a new employment agreement with Michael A.
Iachelli, subject to approval of the FDIC.
The employment agreements of Mr. Schultz and Mr. Young were superseded with
new employment agreements dated as of January 1, 1998, which were approved by
the stockholders at the 1998 annual meeting of stockholders. Mr. Young resigned
his positions with the Company and its subsidiaries effective January 11, 1999.
The Company and Mr. Young have executed a Separation Agreement, and Pacific
Thrift and Mr. Young have executed a six-month Consulting Agreement, both of
which agreements are subject to approval of the FDIC, which approval has not
been obtained as of the date of this report.
The new employment agreements with Mr. Schultz is for an initial term of
three years, beginning effective January 1, 1998 and expiring on December 31,
2000. The agreement is subject to automatic extension for successive one year
terms unless, at least six months prior to the end of the term, either the
Company or the executive gives notice of intent not to renew.
Under the new agreement, Mr. Schultz receives an annual base salary of
$425,000 per year, adjusted annually to reflect any increases in the consumer
price index. In addition, Mr. Schultz is entitled to receive an annual bonus if
the Company earns net after-tax profits for any calendar year during the term of
the agreement. Mr. Schultz did not earn an annual bonus for the year ended
December 31, 1998 due to the net after-tax loss reported by the Company. The
amount of any annual bonus that may be earned in any future year under the
agreement would be equal to 2-1/2% of the annual net pre-tax profits of the
Company (before deduction of bonuses paid to Mr. Schultz referred to as "annual
bonuses") if the Company earns annual net after-tax profits (after payment of
annual bonuses) equal to a minimum annual return on equity in excess of 10%, or
5% of the annual net pre-tax profits of the Company if the Company earns annual
net after-tax profits equal to a minimum annual return on equity in excess of
20%. Return on equity is determined as net after-tax profits as a percentage of
stockholder equity at January 1 of each year. The annual bonuses are payable in
quarterly installments during the year earned, determined by annualizing the
quarterly net pre-tax profits, net after-tax
52
<PAGE>
profits and return on equity for each of the first three quarters of the year,
with a final determination of the total annual bonus following release of the
Company's audited consolidated financial statements for the year.
Each installment of any annual bonus is paid 50% in cash and 50% in Common
Stock. The Common Stock portion of the annual bonus will be held in escrow by
the Company unless and until either of the following forfeiture conditions are
met: (a) pre-tax net income for the year following the bonus year must be at
least 12.5% higher than the bonus year (i.e., for any 1999 bonus, 2000 pre-tax
net income must exceed 1999 pre-tax net income by 12.5%); or (b) return on
equity (after payment of annual bonuses) must be at least 25% for the year
following the bonus year (i.e., for the 1999 bonus, 2000 return on equity must
be at least 25%). (The forfeiture conditions are only applicable for the year
2000 bonus year if the executive is employed under an employment contract
through the end of the year 2001.) The amount of Common Stock issued in payment
of quarterly installments of the annual bonus is determined as the highest of
(x) the closing price on the last trading day of the applicable quarter; (y) the
average closing price for the 10 trading days prior to the end of the applicable
quarter; or (z) $10 per share. The Company will use its best efforts to register
with the Securities and Exchange Commission for resale by the executive the
Common Stock issued in payment of the annual bonus.
Any amount paid as a quarterly installment of the annual bonus is subject
to repayment if the Company determines that the amount paid was in excess of the
amount of the annual bonus earned for the year. To the extent that the total
quarterly annual bonus payments exceed the total annual bonus determined at the
end of the year, the excess will be repaid first from the Common Stock issued to
the executive during the year, using the average weighted price per share of the
Common Stock issued in payment of the annual bonus during the year, and then in
cash or, at the executive's option, in shares of Common Stock previously
purchased by him. For 1998, Mr. Schultz received a quarterly bonus installment
of $133,950 in the first quarter of 1998, which Mr. Schultz intends to repay
with the return of 6,159 shares of Common Stock previously purchased by him, at
$21.75 per share, which was the average weighted price per share of Common Stock
issued in payment of the bonus installments during 1998 as provided for in Mr.
Schultz's employment agreement.
Mr. Schultz is also entitled to receive a special cash bonus equal to 1% of
the annual pre-tax net income of the Company calculated before payment of the
special bonus but after payment of the annual bonuses, if the following
conditions are met: (a) comparing the special bonus year with the prior year,
the pre-tax net income for the special bonus year is at least 25% higher than
the prior year or the return on equity for the special bonus year is at least
25%; and (b) comparing the special bonus year with the following year, the
pre-tax net income for the year following the special bonus year is at least 25%
higher than the special bonus year or the return on equity for the year
following the special bonus year is at least 25%. (For the year 2000 special
bonus, the performance conditions for the year 2001 are only applicable if the
executive is employed under an employment contract through the end of the year
2001.)
Mr. Schultz also received a stock option for 100,000 shares upon approval
by the stockholders of the new employment agreement, at an exercise price equal
to $17.75 per share, which was 100% of the fair market value of the Common Stock
on the date of grant. The option is exercisable at any time beginning six months
after grant for a term of 10 years.
Mr. Schultz is also entitled to participate in benefit plans maintained by
the Company for its executive officers, including insurance, pension, stock
option plans and stock purchase plans, and to receive perquisite benefits
including an automobile allowance and expense allowance. In addition, Mr.
Schultz is entitled to receive the insurance benefits made available to all
executives of the Company.
Upon a termination of the employment agreement as a result of the death or
disability of the executive, he or his personal representative is entitled to
receive any unpaid annual and special bonuses for any prior year and through the
last full quarter prior to termination, including cash and Common Stock, free of
any forfeiture or other conditions otherwise applicable to such bonuses, plus a
lump sum payment equal to the sum of the full annual bonus and special bonus
earned in the prior year, plus payments of the base salary and all benefits for
one year. If, at the end of the year of such a termination, it is determined
that the annual bonus that would have been earned in the year of termination is
higher than the annual bonus for the prior year, the executive or his personal
representative is entitled to an additional payment equal to the difference
between the annual bonus that would have been earned and the annual bonus amount
paid upon termination.
53
<PAGE>
The Company may terminate Mr. Schultz' employment agreement "for cause,"
which is defined to include: (i) theft or embezzlement; (ii) fraud or other acts
of dishonesty in the conduct of the Company's business; (iii) conviction or plea
of nolo contendere to any felony or crime of moral turpitude; (iv) any action
willfully and knowingly taken which is injurious to the Company's business or
reputation. Upon a termination for cause, the Company is only obligated to pay
the amount of base salary and annual bonus earned through the date of
termination. Any Common Stock held in escrow upon termination for cause will be
released to the executive if and when the conditions are met in accordance with
the terms of his employment agreement. In addition, the Company is obligated to
pay any special bonus to the executive for each year that he was employed, to
the extent the performance targets are met in accordance with the terms of the
employment agreement.
If Mr. Schultz terminates his employment agreement for any reason other
than a "corporate change" (as defined below), he is entitled to his base salary
through the date of termination and his annual bonus earned through the end of
the last full quarter prior to termination. Any Common Stock held in escrow upon
such a termination by Mr. Schultz will be released to the executive if and when
the conditions are met in accordance with the terms of his employment agreement.
In addition, the Company is obligated to pay any special bonus for each year
that Mr. Schultz was employed, to the extent the performance targets are met in
accordance with the terms of his employment agreement.
If the Company terminates the employment agreement of Mr. Schultz without
cause, he is entitled to benefits for one year, plus a lump sum payment equal to
one year's base salary and the annual bonus earned for the prior year. Mr.
Schultz is also entitled to any special bonus for the year prior to termination
if the performance targets were met for the year prior to termination, plus the
cash value of all vacation, holiday and sick days which have accrued and would
have accrued for one year following termination. If, at the end of the year of
termination, it is determined that the annual or special bonus that would have
been earned by Mr. Schultz in the year of termination is higher than the annual
or special bonus for the prior year, Mr. Schultz is entitled to an additional
payment equal to the difference between the annual and/or special bonus that
would have been earned and the annual and special bonus amounts paid upon
termination. In addition, all Common Stock then held in escrow for Mr. Schultz
is required to be released immediately.
If, at any time within one year of a "corporate change" (as defined below),
the Company or Mr. Schultz terminates his employment for any reason other than
"for cause," Mr. Schultz is entitled to receive full benefits for 18 months
after termination and the cash value of all vacation, holiday and sick days
which would have accrued for 18 months following termination. In addition, Mr.
Schultz is also entitled to receive any earned and unpaid installments of his
annual bonus through the last full quarter of his employment, and an additional
lump sum equal to the sum of two times his annual base salary, two times his
annual bonus earned in the prior year, the special bonus amount earned for the
year prior to termination, plus an additional "in lieu of special bonus" amount
equal to 1% of the annualized pre-tax net income for the year of termination.
If, at the end of the year of termination, it is determined that two times the
annual bonus or the special bonus that would have been earned in the year of
termination is higher than the two times the annual bonus or the special bonus
amount paid upon termination, Mr. Schultz is entitled to an additional payment
equal to the difference between two times the annual bonus and the special bonus
actually paid and two time the amount that would have been earned in the year of
termination, in addition to a payment equal to the difference between the "in
lieu of special bonus" amount paid and the amount that would have been paid as a
special bonus in the year of termination. In addition, all Common Stock then
held in escrow for Mr. Schultz is required to be released.
The employment agreement with Mr. Siegel provides for a term of two years,
which is automatically extended for additional one year terms thereafter unless
either party gives at least six months written notice of its or his intention
not to renew the agreement. The Company has given notice to Mr. Siegel that it
does not intend to renew his contract after its expiration date of December 31,
1999 at which time, Mr. Siegel will become an "at-will" employee. Mr. Siegel's
annual salary was $160,000 per year until May 1997, when it was increased to
$175,000 per year, as adjusted annually for increases in the cost of living
index. Mr. Siegel is also eligible to participate in the employee cash bonus
pool of the Company. Upon certain events constituting a change of control (a
Corporate Change," as further defined below), Mr. Siegel is entitled to receive
two times his annual salary and three times his last annual bonus.
The employment agreements with Mr. Markiewicz and Mr. Fremed provide for a
term of one year, which is automatically extended for additional one year terms
thereafter unless either party gives at least six months written notice of its
or his intention not to renew the agreement. The Company has notified Mr.
Markiewicz and Mr. Fremed that their employment agreements will not be renewed
after expiration on June 26, 1999 at which time Mr. Markiewicz and Mr. Fremed
will become "at-will" employees. Mr. Markiewicz' annual salary is
54
<PAGE>
$135,000 per year, and Mr. Fremed's annual salary is $125,000 per year, in each
case as adjusted annually for increases in the cost of living index, and Mr.
Markiewicz and Mr. Fremed are also eligible to participate in the employee cash
bonus pool of the Company. Upon a Corporate Change, Mr. Markiewicz and Mr.
Fremed are each entitled to receive one-half his annual salary.
As described above, the employment agreements of Messrs. Schultz, Siegel,
Markiewicz and Fremed contain special termination provisions upon a Corporate
Change. Corporate Change is defined in each of the employment agreements to
include any one (or more) of the following events: (i) any person, including a
group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), becomes the beneficial owner of shares of the
Company with respect to which twenty percent (20%) or more of the total number
of votes for the election of the Board may be cast; (ii) as a result of, or in
connection with, any cash tender offer, exchange offer, merger or other business
combination, sale of assets, or contested election for the Board of Directors,
or combination of the foregoing, persons who were directors of the Company just
prior to such event(s) shall cease to constitute a majority of the Board; (iii)
a transaction in which the Company will cease to be an independent publicly
owned corporation that is required to file quarterly and annual reports under
the Exchange Act, or a sale or other disposition of all or substantially all the
assets of the Company (including but not limited to the assets or stock of
Company's subsidiaries that results in all or substantially all of the assets or
stock of Company on a consolidated basis being sold); (iv) a tender offer or
exchange offer is made for shares of the Company's Common Stock (other than one
made by the Company) and shares of Common Stock are acquired thereunder; (v) the
stockholders of the Company cause a change in the majority of the members of the
Board of Directors within a twelve (12) month period; provided, however, that
the election of one or more new directors shall not be deemed to be a change in
the membership of the Board of Directors if the nomination of the newly elected
directors was approved by the vote of three-fourths of the directors then still
in office who were directors at the beginning of such twelve (12) month period;
(vi) with respect to Joel Schultz only, a change in his duties or a reduction in
compensation; or (vii) with respect to Mr. Siegel only, a change in the Chief
Executive Officer and Senior Executive Vice President of the Company.
The Company retains the right to terminate any of the employment agreements
in the event of an employee's physical or mental disability which renders him
unable to perform under the agreement for any period of one hundred and twenty
(120) consecutive days or for an aggregate period of one hundred and twenty
(120) or more days during any twelve (12) month period. In the event of
termination due to disability, an employee would be entitled to receive as
disability compensation a lump sum payment equal to the annual bonus earned by
employee during the fiscal year preceding the year of termination, one year's
annual salary, payable not less frequently than monthly and continuation of
certain benefits for the greater of one year or the remainder of the term under
the agreement. In the event of death, an employee's personal representative is
entitled to receive as a death benefit, in addition to any other payments which
he may be entitled to receive under any of the Company's benefit plans, payment
of one year's salary, payable not less frequently than monthly.
From January 1, 1996 until October 28, 1998, the date of closing of the
wholesale loan division, Mr. Frank Landini was employed under written employment
agreements with Pacific Thrift. Upon his termination in October 1998, Pacific
Thrift paid Mr. Landini a termination payment of $200,000. The original
employment agreement of Mr. Landini with Pacific Thrift was for a term of two
years, with automatic extensions for additional one year terms thereafter unless
either party gave at least six (6) months written notice of its or his intention
not to renew the agreement. Mr. Landini received an annual base salary of
$150,000, as adjusted annually for increases in the cost of living index. Mr.
Landini also received an annual bonus equal to the sum of (a) 1.5% of the
pre-tax net profits of the Pacific Thrift Wholesale Division up to $10 million;
(b) 1.875% of the pre-tax profits between $10 and $20 million; and (c) 2.25% of
all pre-tax profits in excess of $20 million, less the amount of Mr. Landini's
salary. For purposes of the bonus calculation, Mr. Landini's salary was deducted
from the calculation of pre-tax net profits.
In April 1998, Mr. Landini entered a new employment agreement with Pacific
Thrift under which he was to receive an annual base salary of $400,000. Also in
April 1998, Mr. Landini entered into a bonus agreement with the Company, under
which the Company agreed to assume responsibility for payment of Mr. Landini's
annual bonus, in accordance with the same formula and payment terms provided in
Mr. Landini's prior agreement with Pacific Thrift.
Mr. Landini's original agreement provided for him to receive up to $100,000
of his bonus earned in 1996 plus one-half of any bonus earned in 1996 in excess
of $200,000 in January 1997, with any remaining bonus amount earned
55
<PAGE>
in 1996 to be paid 36 months later. For years after 1996, one-half of Mr.
Landini's bonus was to be paid the following January, and the remaining half
paid 36 months later. Pursuant to an amendment to his agreement dated as of
January 1, 1997, 75% of the bonus earned in 1996 was paid in January 1997, and
75% of the bonus payable for future years is payable in the following January,
with the remainder of each year's bonus payable three years thereafter. In every
case, the deferred bonus amount was subject to forfeiture if Mr. Landini
voluntarily terminated his employment or Pacific Thrift terminated his
employment "for cause." As a result of Mr. Landini's termination in connection
with the closing of the wholesale loan division in October 1998, the Company has
calculated that it and its affiliates owed Mr. Landini a total of $200,000 for
severance pay and benefits and $523,284 for deferred bonuses earned in 1996 and
1997, of which $200,000 in severance has been paid to date. No arrangements have
been made with Mr. Landini regarding the amounts owed to him and the Company has
informed Mr. Landini that it does not expect to pay these amounts for the
foreseeable future.
Effective January 11, 1999, Mr. Richard D. Young Senior Executive Vice
President of the Company and President and Chief Operating Officer of Pacific
Thrift was no longer employed by the Company. The Company entered into a
Separation Agreement with Mr. Young dated as of March 9, 1999, and Pacific
Thrift entered into a Consulting Agreement with Mr. Young, also dated as of
March 9, 1999. The Separation Agreement provides for Mr. Young to receive
payments from the Company under a note for $475,000, payable over two years
beginning January 1, 2002. The Consulting Agreement provides for Mr. Young to
provide consulting services for a period of six months, for a consulting fee of
$10,000 per month. The Separation Agreement and the Consulting Agreement are
subject to the approval of the FDIC, which was applied for on March 11, 1999,
but has not yet been granted.
On April 9, 1999, Pacific Thrift entered into a new employment agreement
with Mr. Michael A. Iachelli, subject to approval of the FDIC. Under the
agreement, Mr. Iachelli has been appointed as President and Chief Executive
Officer of Pacific Thrift for a term of one year, with automatic renewal for
successive one year terms unless either party notifies the other of nonrenewal
60 days before expiration of the current term. The agreement provides for Mr.
Iachelli to receive an annual salary of $200,000, plus an annual bonus similar
in form and structure to that of Mr. Schultz, as it may be modified from time to
time, but excluding from the determination of net pre-tax and net after-tax
income the effect of any changes in valuation of existing interest-only strips
receivable held by Pacific Thrift. In addition, Mr. Iachelli receives a car
allowance and standard executive benefits. Mr. Iachelli has further been granted
stock options exercisable for 100,000 shares of Common Stock of the Company at
$.4375 per share, the closing price of the Common Stock on April 9, 1999, vested
25% annually. In addition, Mr. Iachelli has received a grant of nonqualified
stock options exercisable for 25,000 shares of Common Stock of the Company at
$2.00 per share, vested 100% in one from the date of his commencement of
employment. Mr. Iachelli has further received the right, exercisable within 30
days from the date of commencement of his employment, to purchase up to 100,000
shares of Common Stock of the Company at fair market value as of the date of
purchase. The other terms of Mr. Iachelli's employment are similar to Mr.
Schultz' employment agreement, except that, upon a change in control of the
Company, Mr. Iachelli is entitled to receive a payment equal to one year of his
base salary, plus full vesting of all unvested options.
Plans and Arrangements
Employees of the Company, including executive officers, are entitled to
participate in various benefit plans established by the Company and approved by
the Board of Directors and the Partnership, as the sole stockholder of the
Company, prior to the Restructuring.
1995 Stock Option Plan
The 1995 PacificAmerica Money Center, Inc. Stock Option Plan (the "1995
Plan") is designed to promote and advance the interests of the Company and its
stockholders by: (i) enabling the Company to attract, retain and reward
managerial and other key employees and non-employee directors; and (ii)
strengthening the mutuality of interests between participants and the
stockholders of the Company in its long term growth, profitability and financial
success by offering stock options. The 1995 Plan empowers the Company to award
or grant options from time to time until December 31, 2003, when the 1995 Plan
expires except with respect to options then outstanding, to officers, directors,
key employees and consultants of the Company and its subsidiaries, Incentive and
Non-Qualified Stock Options ("Options") authorized by the Executive Compensation
Committee of the Board of Directors, which administers the 1995 Plan.
56
<PAGE>
Shares Subject to 1995 Plan. As approved by the stockholders at the annual
meeting of stockholders in June 1998, the adjusted maximum number of shares of
Common Stock in respect of which Options may be granted under the Plan (the
"Plan Maximum") is 800,000 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 of 1,000,000 shares, commencing
January 1, 1997. As of February 28, 1999 902,977 options were issuable under the
1995 Plan, and options for 403,049 shares had been granted under the 1995 Plan,
leaving options for 499,928 shares available for future issuance.
For the purpose of computing the total number of shares of Common Stock
available for Options under the 1995 Plan, the above limitations are reduced by
the number of shares of Common Stock subject to issuance upon exercise or
settlement of Options, determined at the date of the grant of such Options.
However, if any Options are forfeited, terminated, settled in cash or exchanged
for other Options or expire unexercised, the shares of Common Stock previously
subject to such Options are again available for further Option grants. The
shares of Common Stock which may be issued to participants in the 1995 Plan may
be either authorized and unissued Common Stock or issued Common Stock reacquired
by the Company. No fractional shares may be issued under the 1995 Plan.
The maximum number of shares of Common Stock issuable upon exercise of
Options granted or which may be subject to Options, as applied to the 1995 Plan
and its several components, is subject to appropriate equitable adjustment in
the event of a reorganization, stock split, stock dividend, combination of
shares, merger, consolidation or other recapitalization of the Company. The
number of shares subject to outstanding options and issuable under the 1995 Plan
was adjusted to reflect the one-for-one stock dividend paid on August 13, 1997,
which had the effect of a two-for-one stock split.
Administration. The 1995 Plan is administered by the Executive Compensation
Committee of the Board of Directors (the "Committee"). The 1995 Plan provides
that the Committee must consist of at least two directors of the Company who are
"non-employee directors" within the meaning of Rule 16b-3(b)(3)(i) of the
Exchange Act promulgated by the Securities and Exchange Commission (the
"Commission"). The Committee has the sole authority to construe and interpret
the 1995 Plan, to make rules and procedures relating to the implementation of
the 1995 Plan, to select participants, to establish the terms and conditions of
Options and to grant Options, with broad authority to delegate its
responsibilities to others, except with respect to the selection for
participation of, and the granting of Options to, persons subject to Sections
16(a) and 16(b) of the Exchange Act. Members of the Committee are not eligible
to receive discretionary Options under the 1995 Plan.
Eligibility Conditions. All officers and key employees of the Company and
its subsidiaries, are eligible to receive Options under the 1995 Plan.
Non-employee directors and consultants are only eligible to receive
Non-Qualified Stock Options under the 1995 Plan. Except for Non-Qualified Stock
Options granted to non-employee directors, the selection of recipients of, and
the nature and size of, Options granted under the 1995 Plan is wholly within the
discretion of the Committee. The 1995 Plan is subject to specific formula
provisions relating to the grant of options to non-employee directors, the
exercisability of Incentive Stock Options and the total shares available for
option grants. In addition, there is a 50,000 share limit on the number of
shares of Common Stock in respect of which any type of Options may be granted to
any person in each calendar year.
Transferability. No Option granted under the 1995 Plan, and no right or
interest therein, is assignable or transferable by a participant except by will
or the laws of descent and distribution.
Term, Amendment and Termination. The 1995 Plan currently provides for
termination on December 31, 2003, except with respect to Options then
outstanding. The Board of Directors may amend or terminate the 1995 Plan at any
time, except that: (i) to the extent restricted by Rule 16b-3 promulgated under
the Exchange Act, as amended and in effect from time to time (or any successor
rule), the Board of Directors may not, without approval of the stockholders of
the Company, make any amendment that would: (a) increase the total number of
shares available for issuance (except as permitted by the 1995 Plan to reflect
changes in capital structure); (b) materially change the eligibility
requirements; or (c) materially increase the benefits accruing to participants
under the 1995 Plan; and (ii) the provisions of the 1995 Plan governing the
award of options to non-employee directors may not be amended more than once
every six months other than to comport with changes to the Internal Revenue Code
of 1986, as amended (the "Code"), the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the regulations promulgated thereunder.
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Change of Control. The 1995 Plan provides that the exercisability of
outstanding Options shall be accelerated upon any of the following events: (i)
any person, including a group as defined in Section 13(d)(3) of the Exchange
Act, becomes the beneficial owner of shares of the Company with respect to which
twenty percent (20%) or more of the total number of votes for the election of
the Board of Directors may be cast; (ii) as a result of, or in connection with,
any cash tender offer, exchange offer, merger or other business combination,
sale of assets or contested election for the Board, or combination of the
foregoing, persons who were directors of the Company just prior to such event(s)
shall cease to constitute a majority of the Board of Directors; (iii) a
transaction in which the Company will cease to be an independent publicly owned
corporation that is required to file quarterly and annual reports under the
Exchange Act, or a sale or other disposition of all or substantially all the
assets of the Company (including but not limited to the assets or stock of the
Company's subsidiaries that results in all or substantially all of the assets or
stock of Company on a consolidated basis being sold); (iv) a tender offer or
exchange offer is made for shares of the Company's Common Stock (other than one
made by the Company) and shares of Common Stock are acquired thereunder; or (v)
the stockholders of the Company cause a change in the majority of the members of
the Board of Directors within a twelve (12) month period; provided, however,
that the election of one or more new directors shall not be deemed to be a
change in the membership of the Board of Directors if the nomination of the
newly elected directors was approved by the vote of three-fourths of the
directors then still in office who were directors at the beginning of such
twelve (12) month period (collectively, a "Change of Control").
Incentive Stock Options. Options designated as Incentive Stock Options,
within the meaning of Section 422 of the Code, in respect of up to the Plan
Maximum may be granted under the 1995 Plan. The number of shares of Common Stock
in respect of which Incentive Stock Options are first exercisable by any
optionee during any calendar year shall not have a fair market value (determined
at the date of grant) in excess of $100,000 (or such other limit as may be
imposed by the Code). To the extent the fair market value of the shares for
which options are designated as Incentive Stock Options that are first
exercisable by any optionee during any calendar year exceed $100,000, the excess
amount shall be treated as Non-Qualified Stock Options. Incentive Stock Options
shall be exercisable for such period or periods, not in excess of ten years
after the date of grant, as shall be determined by the Committee.
Grant of Incentive Stock Options. As of February 28, 1999, the Board of
Directors of the Company has granted Incentive Stock Options to acquire a total
of 499,921 shares of Common Stock to certain key employees, including the
executive officers, of the Company, at exercise prices ranging from $0.50 to
$28.75 per share. For employees who were employed by the Partnership for five
(5) years or more, options become exercisable 20% after the first six (6) months
following the grant, and an additional 20% on the first, second, third and
fourth-year anniversary dates of the grant thereafter. For employees who were
employed by the Partnership for less than five (5) years, options become
exercisable 25% on each of the first, second, third and fourth-year anniversary
dates of the grant.
Non-Qualified Stock Options. Non-Qualified Stock Options may be granted for
such number of shares of Common Stock and will be exercisable for such period or
periods as the Committee shall determine, up to a maximum term of ten years.
Options to Non-Employee Directors. The 1995 Plan also provides for the
grant of Options to non-employee directors of the Company or any of its
subsidiaries, without any action on the part of the Board of Directors or the
Committee, only upon the terms and conditions set forth in the 1995 Plan. The
1995 Plan was amended in June 1997 to provide that non-employee directors of the
Company and its subsidiaries would be entitled to receive an initial grant of
1,000 shares of Common Stock and an annual grant of 1,000 shares of Common Stock
after each twelve (12) month period of continuous service as a director. On
April 22, 1998 the Board of Directors amended the 1995 Plan to clarify that, as
a result of the August 13, 1997 stock dividend which had the effect of a
two-for-one stock split, the amount of each initial and annual grant of options
to non-employee directors of the Company and its subsidiaries would be increased
to 2,000 shares of Common Stock. Each Option becomes exercisable as to 50% of
the shares of Common Stock subject to the Option on the first anniversary date
of the grant and 50% on the second anniversary date of the grant, and expires
ten (10) years from the date the Option is granted. The exercise price of all
Options granted non-employee directors must be equal to 100% of the fair market
value of the Common Stock subject to the Option on the date on which such
Options are granted. Each Option is subject to the other provisions of the 1995
Plan.
As of February 28, 1999, the non-employee directors of the Company have
been granted Non-Qualified Options to acquire 18,000 shares of Common Stock, at
exercise prices ranging from $5 to $16 per share.
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Option Exercise Prices. The exercise price of an Incentive Stock Option
must be at least 100% of the fair market value of the Common Stock on the date
of grant. Except for Options to non-employee directors, Non-Qualified Stock
Options may be issued at such option exercise price as the Committee shall
determine, but not less than par value per share. The fair market value of all
Options is determined as the closing price of the Common Stock on the date the
Option is granted.
Exercise of Options. Options are exercisable for a maximum term of 10
years, but may not be exercised after three months following a termination of
employment, or after one year following disability or death of an optionee.
Options are exercisable only upon the payment in full of the applicable Option
exercise price in cash or, if approved by the Committee, in shares of the Common
Stock (at the fair market value thereof at exercise date) or by concurrent sale
of the shares under the Option with instructions to the selling broker to
deliver the proceeds of sale, up to the exercise price, to the Company. No
Incentive or Non-Qualified Stock Option may be exercised within six months
following the date of grant.
Retirement Plan
The Company has a 401(k) Plan (the "401(k) Plan") which Plan allows
employees to invest contributions in Common Stock of the Company.
All employees (including officers) of the Company and its subsidiaries are
eligible to participate in the Retirement Plan and future employees will be
eligible following the completion of 1,000 hours of service and their first year
of employment. Subject to certain limitations, participants in the 401(k) Plan
may make contributions from 2% to 15% of their pretax compensation, up to a
maximum of $9,500 per year (in 1997), subject to certain limitations and annual
adjust ments for inflation. The Company may, in its discretion, make a matching
contribution equal to a percentage of compensation contributed by each
participant, not to exceed 6% of compensation. The 401(k) Plan is designed to
qualify under Section 401(k) of the Internal Revenue Code and therefore
contributions by the Company and the participants are deductible by the Company
and not includable in the income of the participants for federal income tax
purposes. Participants will always be fully vested in all of their individual
contributions to the 401(k) Plan (and in earnings on such contributions).
Participants will be fully vested in employer contributions (and earnings on
such contributions) to the 401(k) Plan, regardless of years of service, upon the
attainment of normal retirement age (age 65), such participant's death or
permanent and total disability while employed by the Company or the termination
or complete discontinuance of the 401(k) Plan. If a participant terminates
employment with the Company for any reason other than retirement, then such
participant's interest in employer contributions to the 401(k) Plan shall vest
20% after one year of service, and 20% for each year of service thereafter, so
they will be vested 100% after five or more years of service. An employee's
service with the Partnership, the General Partner and former affiliates is
counted for purposes of vesting under the 401(k) Plan.
Stock Purchase Plan
The 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan") provides
for eligible employees of the Company and its subsidiaries to participate in the
ownership of the Company by acquiring the right to purchase shares of the
Company's Common Stock. As approved by the stockholders at the 1998 annual
meeting of stockholders the Stock Purchase Plan covers a total of 230,000 shares
of Common Stock. Shares of Common Stock may be purchased by the Stock Purchase
Plan in the open market or issued by the Company from authorized and unissued
treasury stock. The purpose of the Stock Purchase Plan is to promote the
interests of the Company by providing a method whereby employees of the Company
may participate in the ownership of the Company by acquiring an interest in the
Company's growth and productivity.
The Options. The Stock Purchase Plan provides that, during each specified
period ("Option Period"), the Company may grant options to participants to
purchase, at the termination of that Option Period, shares of Common Stock under
the Stock Purchase Plan. The Option Periods coincide with the Company's calendar
year. The price at which each share covered by an option under the Stock
Purchase Plan may be purchased is 100% of the fair market value of a share of
Common Stock on the first day of the applicable Option Period.
Unless terminated, options granted at the commencement of an Option Period
are exercised automatically on the last day of that Option Period. An option
terminates upon a voluntary withdrawal from participation in the Stock
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Purchase Plan by a participant, which may be effected any time prior to the last
day of the Option Period by completing a notice of termination form. An option
also terminates automatically if the participant holding the option ceases to be
employed by the Company or a subsidiary of the Company for any reason (including
death, disability or retirement) prior to the last day of the Option Period.
An option may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent or
distribution, and may be exercised, during the lifetime of the optionee, only by
such optionee. Optionees do not have rights as stockholders of the Company with
respect to option shares until they exercise their options.
Eligibility and Participation. All full-time employees of the Company and
its subsidiaries who have been employed continuously for at least 30 days and
who work more than 20 hours per week are eligible to participate in the Stock
Purchase Plan at their election. However, no employee may be granted an option
if such employee would immediately thereafter own, directly or indirectly, 5% or
more of the combined voting power of all classes of stock of the Company, as
determined pursuant to Section 424(d) of the Code.
Eligible employees may enroll as participants in the Stock Purchase Plan by
executing a form provided by the Company prior to the commencement of each
Option Period on which they may designate the stated maximum set forth on the
form, to: (i) the portion of their compensation, in any amount up to the stated
maximum set forth on the form, to be deducted semi-monthly, and accumulated for
the purchase of shares of Common Stock; and/or (ii) the amount of funds, if any,
which they will deposit at the beginning of the Option Period for the purchase
of shares of Common Stock. Once chosen, the semi-monthly contribution for that
Option Period cannot be decreased or increased without terminating the option.
The aggregate maximum dollar amount which may be designated by a participant to
be applied to the purchase of shares under the Stock Purchase Plan may not
exceed the lesser of 15% of base compensation or $25,000 per year.
Administration and Amendment. The Stock Purchase Plan is administered by
the Executive Compensation Committee of the Board of Directors. That committee
is empowered to interpret and construe any provision of the Stock Purchase Plan
and to adopt such rules and regulations for administering the Stock Purchase
Plan as it deems necessary.
The Board of Directors of the Company may at any time, insofar as is
permitted by law, alter, amend, suspend or discontinue the Stock Purchase Plan
with respect to any shares not already subject to options; provided, however,
that without the approval of the stockholders of the Company, no modification or
amendment may increase the number of shares subject to the Stock Purchase Plan,
extend the term of the Stock Purchase Plan, alter the option price formula,
otherwise materially increase the benefits accruing to participants, materially
modify the requirements as to eligibility for participation or amend the Stock
Purchase Plan in any manner that will cause it to fail to meet the requirements
of an "Employee Stock Purchase Plan" as defined in Section 423 of the Code.
Supplemental Executive Retirement Plan
The PacificAmerica Money Center, Inc. Supplemental Executive Retirement
Plan (the "Supplemental Plan"), an unfunded retirement plan, is designed to
provide additional employer paid benefits to certain long-term executive
officers of the Company and its predecessors. Participants' years of service
with the Partnership and its affiliates prior to the completion of the
Restructuring carry forward for vesting and benefit accrual purposes. The
Supplemental Plan covers the following four employees: Joel R. Schultz, Richard
B. Fremed, Norman A. Markiewicz and Charles J. Siegel. Future participants, if
any, will be determined by the Board of Directors. Administration of the
Supplemental Plan is the responsibility of the Executive Compensation and Stock
Option Committee of the Board of Directors.
Under the Supplemental Plan, a participant's 65th birthday is deemed his or
her normal retirement date ("Normal Retirement Date"). The yearly benefit that a
participant will receive at his or her Normal Retirement Date will be 1-2/3% of
his or her average compensation (whether paid by the General Partner, the
Partnership or the Company) for his or her highest 3 consecutive years,
multiplied by the actual number of his or her years of service. However, in no
event will any years of service in excess of 30 be taken into account. The
participant's benefits are reduced by his estimated Social Security benefit and
by his estimated Section 401(k) Plan benefit. Effective January 1, 1997, the
maximum annual retirement benefit payable under the Supplemental Plan
(determined after application of the reductions for a participant's estimated
Social Security and 401(k) benefits) is limited to $400,000 for Joel R. Schultz
and $100,000 for all other
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participants. Beginning in 1998, the benefit cap amounts described above are
subject to cost-of-living adjustments during the period of a participant's
employment, up to a maximum of 5% per year, but only if the increase in the
applicable cost-of-living index exceeds 5% for any plan year. The estimated
401(k) benefit is determined as a straight life annuity that is the actuarial
equivalent of the sum of the elective deferral and company matching
contributions made to the 401(k) Plan, based on the assumption that the maximum
elective deferrals and company match are contributed to the 401(k) Plan on
behalf of the participant each year and the participant's account yields an
assumed earnings rate. Benefits are payable monthly upon the participant's
retirement.
A participant is entitled to elect early retirement before his or her
Normal Retirement Date, and still receive retirement benefits, at any time
after: (i) he or she has completed fifteen (15) years of service; and (ii) the
sum of his or her age and years of service equals or exceeds seventy (70)
("Early Retirement Date"). The dollar amount of a participant's early retirement
benefit equals the normal retirement benefit reduced 1/4% for each month prior
to his or her 65th birthday.
If a participant dies while employed by the Company at any time when he or
she is eligible for early or normal retirement, his or her surviving spouse will
receive the survivor portion of a benefit determined as if the participant had
retired on the day before his or her death, and had elected to receive his or
her benefit in the form of a 50% joint and survivor annuity.
Participants' benefits will become fully vested upon the attainment of
their Early Retirement Date or Normal Retirement Date; however, participants
will forfeit all of their benefits in the event they either: (i) are terminated
for cause; or (ii) engage in competition with the Company, either before or
after retirement, without express written consent of the Company.
Special rules apply following a Change of Control of the Company. If a
participant terminates his employment within five (5) years following a Change
of Control:
(a) the participant will be entitled to receive a benefit even if he or she
voluntarily terminates employment prior to eligibility for retirement, provided
it is for "good reason," which includes, among other circumstances, reduction in
the participant's annual base salary, the failure to pay, within seven (7) days
of the due date, any portion of the participant's compensation and the Company's
failure to effectively continue any material compensation plan in which the
participant participated immediately before the Change of Control;
(b) the participant will be credited with an additional five (5) years of
service and entitled to receive a lump sum distribution of the present value of
his or her accrued benefit; and
(c) the participant's benefit can be forfeited because he or she is
terminated "for cause" only: (i) if the termination is because of the willful
and continued failure by the participant to substantially perform his or her
duties with the Company after a written demand for substantial performance is
delivered to the participant by the Board of Directors; or (ii) by the
participant's theft or embezzlement from the Company, fraud or other acts of
dishonesty in the conduct of the Company's business, conviction or plea of nolo
contendere to any felony or any crime involving moral turpitude, or willful and
knowing action which is materially injurious to the business or reputation of
the Company.
A participant also has the right to receive a lump sum benefit under the
Supplemental Plan in the event of a voluntary termination of employment within
one year following a Change of Control, based on his actual years of service.
The Board of Directors of the Company may amend or terminate the
Supplemental Plan at any time, provided that such amendment or termination may
not cancel or reduce the amount of a participant's previously accrued benefits
without the consent of that participant. The termination of the Supplemental
Plan will not result in immediate vesting of accrued benefits.
The following table shows the estimated annual retirement benefits, before
any applicable offset for estimated Social Security benefits or estimated 401(k)
benefits under the 401(k) Plan and before application of the benefit cap. Such
benefits would be payable to participants in the Supplemental Plan on their
Normal Retirement Date on a straight life
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annuity basis. Offsets for social security and 401(k) contributions made under
the 401(k) Plan may be substantial for certain participants.
<TABLE>
<CAPTION>
Average Annual Annual Benefit by
Eligible Years of Service at Retirement(1)
Compensation ---------------------------------
------------
10 15 20 25 30
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$100,000 $16,667 $25,000 $33,333 $41,667 $50,000
$200,000 $33,333 $50,000 $66,667 $83,333 $100,000
$300,000 $50,000 $75,000 $100,000 $125,000 $150,000
$400,000 $66,667 $100,000 $133,333 $166,667 $200,000
$500,000 $83,333 $125,000 $166,667 $208,333 $250,000
$600,000 $100,000 $150,000 $200,000 $250,000 $300,000
$700,000 $116,667 $175,000 $233,333 $291,667 $350,000
</TABLE>
- -------------------
(1) Estimated annual retirement benefits, before any applicable offset for
estimated Social Security benefits or estimated 401(k) benefits under the
401(k) Plan and before application of the benefit cap. Effective January 1,
1997, the maximum annual retirement benefit payable under the Supplemental
Plan (determined after application of the reductions for a participant's
estimated Social Security and 401(k) benefits) is limited to $400,000 for
Joel R. Schultz and $100,000 all other participants - $100,000.
As of December 31, 1998, all of the Named Executives were participating in
the Supplemental Plan. The average salary of the Named Executives for purposes
of the Supplemental Plan does not differ substantially from that set forth in
the Actual Annual Compensation table, except for the inclusion of amounts
realized upon exercise or sale of shares of Common Stock received upon exercise
of stock options, and except for Joel R. Schultz, whose average annual eligible
compensation currently is $600,769, which is the average of his annual
compensation for the years 1989, 1990 and 1991. Credited years of service in the
Retirement Plan by the executives participating in the Retirement Plan are as
follows: Joel R. Schultz, 24 years of service; Charles J. Siegel, five years of
service; Norman A. Markiewicz, 24 years of service and Richard B. Fremed, 20
years of service. It is estimated that Mr. Schultz will reach the maximum
$400,000 in annual retirement benefit payable if his average annual eligible
compensation exceeds $960,000 and he has 25 or more years of service.
JOINT REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
AND THE EMPLOYEE COMPENSATION COMMITTEE
The Company's Executive Compensation Committee ("Executive Compensation
Committee") and Employee Compensation Committee ("Employee Compensation
Committee") make this joint report on executive compensation pursuant to Item
402 of Regulation S-K. Notwithstanding anything to the contrary set forth in any
of the Company's previous filings under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, that might incorporate
future filings, including this Report, in whole or in part, this report and the
performance graph which follows this report shall not be incorporated by
reference into any such filings, and such information shall be entitled to the
benefits provided in Item 402(a)(9) of Regulation S-K.
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Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1998, the Executive Compensation
Committee determined the salary and the performance-based bonuses of the
Company's executive officers under written employment contracts and appropriate
awards under the 1995 Stock Option Plan for all officers and employees of the
Company and administered the Company's 401(k) Plan. None of the members of the
Executive Compensation Committee is now, and none of the members of the
Executive Compensation Committee or its predecessor the Executive Compensation
and Stock Option Committee was, at any time during 1997, an officer or employee
of the Company.
The Employee Compensation Committee, consisting of Joel R. Schultz and
Richard D. Young, determined the salary and bonus structure for all employees
who are not employed under written contracts and the annual bonuses of Messrs.
Markiewicz, Fremed and Siegel.
Executive Officer Compensation Policy and Philosophy
The Company's compensation program for executive officers consists
primarily of three key elements: a base salary, a performance-based annual cash
bonus and periodic grants of stock options. The Company believes that its
compensation policies are designed to attract, retain and reward executive
officers who contribute to the Company's success, to provide economic incentives
for executive officers to achieve the Company's business objectives by linking
the executive officers' compensation to the performance of the Company, to
strengthen the relationship between executive pay and stockholder value and to
reward individual performance. Thus, compensation for such executive officers
involves a high proportion of pay which is at risk: the variable annual cash
bonus (which permits individual performance to be recognized on an annual basis,
and which is based, in significant part, on an evaluation of the contribution
made by the officer to the Company's overall performance) and stock options
(which directly relate a significant portion of the executive officer's
long-term remuneration to stock price appreciation realized by the Company's
stockholders).
Components of Compensation
Base Salary. Executive officer salaries are established in relation to a
range of salaries for comparable positions in the subprime residential lending
industry. For the purpose of establishing base salary levels prior to the
Restructuring, the Company compared itself to a self-selected group of subprime
lenders of small to medium market capitalization, which included approximately
five companies in the comparison group. When the new employment agreements with
Mr. Schultz and Mr. Young were negotiated in 1998, increases in the base salary
of each of them were in part established with reference to the performance of
the Company at that time, and in part based upon certain other changes in those
employment agreements to provide for half of each bonus payment to be made in
Common Stock rather than in cash.
The Company seeks to pay salaries to executive officers that are
commensurate with the qualifications, duties and responsibilities of each
officer and that are competitive in the marketplace. In making its annual salary
recommendations, the Executive Compensation Committee and the Employee
Compensation Committee review the Company's financial position and performance,
the contribution of the individual executive officers during the prior fiscal
year in helping to meet the Company's financial and business objectives as well
as the executive officers' performance of their individual responsibilities.
Annual Cash Bonus. Executive officer cash bonuses are used to provide
executive officers with financial incentives to meet annual performance targets
of the Company. The performance goals of Messrs. Schultz and Young were
established in their employment agreements as specified returns on stockholder
equity. The performance goals of Mr. Landini are established as a percentage of
the profits of the wholesale division of Pacific Thrift. The performance targets
and bonus recommendations for executives other than Messrs. Schultz, Young and
Landini are established by the Employee Compensation Committee. The Employee
Compensation Committee develops a Company-wide bonus pool following the end of
each fiscal year. The size of the bonus pool is based upon a subjective
assessment of overall Company and individual business unit performance as
compared to both budgeted and prior fiscal year performance and the extent to
which the Company achieved its overall financial goals of growth in earnings and
return on stockholders' equity. Once the overall size of the bonus pool has been
approved, the Employee Compensation Committee makes
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discretionary, individual bonus recommendations for eligible employees based
upon an evaluation of their individual performance and contribution to the
Company's overall performance
Stock Options. The Board believes that equity ownership by executive
officers provides incentive to build stockholder value and align the interests
of executive officers with the interests of stockholders. Upon hiring executive
officers, the Executive Compensation Committee of the Board will typically
recommend stock option grants to the officers under the 1995 Plan, subject to
applicable vesting periods. Thereafter, the Executive Compensation Committee
will con sider awarding additional grants, usually on an annual basis, under the
1995 Plan. The Executive Compensation Committee believes that these additional
annual grants will provide incentives for executive officers to remain with the
Company. Options will be granted at the then current market price of the
Company's Common Stock and, consequently, will have value only if the price of
the Company's Common Stock increases over the exercise price. The size of the
initial grant will usually be determined based upon prior grants to executive
officers. In determining the size of the periodic grants the Executive
Compensation Committee will consider prior option grants to the executive
officer, the executive's performance during the current fiscal year and his or
her expected contributions during the succeeding fiscal year.
Other Employee Benefit Plans. The Company has certain broad-based employee
benefit plans in which all employees, including executive officers, are
permitted to participate on the same terms and conditions relating to
eligibility and subject to the same limitations on amounts that may be
contributed. The Company also makes matching contributions for all participants
in the Company's 401(k) Plan.
Compensation of the Principal Executive Officers
Mr. Schultz's 1998 Compensation. The terms of Mr. Schultz' employment
agreement, which was approved by the stockholders at the 1998 annual
stockholders meeting, provide for a base salary of $400,000 per annum and a
bonus determined as a specified percentage of the net pre-tax profits of the
Company if the after-tax net income of the Company results in a specified return
on equity. Since the Company did not report after-tax net income for 1998, Mr.
Schultz earned no bonus for 1998. See "EXECUTIVE COMPENSATION AND OTHER MATTERS
- -- Employment Agreements."
Compensation of other Executive Officers and Employees. The terms of the
1998 compensation of all of the Company's executive officers were determined
based on their employment agreements. See "EXECUTIVE COMPENSATION AND OTHER
MATTERS -- Executive Compensation -- Employment Agreements." The annual bonuses
of Mr. Young and Mr. Landini were determined under specific performance-based
formulas provided in their employment agreements, both of which have been
terminated. Since neither the Company nor the wholesale loan division reported
any after-tax net income for 1998, neither Mr. Young nor Mr. Landini earned a
bonus for 1998. See "EXECUTIVE COMPENSATION AND OTHER MATTERS -- Employment
Agreements." Messrs. Siegel, Markiewicz and Fremed also received no annual
bonuses based upon the Company's performance in 1998.
Respectfully submitted,
Executive Compensation Committee
Paul D. Weiser
James C. Neuhauser
Alan J. Siebler
Employee Compensation Committee
Joel R. Schultz
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STOCKHOLDER RETURN PERFORMANCE PRESENTATION
The graph below compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total return on the Nasdaq Stock
Market US Index for the period commencing on June 25, 1996 (the date trading of
the Company's Common Stock commenced on the Nasdaq National Market) and ending
on December 31, 1998. The data set forth below assumes the value of an
investment in the Company's Common Stock and the Index was $100 on June 25,
1996.
Comparison of Total Return*
Since the Initial Public Offering of PacificAmerica Money Center, Inc.
Among PacificAmerica Money Center, Inc., The Nasdaq Stock Market-US Index
and the Nasdaq Financial Stocks Index
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIALS.]
NASDAQ NASDAQ
Stock Financial
Date PAMM Market Stocks
6/25/96 100 100 100
6/28/96 108 101 101
9/30/96 176 105 109
12/31/96 232 110 121
3/31/97 240 104 126
6/30/97 256 123 147
9/30/97 408 144 172
12/31/97 292 135 185
3/31/98 340 158 196
6/30/98 246 162 191
9/30/98 121 147 159
12/31/98 8 190 179
*In calculating cumulative total stockholder return, reinvestment of
dividends, if any, was assumed.
65
<PAGE>
Item 12. Security Ownership Of Certain Beneficial Owners and Management
The following tables sets forth the ownership of Common Stock as of March
31, 1999 by (i) those persons known by the Company to hold at least 5% of the
total outstanding Common Stock of the Company; (ii) the four directors of the
Company, (iii) the Chief Executive Officer and the other four most highly
compensated executive officers of the Company for the fiscal year ended December
31, 1998 (the "Named Executives"), and (iv) all executive officers and directors
of the Company, as a group. The table includes that portion of stock options
granted to the Named Executives which are exercisable within the next 60 days,
as described herein under the heading "EXECUTIVE COMPENSATION AND OTHER MATTERS
- -- Plans and Arrangements -- Stock Option Plan."
66
<PAGE>
Common
Stock Percent
Name and Address of Beneficially of
Beneficial Owner Owned(1) Class
---------------- -------- -----
Joel R. Schultz(2) 110,805 2.1%
21031 Ventura Boulevard
Woodland Hills, CA 91364
Richard D. Young (3) 44,049 *
5500 Wembly Ave.
Oak Park, CA 91377
Charles J. Siegel(4) 38,493 *
21031 Ventura Boulevard
Woodland Hills, CA 91364
Frank P. Landini(5) 30,436 *
500 Ygnacio Valley Road
Walnut Creek, CA 94596
Norman A. Markiewicz(6) 66,045 1.3%
21031 Ventura Boulevard
Woodland Hills, CA 91364
James C. Neuhauser(7) 27,889 *
21031 Ventura Boulevard
Woodland Hills, CA 91364
Paul D. Weiser(8) 44,947 *
21031 Ventura Boulevard
Woodland Hills, CA 91364
Alan J. Siebler(9) 6,600 *
21031 Ventura Boulevard
Woodland Hills, CA 91364
All Directors and Executive Officers, as a group 385,602 7.4%
(10 persons)(10)
- ----------
* Less than 1%.
(1) Except as otherwise noted and except as required by applicable community
property laws, each person has sole voting and disposition powers with
respect to the shares.
(2) Includes an aggregate of 10,007 shares of Common Stock held by Joel R.
Schultz, Toby Schultz, his spouse, and The Schultz Living Trust, of which
Joel R. Schultz and Toby Schultz are the co-trustees, and currently
exercisable options for 100,798 shares.
(3) Includes 44,049 shares of Common Stock and no stock options.
(4) Includes 19,993 shares of Common Stock and currently exercisable options
for 18,500 shares.
67
<PAGE>
(5) Includes 30,436 shares of Common Stock and no stock options.
(6) Includes 55,245 shares of Common Stock and currently exercisable options
for 10,800 shares.
(7) Includes 24,889 shares of Common Stock and currently exercisable options
for 3,000 shares.
(8) Includes 41,947 shares of Common Stock and currently exercisable options
for 3,000 shares.
(9) Includes 4,600 shares of Common Stock and currently exercisable options for
2,000 shares.
(10) Includes 244,504 shares of Common Stock and currently exercisable options
for 141,098 shares.
The Company knows of no contractual arrangements which may at a subsequent
date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
In 1998, the Company engaged Friedman, Billings, Ramsey & Co., Inc.
("FBR"), an investment banking firm, to act as the Company's exclusive financial
adviser in connection with an analysis of the Company's strategic opportunities.
James C. Neuhauser, a director of the Company, is also a Managing Director of
FBR. In the event that the Company engages in a purchase or sale of assets or
stock with another company, or completes a financing transaction, the Company
has agreed to pay commissions to FBR pursuant to either a specified formula or
to be negotiated in connection with the transaction. If a transaction is
completed, the amount of compensation payable to FBR is expected to exceed
$60,000, but the amount cannot be determined until the details of any such
transaction are known.
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 start on page
F-1
(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 no Reports on Form 8-K for the quarter ended
December 31, 1998.
68
<PAGE>
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 April 15, 1999.
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.
Signature Capacity Date
- --------- -------- ----
/S/ JOEL R. SCHULTZ Director, Chief Executive Officer April 15, 1999
- ------------------------- and Chairman of the Board
Joel R. Schultz
/S/ CHARLES J. SIEGEL Chief Financial and Accounting April 15, 1999
- ------------------------- Officer
Charles J. Siegel
/S/ JAMES C. NEUHAUSER Director April 15, 1999
- -------------------------
James C. Neuhauser
/S/ PAUL D. WEISER Director April 15, 1999
- -------------------------
Paul D. Weiser
/S/ ALAN J. SIEBLER Director April 15, 1999
- -------------------------
Alan Siebler
<PAGE>
PacificAmerica
Money Center, Inc.
and Subsidiaries
============================================
Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Contents
================================================================================
PacificAmerica Money Center, Inc. and Subsidiaries
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets
as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations
for the years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Changes in Stockholders' Equity/Partners'
Capital for the years ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements
for the years ended December 31, 1998, 1997 and 1996 F-10
Supplemental Material
Schedule I - Consolidated Schedule - Financial Position -
December 31, 1998 F-65
Schedule II - Consolidating Schedule - Operations -
year ended December 31, 1998 F-67
Schedule III - Consolidating Schedule - Financial Position -
December 31, 1997 F-69
Schedule IV - Consolidating Schedule - Operations -
year ended December 31, 1997 F-71
Schedule V - Consolidating Schedule - Operations -
year ended December 31, 1996 F-73
<PAGE>
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, 1998 and 1997 and the related consolidated statements of operations, changes
in stockholders' equity/partners' capital, and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
incurred a net loss of $24,488,000 during the year ended December 31, 1998 and
has an accumulated deficit of $3,231,000 at December 31, 1998. At December 31,
1998, the Company is in default of the repayment terms of its obligations
related to its interest-only strips receivable (Note 9(b)). At December 31,
1998, the Company's major subsidiary, Pacific Thrift & Loan Company ("Pacific
Thrift"), did not meet the minimum capital requirements to be considered
"adequately capitalized" by the Federal Deposit Insurance Corporation (FDIC). As
a result of its capital designation, Pacific Thrift was required to submit a
capital restoration plan to the FDIC. In addition, Pacific Thrift consented to a
comprehensive Order to Cease and Desist (the 1998 Order) issued by the FDIC. The
1998 Order requires that Pacific Thrift take various actions, which included
increasing its leverage capital ratio to 8% by January 31, 1999. As of April 9,
1999 Pacific Thrift did not meet the capital requirements specified in the 1998
Order. Failure to implement the capital restoration plan and meet the capital
requirements of the 1998 Order expose Pacific Thrift to various regulatory
actions, including the risk of regulatory takeover. Pacific Thrift entered into
an additional Order to Cease and Desist (the 1999 Order) which relates to
Banking information systems. These matters raise substantial doubt about the
ability of the Company to continue as a going concern. Management's plans
regarding these matters are discussed in Note 1. The accompanying financial
statements do not include any provisions or adjustments which might result from
the outcome of the uncertainties discussed above.
F-1
<PAGE>
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.
BDO Seidman, LLP
Los Angeles, CA
April 9, 1999
F-2
<PAGE>
================================================================================
December 31, 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash and cash equivalents (Note 2C) $ 41,811,000 $ 65,927,000
Restricted cash (Note 2D) 582,000 163,000
Receivables 132,000 1,532,000
Accrued interest receivable 1,315,000 1,274,000
Refundable income taxes -- 222,000
Receivables from related parties (Note 11) 215,000 83,000
Note receivable -- 1,015,000
Loans held for sale, (Notes 2E and 3) 72,814,000 35,280,000
Loans receivable (Notes 2F, 2G and 3) 9,444,000 20,629,000
Other real estate (Notes 2M and 5) 219,000 2,028,000
Interest-only strips receivable
(Notes 2H, 2I, 2J, 6 and 9) 116,628,000 94,424,000
Property and equipment (Notes 2N and 7) 4,421,000 3,596,000
Other assets 2,633,000 1,693,000
- --------------------------------------------------------------------------------
$250,214,000 $227,866,000
================================================================================
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Thrift certificates payable (Note 8)
Fully-paid certificates $ 132,618,000 $ 113,731,000
Installment certificates 29,692,000 18,793,000
- -----------------------------------------------------------------------------------------------------
Total thrift certificates payable 162,310,000 132,524,000
Accounts payable and accrued expenses 5,003,000 6,121,000
Accrued interest payable 3,303,000 370,000
Notes payable (Note 9) 52,958,000 28,318,000
Note payable - related party (Note 11) 174,000 --
Deferred income taxes, net (Notes 2P and 10) 1,185,000 12,147,000
- -----------------------------------------------------------------------------------------------------
Total liabilities 224,933,000 179,480,000
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 12, 13, and 17)
- -----------------------------------------------------------------------------------------------------
Stockholders' equity (Note 14)
Preferred stock, $.01 par value, shares authorized 2,000,000;
none issued and outstanding -- --
Common stock, $.01 par value, shares authorized 8,000,000;
issued and outstanding 5,148,839 and 5,016,391 52,000 50,000
Additional paid-in capital 28,460,000 27,079,000
Retained earnings (accumulated deficit) (3,231,000) 21,257,000
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 25,281,000 48,386,000
- -----------------------------------------------------------------------------------------------------
$ 250,214,000 $ 227,866,000
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans receivable (Notes 2F, 2G and 4) $16,039,000 $11,707,000 $11,174,000
Cash equivalents (Note 2C) 621,000 397,000 328,000
- -----------------------------------------------------------------------------------------------------
Total interest income 16,660,000 12,104,000 11,502,000
- -----------------------------------------------------------------------------------------------------
Interest expense
Thrift certificates greater than $100,000 (Note 8) 120,000 50,000 23,000
Other thrift certificates (Note 8) 8,098,000 5,457,000 4,391,000
Notes payable and warehouse financing (Note 9) 6,996,000 1,407,000 552,000
- -----------------------------------------------------------------------------------------------------
Total interest expense 15,214,000 6,914,000 4,966,000
- -----------------------------------------------------------------------------------------------------
Net interest income 1,446,000 5,190,000 6,536,000
Provision for loan losses (Notes 2G and 4) 1,314,000 3,087,000 1,151,000
- -----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 132,000 2,103,000 5,385,000
- -----------------------------------------------------------------------------------------------------
Noninterest income
Other income 1,006,000 345,000 777,000
Gain on sales of loans, including fair value
writedown of $38,300,000 in 1998 and
$2,306,000 in 1997 (Notes 2H and 6) 32,782,000 81,710,000 29,217,000
- -----------------------------------------------------------------------------------------------------
Total noninterest income 33,788,000 82,055,000 29,994,000
- -----------------------------------------------------------------------------------------------------
Noninterest expense
Salaries and employee benefits (Note 13) 34,166,000 29,457,000 14,622,000
General and administrative (Note 11) 27,651,000 22,414,000 10,890,000
Occupancy expense 2,947,000 1,725,000 1,129,000
Related party fees (Note 11) -- -- 872,000
Operations of other real estate (Notes 2M and 5) 124,000 444,000 681,000
Depreciation (Note 2N) 974,000 555,000 714,000
Restructuring (Note 2V) 3,536,000 -- --
- -----------------------------------------------------------------------------------------------------
Total noninterest expense 69,398,000 54,595,000 28,908,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes (35,478,000) 29,563,000 6,471,000
Income tax expense (benefit) (Notes 2P and 10) (10,990,000) 12,468,000 1,658,000
- ------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (24,488,000) 17,095,000 4,813,000
Income from discontinued operations (Note 16) -- -- 387,000
Loss on disposal of discontinued operations (Note 16) -- -- (1,038,000)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $(24,488,000) $ 17,095,000 $ 4,162,000
Basic earnings (loss) per share (Note 2B):
Continuing operations $ (4.82) 4.18 $ 1.53
Discontinued operations -- -- (.32)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4.82) 4.18 $ 1.21
============================================================================================================
Diluted earnings (loss) per share (Note 2B):
Continuing operations $ (4.82) 3.48 $ 1.27
Discontinued operations -- -- (.26)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4.82) 3.48 $ 1.01
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Consolidated Statements of Changes in
Stockholders' Equity/Partners' Capital
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
------------------------------------------------------------------------------------------------------
Retained
Number Additional General Earnings
Partner of Common Paid-In Partner (Accumulated
Interests Shares Stock Capital Warrants Deficit) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Partners' capital,
January 1, 1996 $ 8,727,000 -- $ -- $ -- $ -- $ -- $ 8,727,000
Partner interest
converted to stock (8,727,000) 1,780,000 18,000 8,708,000 -- -- --
Rights offering -- 649,256 6,000 3,240,000 -- -- 3,246,000
Partners cash out -- (571,120) (6,000) (2,849,000) -- -- (2,856,000)
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 -- 106,240 2,000 529,000 -- -- 531,000
plan
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 -- 75,730 1,000 473,000 -- -- 474,000
exercised
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
Subscriber warrants -- 50,236 1,000 313,000 -- -- 314,000
exercised
Stock options exercised -- 72,205 1,000 360,000 -- -- 361,000
Stock bonuses issued -- 10,007 -- 708,000 -- -- 708,000
Net loss - 1998 -- -- -- -- -- (24,488,000) (24,488,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity,
December 31, 1998 $ -- 5,148,839 $ 52,000 $ 28,460,000 $ -- $ (3,231,000) $ 25,281,000
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash
Equivalents
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (24,488,000) $ 17,095,000 $ 4,162,000
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 1,314,000 3,087,000 1,151,000
Changes in discontinued operations -- -- 1,034,000
Provision for losses and other real estate 165,000 26,000 337,000
Net gain on sale of other real estate (170,000) (181,000) (224,000)
Proceeds from sale of loans originated for sale 917,318,000 742,776,000 337,563,000
Originations of loans held for sale (956,741,000) (768,226,000) (335,471,000)
Depreciation and amortization 974,000 663,000 834,000
Stock bonuses issued 708,000 -- --
Deferred income taxes, net (10,962,000) 12,443,000 929,000
Net change in assets and liabilities:
Restricted cash (419,000) (163,000) --
Receivables 2,415,000 (929,000) (282,000)
Premium receivable for loans sold -- 1,195,000 (1,195,000)
Accrued interest receivable (41,000) (130,000) (241,000)
Receivable for mortgage loans shipped -- 24,310,000 (24,310,000)
Receivable from related party (132,000) -- 347,000
Interest-only strips receivable (61,236,000) (85,032,000) (8,973,000)
Writedown of interest-only strips receivable 38,300,000 2,306,000 --
Refundable income taxes -- 508,000 --
Other assets (718,000) (319,000) (1,611,000)
Payable to related party -- -- (881,000)
Accounts payable and accrued expenses 1,677,000 3,886,000 --
Accrued interest payable 138,000 185,000 2,854,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (91,898,000) (46,500,000) (22,939,000)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash
Equivalents
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities
Proceeds from sale of portfolio loans 8,530,000 17,063,000 26,176,000
Payments from notes receivable -- 731,000 --
Increase in loans receivable 2,326,000 (1,915,000) (29,697,000)
Proceeds from sale of other real estate 2,718,000 3,824,000 5,652,000
Proceeds from sale of discontinued operations, net
assets -- -- (1,180,000)
Mortgage assumed (repaid) in connection with other
real estate -- -- (847,000)
Purchase of property and equipment (1,799,000) (1,791,000) (1,791,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 11,775,000 17,912,000 (1,687,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in thrift certificates 29,786,000 51,522,000 20,846,000
Borrowings under line of credit -- -- 3,000,000
Repayment of line of credit -- -- (3,000,000)
Proceeds from note payable 27,372,000 26,159,000 --
Paydowns of note payable (2,000,000) (1,131,000) (6,026,000)
Proceeds from note payable - related party 174,000 -- --
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 314,000 474,000 162,000
Stock options 361,000 563,000 531,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 56,007,000 85,875,000 22,777,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash
Equivalents
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents (24,116,000) 57,287,000 (1,849,000)
Cash and cash equivalents, at beginning 65,927,000 8,640,000 10,489,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end $ 41,811,000 $ 65,927,000 $ 8,640,000
====================================================================================================================================
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest $ 12,281,000 $ 6,355,000 $ 5,054,000
Income taxes 17,000 27,000 668,000
Supplemental schedule of noncash investing and
financing activities
Loans transferred to other real estate 904,000 2,936,000 6,894,000
Mortgage payable assumed in connection with other real
estate -- 278,000 1,793,000
Loans to facilitate sales of other real estate 353,000 2,320,000 311,000
Stock bonuses issued 708,000 -- --
Stock dividend -- 19,000 --
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
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, 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-10
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. General Organization (Continued)
(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 ten 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 $5.00 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. The Common Stock was
delisted from the Nasdaq National Market on
February 26, 1999 because the trading price of the
Common Stock was less than $1 per share and the
market value of public float was less than $5
million. The Common Stock is currently traded on
the OTC Bulletin Board.
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-11
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. General Organization (Continued)
(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.
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.
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 reduction in the size
of the secondary market demand for loans of these
types originated by the Company could adversely
affect the Company's ability to operate profitably
in the future.
F-12
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. General Organization (Continued)
(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.
In October 1998, due to a reduction in demand for
the purchase of loans by the secondary market,
Pacific Thrift closed its wholesale division which
management felt was no longer profitable (Note
2V). Approximately 75% of the current loan
production came from this division.
Pacific Thrift continues to operate its retail
division because the net loan origination costs
are lower for retail production and Pacific Thrift
believes it can generate profits through the
retail division at loan sale premiums currently
available in the secondary market. 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.
PacificAmerica Money Centers, Inc. ("PAMC")
(formerly PacificAmerica Lending), was formed in
1996 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.
F-13
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. General Organization (Continued)
(Continued)
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 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 16). 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.
F-14
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. General Operating Results and Capital Restoration Plan
(Continued)
The Company incurred a net loss of $24,488,000
during the year ended December 31, 1998 and has an
accumulated deficit of $3,231,000 at December 31,
1998. Management believes these losses were
reflective of the rapid change in marketplace
demand for the purchase of sub-prime paper by the
secondary market during the latter half of 1998.
In 1998 the fair value of the interest-only strips
receivable were adjusted down by $38,300,000
(Notes 2H and 6). It is possible that future
adjustments may be required. At December 31, 1998,
the Company is in default of the repayment terms
of its obligations related to its interest-only
strips receivable (Note 9b). In addition, Pacific
Thrift was not "adequately capitalized" at the end
of 1998 or by March 22, 1999 and became subject to
certain regulatory mandates and sanctions (Note
13). Pacific Thrift also has additional regulatory
mandates imposed relating to its Year 2000
readiness and the related Bank information systems
(Notes 13 and 15). Failure to implement the
regulatory mandates would expose Pacific Thrift to
various regulatory actions, including the risk of
regulatory takeover.
These matters raise substantial doubt about the
ability of the Company to continue as a going
concern. Management's plans regarding these
matters are as follows:
Management has taken and continues to take steps
to return the Company to profitability and improve
its financial condition, including such actions as
the closure of Pacific Thrift's wholesale
operations (Note 2V), an emphasis on originating
residential real estate loans for sale under whole
loan sale agreements for a cash premium through
its retail division, a reduction in portfolio
lending until targeted capital ratios are
achieved, and reducing overhead expenses. Pacific
Thrift has hired a consultant and submitted a
revised Year 2000 plan to the regulators and
believes it will be able to meet the guidelines of
the order regarding Year 2000 (Note 13).
F-15
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. General Operating Results and Capital Restoration Plan
(Continued) (Continued)
Management expects that Pacific Thrift will be
profitable in 1999 and will comply to the greatest
extent possible with the regulatory mandates.
Management has submitted a Capital Restoration
Plan (the Plan) which was approved by the FDIC. In
addition to a revised business plan, the Plan
includes restructuring debt to provide capital
contributions to Pacific Thrift and raising
capital through private or public offerings of
debt or equity securities. Management is
negotiating a restructuring of its obligations in
default relating to its interest-only strips
receivable. (Note 9) There is no assurance that
management's plans can be achieved. These
financial statements do not include any provisions
or adjustments that might result from the outcome
of these uncertainties.
2. Summary of A. Consolidation
Significant
Accounting The consolidated financial statements include the
Policies accounts of the Corporation, Pacific Thrift, PAMC,
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
16).
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 stockholders of
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 period's 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 have been restated to conform to the
provisions of SFAS No. 128.
F-16
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of B. Earnings Per Share (Continued)
Significant
Accounting Basic earnings per share is computed by dividing
Policies net earnings by the weighted average number of
(Continued) 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 stock dividend accounted for as a
one-for-one stock split, in August 1997. The
following table presents the earnings per share
data as required by SFAS No. 128.
Pro
Historical Forma
--------------------------- ----------
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Income (numerator)
Income/(loss) before income taxes
(benefit) $(35,478,000) $29,563,000 $6,471,000
Income taxes (benefit) (10,990,000) 12,468,000 2,718,000
- --------------------------------------------------------------------------------
Income (loss) from continuing
operations $(24,448,000) $17,095,000 $3,753,000
================================================================================
Shares (denominator)
Weighted average common shares
outstanding for basic earnings
per share 5,078,325 4,093,274 2,449,454
Effect of dilutive common shares:
Subscriber warrants 0 68,025 41,681
General partner warrants -- 471,287 317,666
Options 0 281,816 146,877
- --------------------------------------------------------------------------------
Diluted common shares 5,078,325 4,914,402 2,955,678
================================================================================
Basic earnings (loss) per common
share from continuing operations $ (4.82) $ 4.18 $ 1.53
- --------------------------------------------------------------------------------
Diluted earnings (loss) per common
share from continuing operations $ (4.82) $ 3.48 $ 1.27
================================================================================
F-17
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of B. Earnings Per Share (Continued)
Significant
Accounting Options to purchase 456,362 shares of common stock
Policies at a range of price from $0.50 to $28.75 per share
(Continued) were outstanding at December 31, 1998 but were not
included in the computation of earnings per share
because the options' exercise price was greater
than the average market price of the common stock.
Options to purchase 11,424 shares of common stock
at a range of price from $23.00 to $28.75 per
share were outstanding at December 31, 1997 but
were not included in the computation of diluted
earnings per share because the options' exercise
price was greater than the average market price of
the common stock.
Earnings per common share for the years ended
December 31, 1996 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.
Earnings per share related to discontinued
operations and net income for 1996 includes
additional pro forma income tax expense of
$126,000 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, 1998 includes
$38,000,000 on deposit with the Federal Reserve
and $3,811,000 on deposit with a major well
capitalized bank which is in excess of the
federally insured limit of $100,000. Cash and cash
equivalents at December 31, 1997 includes
$50,000,000 on deposit with the Federal Reserve
and $15,270,000 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>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of D. Restricted Cash
Significant
Accounting Cash received in connection with certain loan sale
Policies transactions are held in a trust account for the
(Continued) beneficiary and is classified as restricted cash
on the Company's balance sheet. This amount
represents the monthly timing difference between
when cash is received and when it is remitted.
E. Loans Held for Sale
The Company has designated certain of its loans
receivable as being held for sale. Loans held for
sale are recorded at the lower of cost or market
value. Any unrealized losses are recorded as a
reduction in income. Gains or losses on
disposition are based on the net proceeds and the
adjusted carrying amount of the assets sold, using
the specific identification method.
F. Loans Receivable
Loans receivable are stated at the principal
amount outstanding, less unamortized 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
records allowances for all accrued but uncollected
interest income.
Nonrefundable loan fees and direct costs
associated with the origination of loans are
deferred and are offset against outstanding loan
balances. These 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.
F-19
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of G. Allowance for Loan Losses
Significant
Accounting Loan losses are charged to the ALLL and recoveries
Policies are credited to the ALLL. The provision for loan
(Continued) 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.
The Company follows Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by
Creditors for Impairment of a Loan (as amended by
SFAS No. 118, Accounting by Creditors for
Impairment of a Loan Income Recognition and
Disclosures). 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.
F-20
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of G. Allowance for Loan Losses (Continued)
Significant
Accounting A restructuring of a debt is considered a troubled
Policies debt restructuring when the Company, for economic
(Continued) 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.
H. Loan Sales Revenue Recognition
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 strips 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 strips at
the date of sale.
F-21
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of H. Loan Sales Revenue Recognition (Continued)
Significant
Accounting The fair value of the interest-only strips
Policies receivable is determined by computing the present
(Continued) value of the excess interest income to be received
by the Company over the coupon interest to the
investor after giving effect to prepayment
assumptions, allowance for potential credit
losses, and other transaction costs on loans sold.
The interest-only strips receivable, which is
classified as a trading security, is carried at
fair value and is analyzed quarterly by the
Company. Adjustments to the fair value are
recognized as unrealized gains or losses and are
included as part of gain on sale of loans.
Adjustments of $38.3 million and $2.3 million were
recorded as a reduction of the interest-only
strips receivable fair value in 1998 and 1997.
Fair value of the interest-only strips receivable
is based on management's judgments regarding
expected future cash flows taking into account
estimated loan prepayment speeds, estimated
default rates and an appropriate discount rate
given the risk characteristics associated with the
instrument. It is possible that these judgments
and estimates 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 in the
near term.
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.
F-22
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of I. Mortgage Servicing Rights
Significant
Accounting In 1996, the Company adopted SFAS No. 122,
Policies "Accounting for Mortgage Servicing Rights, an
(Continued) 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.
The effect of the adoption of SFAS No. 122 was not
material to the Company, primarily because the
Company sells substantially all of its loans on a
servicing released basis.
J. Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
On January 1, 1997, the Company adopted Statement
of Financial Accounting Standard No. 125
"Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of
Liabilities: (SFAS 125). This statement provides
guidance for distinguishing transfers of financial
assets that are sales from transfers that are
secured borrowings. SFAS 125 supersedes SFAS 76,
77 and 122, while amending both SFAS 65 and 115.
The statement was to be applied prospectively and
earlier implementation was not permitted. The
adoption of SFAS 125 did not have a material
effect on the Company's results of operations.
F-23
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of J. Transfers and Servicing of Financial Assets and
Significant Extinguishment of Liabilities (Continued)
Accounting
Policies A transfer of financial assets in which control is
(Continued) 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 asset 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.
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.
K. 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 initial adoption of SFAS No. 121
did not have a material impact on the Company's
financial condition or results of operations.
F-24
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of L. Advertising Costs
Significant
Accounting The Company generally charges to expense the
Policies production costs of advertising the first time the
(Continued) advertising takes place, except for
direct-response advertising, which is capitalized
and amortized over the expected period of future
benefits. Direct-response advertising includes
mailing campaigns relating to retail loan
solicitations which are mailed over a period of
twelve weeks. Capitalized direct-response
advertising included in prepaid expenses and other
assets was $577,818 and $167,012 at December 31,
1998 and 1997. Advertising expense was $7,714,000,
$4,653,000 and $689,000 for the years ended
December 31, 1998, 1997 and 1996.
F-25
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of M. Other Real Estate
Significant
Accounting Other real estate is comprised of formally
Policies foreclosed property. These assets are recorded at
(Continued) the lower of the net investment in the loan or the
fair value of the property. 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. Selling costs and any
subsequent declines in value are charged to
operations, and a valuation allowance is
established.
N. Property and Equipment
Property and equipment is stated at cost, less
accumulated depreciation. Depreciation of property
and equipment is based on the asset's estimated
useful life, ranging from two to eight years, and
is computed using the straight-line method.
Expenditures that improve or extend the service
lives of assets are capitalized. Repairs and
maintenance are charged to expense as incurred.
O. 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 16).
P. Income Taxes
The Company uses the asset and liability method of
accounting for income taxes. Under this 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.
F-26
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of P. Income Taxes (Continued)
Significant
Accounting All tax benefits are recorded and then reduced by
Policies a valuation allowance when management believes
(Continued) there is a greater likelihood, the benefit will
not be realized than there is of the asset being
realized.
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.
Q. 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 and 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.
R. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No.
107, Disclosures about Fair Value of Financial
Instruments (SFAS 107), requires that the Company
disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and
assumptions are set forth below for the Company's
financial instruments. SFAS No. 107 defines fair
value as the amount which the instrument could be
exchanged for in a current transaction between
willing parties, other than in a forced sale or
liquidation. Where possible, the Company has
utilized quoted market prices to estimate fair
value. Since quoted market prices were not
available for a significant portion of the
financial instruments, the fair values were
approximated using discounted cash flow
techniques.
F-27
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of R. Fair Value of Financial Instruments (Continued)
Significant
Accounting Fair value estimates are made at a specific point
Policies in time, based on judgments regarding future
(Continued) expected loss experience, current economic
conditions, risk conditions, risk characteristics
of various financial instruments and other
factors. These estimates do not reflect any
premium or discount that could result from
offering for sale at one time the Company's entire
holdings of a particular financial instrument.
These estimates are subjective in nature and
involve uncertainties and matters of significant
judgment and therefore cannot be determined with
precision. Changes in assumptions could
significantly affect the estimates in the near
term.
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. This
information is presented solely for compliance
with SFAS No. 107 and is subject to change over
time based on a variety of factors.
December 31, 1998
----------------------------------
Carrying Estimated
Value Fair Value
-----------------------------------------------------------------------
Assets
Cash and cash equivalents $ 41,811,000 $ 41,811,000
Loans receivable 10,504,000 10,288,000
Allowance for loan losses (1,060,000) (1,046,000)
-----------------------------------------------------------------------
Total loans 9,444,000 9,242,000
-----------------------------------------------------------------------
Loans held for sale 72,814,000 74,998,000
Interest-only strips receivable 116,628,000 116,628,000
Liabilities
Installment certificates 29,692,000 29,692,000
Fully-paid certificates 132,618,000 132,328,000
Notes payable 52,958,000 52,958,000
F-28
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of R. Fair Value of Financial Instruments (Continued)
Significant
Accounting
Policies
(Continued) December 31, 1997
----------------------------------
Carrying Estimated
Value Fair Value
-----------------------------------------------------------------------
Assets
Cash and cash equivalents $ 65,927,000 $ 65,927,000
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
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
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
and residential mortgage. Each loan category was
further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming
categories.
F-29
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of R. Fair Value of Financial Instruments (Continued)
Significant
Accounting Loans (Continued)
Policies
(Continued) 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,
valuation of the underlying collateral 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.
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 and estimated future
prepayment rates and default experience. The
carrying amount is considered to be a reasonable
estimate of fair value.
F-30
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of R. Fair Value of Financial Instruments (Continued)
Significant
Accounting Thrift Certificates Payable
Policies
(Continued) 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. 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.
December 31, 1998
------------------------------
Carrying Estimated
Value Fair Value
----------------------------------------------------------------------
Installment certificates $ 29,692,000 $ 29,692,000
======================================================================
Fully-paid certificates:
Maturing in six months or less $ 55,412,000 $ 55,297,000
Maturing between six months and
one year 72,465,000 72,246,000
Maturing between one and three
years 4,741,000 4,785,000
----------------------------------------------------------------------
Total fully-paid certificates $132,618,000 $132,328,000
======================================================================
December 31, 1997
------------------------------
Carrying Estimated
Value Fair Value
----------------------------------------------------------------------
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
======================================================================
F-31
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of R. Fair Value of Financial Instruments (Continued)
Significant
Accounting Thrift Certificates Payable (Continued)
Policies
(Continued) 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.
Notes Payable
Due to the adjustable rate characteristics of the
notes payable, the fair value approximates the
carrying value.
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.
S. 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.
F-32
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of T. Recently Issued Accounting Pronouncements
Significant
Accounting Reporting Comprehensive Income
Policies
(Continued) 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 Company had no
comprehensive income (loss) during the year ended
December 31, 1998 and as a result comprehensive
loss is the same as the net loss for the year
ended December 31, 1998.
Segment Reporting
In June 1997, the FASB issued Statement of
financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). This statement
establishes 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 segments in interim
financial reports issued to shareholders. It also
establishes standards for related disclosures
about products and services, geographic areas, and
major customers. This statement supersedes FASB
Statement No. 14 "Financial Reporting for a
Business Enterprise", but retains the requirement
to report information about major customers. It
amends FASB Statement No. 94 "Consolidation of All
Majority-Owned Subsidiaries" to remove the special
disclosure requirements for previously
unconsolidated subsidiaries. This statement does
not apply to nonpublic business enterprises or to
not-for-profit organizations.
F-33
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of T. Recently Issued Accounting Pronouncements
Significant (Continued)
Accounting
Policies Segment Reporting (Continued)
(Continued)
SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. In the
initial year of application, comparative
information for earlier years is to be restated.
This statement need not be applied to interim
financial statements in the initial year of
application, but comparative information for
interim periods in the initial year of application
is to be reported in financial statements for
interim periods in the second year of application.
The adoption of this statement did not have a
material effect on the Company's financial
statements.
The Company, through the branch network of its
subsidiary, Pacific Thrift and Loan, provides a
broad range of mortgage products. While the
Company's chief decision makers monitor the
revenue streams through wholesale and retail loan
originations, operations are managed and financial
performance is evaluated on a Company wide basis.
Accordingly, all of the Company's operations are
considered by management to be aggregated in one
reportable operating segment.
Pensions and Other Postretirement Benefits
In February 1998, the Financial Accounting
Standards Board issued SFAS No. 132, Employers'
Disclosures about Pensions and other
Postretirement Benefits ("SFAS No. 132"), an
amendment of FASB statements No. 87, 88, and 106.
SFAS No. 132 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.
Restatement of disclosures for earlier periods
provided for comparative purposes is required. The
impact of the adoption of this statement is
disclosure related and the adoption did not have a
material impact on the financial condition,
results of operations and cash flows.
F-34
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of T. Recently Issued Accounting Pronouncements
Significant (Continued)
Accounting
Policies Derivative Instruments and Hedging Activities
(Continued)
In June 1998, the Financial Accounting Standards
Board issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133")
which requires companies to recognize all
derivatives contracts as either assets or
liabilities in the balance sheet and to measure
them at fair value. The provisions of this
statement are effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The
Company has not determined the effect, if any,
adoption of the new standard will have on its
financial condition, results of operations and
cash flows.
Mortgage Backed Securities
In October 1998, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", which effectively
changes the way mortgage banking firms account for
certain securities and other interests they retain
after securitizing mortgage loans that were held
for sale. The adoption of SFAS 134 had no impact
on the Company's financial position.
Technical Corrections
In February 1999, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 135 ("SFAS No. 135"),
Rescission of Financial Accounting Standards Board
no. 75 ("SFAS No. 75") and Technical Corrections.
SFAS No. 135 rescinds SFAS No. 75 and amends
Statement of Financial Accounting Standards Board
No. 35 also amends other existing authoritative
literature to make various technical corrections,
clarify meanings, or describe applicability under
changed conditions. SFAS No. 135 is effective for
financial statements issued for fiscal years
ending after February 15, 1999. The Company
believes that the adoption of SFAS No. 135 will
not have a significant effect on its financial
statements.
F-35
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of U. Reclassifications
Significant
Accounting Certain reclassifications of balances from prior
Policies years have been made to conform to the current
(Continued) year's reporting format.
V. Restructuring Charge
In the third quarter of 1998, the Company recorded
a restructuring charge, including related asset
impairment, of approximately $3.5 million. The
restructuring initiatives involve the Company's
closure of its wholesale loan origination activity
resulting in workforce reductions of approximately
300 employees and the impairment of certain
long-lived assets.
Details of the restructuring charge included on
the statement of operations are as follows:
Utilized Balance at
Original ------------------ December 31,
(In 000's) Accrual Cash Noncash 1998
--------------------------------------------------------------------------
Impairment of long-lived
assets $1,067 $ -- $1,067 $ --
Employees severance and
termination benefits 1,951 1,128 -- 823
Other 518 74 -- 444
--------------------------------------------------------------------------
$3,536 $1,202 $1,067 $1,267
==========================================================================
The tangible assets to be disposed of have been
written down to their estimated fair value, less
cost of disposal. All intangible asset carrying
values associated with the wholesale operation
have been eliminated. Management is negotiating
sublease arrangements on existing office lease
commitments and the restructuring accrual related
to these leases has been recorded taking this into
account. Considerable management judgment is
necessary to estimate fair value, accordingly,
actual results could vary significantly from such
estimates. As part of the restructuring
initiative, approximately 300 employees have
separated from the Company as of December 31,
1998. The restructuring actions were substantially
complete by late 1998.
F-36
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Loans Held Loans held for sale comprised of real estate
For Sale loans.
The Company intends to sell the $72,814,000 of
loans held for sale at December 31, 1998 under
whole loan sale agreements. The Company has sold
approximately $46.3 million of these loans for
cash premiums ranging from 1.1% to 3.5% through
April 9, 1999.
The Company entered into transactions with two
customers which accounted for more than 10% of
total whole loan sales for the year ended December
31, 1998. Approximately 62.0% and 20.2% of whole
loans sold to these two customers resulted in
whole loan gains on sales of approximately 89.7%
and 10%, of the total gross gains related to whole
loan sales. During the year ended December 31,
1997, the Company did not have transactions with
any single customer which accounted for more than
10% of the Company's total whole loan sales.
During 1998 and 1997 the Company sold
approximately $366 million and approximately $15.7
million of loans under whole loan sale agreements
and received cash premiums of approximately $10.2
million and $460,000.
During 1996, the Company sold loans primarily to
two purchasers on a whole 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.
F-37
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Loans Held During 1998, 1997 and 1996, the Company sold an
For Sale aggregate of $221 million, $643 million and $338
(Continued) million of pre-approved securitizable loans to the
Purchasers.
In 1998 and 1997, the Company securitized $330
million and $100 million of loans into
Asset-Backed Securities (ABS), which are secured
primarily by fixed and adjustable rate one-to
four-family, first lien home equity loans, and
were issued by the Company pursuant to an
indenture between the Company and Bankers Trust
Company of California, N.A., the Indenture
Trustee.
4. Loans Receivable Loans Receivable
and
Allowance for Loan Loans receivable at December 31, 1998 and 1997 are
Losses summarized as follows:
December 31, 1998 1997
--------------------------------------------------------------------------
Real estate loans $ 22,542,000 $ 43,474,000
Participations sold (12,038,000) (21,183,000)
--------------------------------------------------------------------------
Total real estate loans - net $ 10,504,000 $ 22,291,000
==========================================================================
Loans receivable held for investment $ 10,504,000 $ 22,291,000
Net deferred loan fees and costs (196,000) (224,000)
Allowance for loan losses (864,000) (1,438,000)
--------------------------------------------------------------------------
$ 9,444,000 $ 20,629,000
==========================================================================
The components of the loan portfolio at December
31, 1998 and 1997 were as follows:
December 31, 1998 1997
--------------------------------------------------------------------------
One-to-four family residential $ 4,038,000 $ 6,028,000
Five-or-more family residential 1,769,000 6,172,000
Home improvement 827,000 1,090,000
Commercial 3,870,000 9,001,000
--------------------------------------------------------------------------
$ 10,504,000 $ 22,291,000
==========================================================================
During 1998 and 1997, the Company sold, without
recourse, approximately $8,530,000 and $17,063,000
of portfolio mortgage loans.
F-38
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
4. Loans Receivable Allowance for Loan Losses
and
Allowance for Loan Changes in the allowance for loan losses for the
Losses (Continued) years ended December 31, 1998, 1997 and 1996 are
as follows:
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning $ 1,438,000 $ 2,464,000 $ 4,229,000
Provision charged to expense 1,314,000 3,087,000 1,151,000
Transferred to loans held for sale -- (1,902,000) --
Loan charge-offs, net of
recoveries (1,888,000) (2,211,000) (2,916,000)
- --------------------------------------------------------------------------------
Balance at end $ 864,000 $ 1,438,000 $ 2,464,000
================================================================================
At December 31, 1998 and 1997, loans with more
than two monthly payments past due and on
nonaccrual status totaled $836,000 and $1,395,000.
If interest on these loans had been accrued,
interest income would have increased by
approximately $98,000 and $175,000 in 1998 and
1997. At December 31, 1998 and 1997, loans with
more than two monthly payments past due and on
accrual status totaled $696,000 and $1,962,000.
Interest income recognized on these loans totaled
approximately $26,000 and $402,000 in 1998 and
1997.
The following information relates to the Company's
impaired loans which includes troubled debt
restructuring that meet the definition of impaired
loans as of and for the years ended December 31,
1998 and 1997:
December 31, 1998 1997
-------------------------------------------------------------------------
Impaired loans with a specific allowance $ 993,000 $ 852,000
Impaired loans with no specific allowance 959,000 813,000
-------------------------------------------------------------------------
Total impaired loans $1,952,000 $1,665,000
Total allowance related to impaired loans $ 288,000 $ 337,000
Average balance of impaired loans for the
period $1,728,000 $2,191,000
Interest income on impaired loans for the
period recorded on a cash basis $ 97,000 $ 104,000
=========================================================================
F-39
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
5. Other Real Estate Other real estate consisted of the following at
December 31, 1998 and 1997:
December 31, 1998 1997
-----------------------------------------------------------------------------
Foreclosed real estate $ 734,000 $ 3,132,000
Allowance for losses on other real estate (515,000) (1,104,000)
-----------------------------------------------------------------------------
$ 219,000 $ 2,028,000
=============================================================================
Changes in the allowance for losses on other real
estate for the years ended December 31, 1998, 1997
and 1996 are as follows:
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Balances at beginning $ 1,104,000 $ 2,285,000 $ 2,434,000
Provision for losses 165,000 26,000 337,000
Net charge offs (754,000) (1,207,000) (486,000)
- --------------------------------------------------------------------------------
Balance at end $ 515,000 $ 1,104,000 $ 2,285,000
================================================================================
Operations of other real estate for the years
ended December 31, 1998, 1997 and 1996 consisted
of the following:
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Provision for losses $ 165,000 $ 26,000 $ 337,000
Net gain on sales (170,000) (181,000) (224,000)
Other expenses 129,000 599,000 568,000
- --------------------------------------------------------------------------------
$ 124,000 $ 444,000 $ 681,000
================================================================================
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 $-0- at December 31, 1998
and 1997.
F-40
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. Interest-Only Strips Interest-only strips receivable consist of assets
Receivables generated from loan sales and securitization as
follows:
December 31, 1998 1997
--------------------------------------------------------------------
Interest-only strip, certificated $ 44,351,000 $13,417,000
Interest-only strip, non-certificated 72,277,000 81,007,000
--------------------------------------------------------------------
$116,628,000 $94,424,000
====================================================================
Net unrealized holding loss included in gain on
sale of loans on the statement of operations was
$38,300,000 and $2,306,000 for the years ended
December 31, 1998 and 1997, and accordingly was
recorded as a reduction of the interest-only
strips receivable in these same years.
The interest-only strips receivable are recorded
as a result of the Company's sale and
securitization of real estate loans. The
interest-only strips receivables classified as a
trading security and reported at fair value, with
unrealized gains and losses included in earnings.
The Company estimates and values its future cash
flows on interest-only strips receivable by
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 amounts the Company will ultimately realize
could differ significantly and could require an
adjustment in the near term to the fair value of
this asset.
In December 1998, the FASB issued, in question and
answer format, "A Guide to Implementation of
Statement 125 on Accounting for Transfers and
Servicing of Financial Assets and Extinguishments
of Liabilities, Questions and Answers, Second
Edition" (the "Special Report"). The Special
Report indicates that two methods have arisen in
practice for accounting for credit enhancements
relating to securitization. These methods are the
cash-in method and the cash-out method. The
cash-in method treats credit enhancements (pledged
loans or cash) as belonging to the Company. As
such, these assets are recorded at their face
value as of the time they are received by the
trust. The cash-out method treats credit
enhancements as assets owned by the related
securitization trust. As such, these assets are
treated as part of the interest-only strips and
are recorded at a discounted value for the period
between when collected by the trust and released
to the Company. The Special Report indicates that
if no true market exists for credit enhancement
assets, the cash-out method should be used to
measure the fair value of credit enhancements. The
Company uses the cash-out method, which is
consistent with prior periods.
F-41
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. Interest-Only Strips The fair value of the interest-only strips
Receivables receivable is determined by computing the present
(Continued) 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 present
value calculation 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 expected to be received by the
Company 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 strips
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 strips receivable.
In March 1999 the Company obtained an independent
valuation report of interest-only strips
receivable and recorded a writedown of $794,000 at
December 31, 1998. During 1998 the aggregate
writedown was $38,300,000. At December 31, 1997,
the Company adjusted the fair value of its
interest-only strip receivable downward by
approximately $2.3 million. In March 1998, the
Company obtained an independent valuation 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 strips receivable.
F-42
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. Interest-Only Strips The fair values at December 31, 1998 can be
Receivables calculated with constant prepayment rate
(Continued) assumptions ranging from 22.5% to 37.8%; a range
of .50% to 1% annual loss rate after an initial
six month ramp up period; and an 15% discount rate
on estimated cash flows from each of its pools.
The fair values at December 31, 1997 can be
calculated with constant prepayment rate
assumptions ranging from 26% to 36%; a .50% annual
loss rate after an initial six 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 (loss) in that period.
F-43
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
7. Property and Property and equipment consisted of the following
Equipment at December 31, 1998 and 1997:
December 31, 1998 1997
-------------------------------------------------------------
Computer and office equipment $ 3,006,000 $ 3,738,000
Furniture and fixtures 3,069,000 1,235,000
Leasehold improvements 783,000 676,000
-------------------------------------------------------------
6,858,000 5,649,000
Accumulated depreciation and
amortization (2,437,000) (2,053,000)
-------------------------------------------------------------
$ 4,421,000 $ 3,596,000
=============================================================
In 1998 the Company wrote off certain impaired
assets after it closed down its wholesale division
(Note 2V).
At December 31, 1998 the Company subleases certain
assets with a net book value of $80,000 under a
sublease arrangement which expires on October 31,
1999. The lease arrangement provides monthly
rental income of $4,500.
8. Thrift Certificates Thrift certificates are fully paid certificates
Payable and installment certificates. The approximate
weighted average interest rate of fully-paid and
installment certificate accounts at December 31,
1998 was 5.65% and 5.05% and at December 31, 1997
was 6.11% and 5.01%. The interest payable on the
thrift certificates totaled $508,000, $370,000 and
$185,000 at December 31, 1998, 1997 and 1996.
At December 31, 1998 and 1997, fully-paid thrift
certificates consisted of the following:
December 31, 1998 1997
---------------------------------------------------------------------------
Certificates equal or greater than $100,000 $ 498,000 $ 4,180,000
Certificates less than $100,000 132,120,000 109,551,000
---------------------------------------------------------------------------
$132,618,000 $113,731,000
===========================================================================
F-44
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
8. Thrift Certificates At December 31, 1998, scheduled maturities of
Payable (Continued) fully-paid thrift certificates were as follows:
December 31, 1998
----------------------------------
Less than 3 months $ 19,560,000
3 to 6 months 35,852,000
6 to 12 months 72,465,000
1 to 5 years 4,741,000
----------------------------------
$132,618,000
==================================
9. Notes Payable Notes payable consisted of the following at
December 31, 1998 and 1997:
December 31, 1998 1997
---------------------------------------------------------------
Third party (a) $ 3,000,000 $ --
Interest-only strips advances (b) 49,958,000 28,318,000
---------------------------------------------------------------
$52,958,000 $28,318,000
===============================================================
(a) The loan interest rate is 3-month LIBOR plus
5.0%, which was 10.07% at December 31, 1998. The
stock of the Company's subsidiary, Pacific Thrift
and Loan, is pledged as security for this loan.
This loan was due in April 1999. However, in
February 1999, the due date was extended by the
third party to January 2000.
(b) The interest-only strip advances are from the
Purchasers (Note 3) secured by the Company's
interest-only strips receivable. Advances ranging
from 3.00% to 4.75% of the par value of loans sold
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%.
F-45
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. Notes Payable In connection with the advances received under a
(Continued) Master Assignment Agreement, dated as of December
18, 1997, 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 decline in value from the levels
established at the time of the advance. At
December 31, 1998, the Company is in default of
the repayment terms of the Master Assignment
Agreement on $18.4 million of advances
collateralized by $44.4 million of interest only
strips receivable.
In connection with the advances received under the
Corporate Finance Agreement, dated as of January
27, 1997 with Advanta Mortgage Corp. USA, such
advances are due 38 to 46 months after the advance
is made. The advances are cross collateralized. At
December 31, 1998 $29.6 million of outstanding
advances are collateralized by $68.5 million of
interest-only strips receivable.
10. 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.
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:
December 31, 1998 1997 1996
======================================================
Current $ 55,000 $ 26,000 $ 727,000
Deferred (11,045,000) 12,442,000 931,000
------------------------------------------------------
$(10,990,000) $12,468,000 $1,658,000
======================================================
F-46
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
10. Income Taxes The tax effects of temporary differences that give
(Continued) rise to the deferred tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
December 31, 1998 1997
---------------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforward $ 25,402,000 $ 18,321,000
Accrued expenses 1,197,000 848,000
Loans held for sale 817,000 --
Reserves 703,000 1,157,000
Capital loss carryforward 402,000 402,000
State tax deduction 19,000 2,050,000
Alternate minimum tax credit
carryforward -- 196,000
Other 100,000 63,000
---------------------------------------------------------------------------
Total gross deferred tax assets 28,640,000 23,037,000
---------------------------------------------------------------------------
Valuation allowance (2,036,000) (402,000)
---------------------------------------------------------------------------
Deferred tax liabilities
Interest-only strip receivable (27,332,000) (33,628,000)
Depreciation (299,000) (198,000)
Loan loss reserve (91,000) --
Loans held for sale -- (726,000)
Deferred loan costs (67,000) (230,000)
---------------------------------------------------------------------------
Total deferred tax liabilities (27,789,000) (34,782,000)
---------------------------------------------------------------------------
Total deferred tax asset (liability), net $ (1,185,000) $(12,147,000)
===========================================================================
F-47
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
10. Income Taxes Included in the deferred tax asset at December 31,
(Continued) 1998 and 1997 is a capital loss carryforward of
$402,000 which is fully reserved (Note 16). In
1998, the Company established an additional
valuation reserve of $1,546,000 on net operating
loss carryforwards because management believes it
is more likely than not that the full amount will
not be utilized before they expire.
At December 31, 1998, the Company has net
operating loss carryforwards for federal income
tax purposes of approximately $71 million that are
available to offset future federal taxable income.
These federal net operating losses expire in the
years 2010 through 2013. Net operating loss
carryforwards for State franchise tax purposes are
approximately $34 million. These State
carryforwards expire in the years 2001 and 2013.
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 1998, 1997 and 1996 provision for income taxes
(benefit) from continuing operations and the
federal statutory tax rate:
1998 1997 1996
-------------------------------------------------------------
Federal statutory tax rate 34% 35% 34%
Valuation allowance (8)% -- (19)
Loss of benefit of former partnership
losses -- -- 11
State taxes net of federal benefit 5 7 --
-------------------------------------------------------------
Effective tax rate (benefit) 31% 42% 26%
=============================================================
F-48
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
11. Related Parties The Partnership had various related party
and Affiliates transactions with the following entities:
o Presidential Management Company - Prior to the
restructuring (Note 1) the former general
partner received specified fees for services
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 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 year ended December 31, 1996 was as
follows:
Years ended December 31, 1996
------------------------------------------------
Base fee $834,000
Loan servicing fee 125,000
------------------------------------------------
Total fees $959,000
================================================
Salaries and overhead reimbursements $100,000
================================================
o 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-49
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
11. Related Parties o Presidential Management Company (Continued)
and Affiliates
(Continued) During 1996, Pacific Thrift paid and allocated
certain salaries and overhead for the Partnership,
Corporation, PAMC, 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.
o 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 were paid by the Partnership to the
managing officer for the years ended December
31, 1996.
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
$994,000, $785,000 and $424,000 for the years
ended December 31, 1998, 1997 and 1996.
Receivables from related parties consisted of the
following at December 31, 1998 and 1997:
December 31, 1998 1997
----------------------------------------
Due from officer $134,000 $ --
Employee advances 81,000 83,000
----------------------------------------
$215,000 $83,000
========================================
The above receivable of $134,000 at December 31,
1998 is due from the Chief Executive Officer
relating to overpayment of bonus for 1998.
F-50
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
11. Related Parties o Other (Continued)
and Affiliates
(Continued) Loans to employees at rates ranging from 6.5% to
8.25% totaled approximately $151,000 and $88,000
at December 31, 1998 and 1997.
Thrift certificates purchased by members of
management totaled approximately and $160,000 and
$34,000 at December 31, 1998 and 1997, on terms
slightly more favorable than the terms for
unrelated parties. Interest expense on these
certificates totaled approximately $1,000 and
$2,000 for the years ended December 31, 1998 and
1997.
At December 31, 1998, the Company has an unsecured
note payable to the former president of Pacific
Thrift & Loan. The underlying interst rate is
prime and the loan was due on March 27, 1999. This
was incorporated as part of a negotiated severance
agreement (Note 17 "Other Subsequent Events").
12. Commitments and At December 31, 1998 the Company had committed to
Contingencies but not yet funded approximately $622,000 of real
estate loans.
The Company conducts its operations from leased
facilities under non-cancelable operating leased.
Rental expenses were approximately $2,947,000,
$1,725,000 and $1,129,000 for the years ended
December 31, 1998, 1997 and 1996 . At December 31,
1998, the approximate minimum rental commitments
under all noncancelable operating leases are as
follows:
Year Amount
---------------------------------
1999 $2,618,000
2000 2,173,000
2001 1,587,000
2002 1,235,000
2003 and thereafter 872,000
---------------------------------
$8,485,000
=================================
F-51
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
12. Commitments and On November 1, 1998 the Company entered into a
Contingencies subleasing arrangement which expires on November
(Continued) 1, 1999. The sublease provides for monthly rental
income of $26,395. The lease has an option to
extend all or a portion of the sublease for an
additional year.
At December 31, 1998 and 1997, the Company was
servicing Title I loans for others totaling
approximately $4,433,000 and $6,352,000. 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 15). On January 1, 1997, the
Corporation entered into an employment agreement
with its Chief Financial Officer. In January 1999
the Company ended its relationship with the
President and Chief Executive Officer of Pacific
Thrift. In April 1999 a new President and Chief
Executive Officer of Pacific Thrift was appointed
(see Note 17- "Other Subsequent Events").
The agreements provide for initial terms ranging
from one to three years and all extend
automatically for additional one-year 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. In addition, one of the officers is also
entitled to received a special cash bonus equal to
1% of the annual pre-tax net income of the Company
calculated before payment of the special bonus but
after payment of the annual bonuses, under certain
conditions.
F-52
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
12. Commitments and Litigation
Contingencies
(Continued) On March 9, 1999 the Company was served with a
lawsuit with allegations related to the sale of
pools of loans between 1993 and 1995. The lawsuit
is for an amount in excess of $15 million plus
costs and unspecified punitive damages. Management
believes that there is no basis for any of the
allegations for several reasons. First, in spite
of the provisions of the loan sale agreements
which allow the party to demand that the Company
repurchase loans which did not meet
representations and warranties, the party has
requested that the Company repurchase less than
0.5% of the total amount of loans sold to the
party over the approximately three year period
that the loans were sold. Second, the party has
never previously identified to the Company any
problem loans other than those few loans the party
has previously requested be repurchased. Third,
the Company believes substantially all of the
loans sold to the party were written to the
party's own underwriting guidelines specifically
for sale to the party. Fourth, the party reviewed
in detail and approved every loan file for every
loan originated for sale to them prior to loan
funding. Fifth, the Company had an independent
review appraiser approved by the party, review
every appraisal for every loan originated for sale
to them. For these reasons, management of the
Company has no reason to believe that there is any
merit to the complaint and is unable to determine
the likelihood of an unfavorable outcome and range
of possible loss, if any.
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.
See Note 17 for Regulatory Matters and Capital
Adequacy.
F-53
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
13. Retirement The Company implemented a retirement savings plan
Plans (defined contribution plan) in 1994. All full-time
employees who have completed six months of service
and reached age 21 are eligible to participate in
the plan. Contributions are made from
employee-elected salary deferrals. The Company
matches the first 6% of employee contributions to
the plan at the rate of $.50 on the dollar. During
the years ended December 31, 1998, 1997 and 1996,
the Company's contributions to the plan totaled
$-0-, $231,000 and $241,000.
The Company implemented an employee severance plan
in 1994. Regular full-time and part-time (as
defined) employees receive severance benefits
based on their period of employment (Note 2V).
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 1998, 1997, and 1996
includes the following components:
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C>
Service cost $187,000 $216,000 $ 26,000
Interest cost 221,000 218,000 42,000
Prior service cost 146,000 226,000 32,000
--------------------------------------------------------------
$554,000 $660,000 $100,000
==============================================================
</TABLE>
The net pension liability at December 31, 1998 and
1997 was $1,314,000 and $760,000.
Actuarial assumptions are a weighted average
discount rate of 7% and a salary progression rate
of 3%.
F-54
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
14. Stockholders' The Company has a 1995 Stock Option Plan and a
Equity/Partners' 1995 Stock Purchase Plan pursuant to which options
Capital, Stock to purchase shares of the Company's common stock
Options and may be granted to employees. The plans provide
Warrants 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, 1996, there were 466,800 shares
reserved for options to be granted under the
plans. The following summarizes stock option
transactions:
Weighted
Average
Price
Shares Per Share
-----------------------------------------------------------
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 (87,838) 5.18
Cancelled (25,880) 8.27
-----------------------------------------------------------
Outstanding at December 31, 1997 472,382 8.45
Granted 143,200 9.65
Exercised (72,205) 5.11
Cancelled (87,015) 10.67
-----------------------------------------------------------
Outstanding at December 31, 1998 456,362 $10.96
===========================================================
At December 31, 1996 the Corporation had 1,106,754
general partner warrants outstanding each
exercisable for one share of common stock at any
time until December 27, 1997 at an exercise price
of $7.50 per share. During the year ended December
31, 1997, 1,105,078 general partner warrants were
exercised. As of December 31, 1997, all
unexercised general partner warrants were
cancelled.
F-55
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
14. Stockholders' At December 31, 1998 and 1997 the Corporation had
Equity/Partners' zero and 52,052 subscriber warrants outstanding
Capital, Stock each exercisable for one share of common stock at
Options and any time until June 27, 1998 at an exercise price
Warrants of $6.25 per share. During the years ended
(Continued) December 31, 1998 and 1997, 50,236 and 75,730
subscriber warrants were exercised.
Information relating to stock options is
summarized by exercise price as follows
December 31, 1998
- --------------------------------------------------------------------------------
Outstanding
------------------------------------ Exercisable
Weighted Average -----------------------
Exercise Price -------------------------- Weighted
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------
$0.50 to $0.50 100 10.0 $ 0.50 -- $ --
$0.53 to $5.00 214,912 7.5 $ 4.94 69,712 $ 5.00
$6.25 to $14.50 68,650 8.0 $11.32 21,182 $ 9.92
$14.63 to $17.50 35,500 8.7 $15.51 12,025 $15.40
$17.75 to $17.75 100,000 9.5 $17.75 100,000 $17.75
$18.00 to $25.50 36,600 8.7 $22.39 2,675 $23.47
$25.75 to $25.75 200 8.8 $25.75 50 $25.75
$26.75 to $26.75 100 8.8 $26.75 25 $26.75
$27.00 to $27.00 125 8.8 $27.00 50 $27.00
$28.75 to $28.75 175 8.8 $28.75 100 $28.75
- --------------------------------------------------------------------------------
$0.50 to $28.75 456,362 8.2 $10.96 205,819 $12.57
================================================================================
All stock options issued to employees have an
exercise price not less than the fair market value
of the Company's common stock on the date of
grant, and in accordance with accounting for such
options utilizing the 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 (loss) from continuing
operations and earnings (loss) per share from
continuing operations for the year ended December
31, 1998 and 1997 would have been reduced to the
pro forma amounts presented below:
1998 1997
-------------------------------------------------------
Net income
As reported $(24,488,000) $17,095,000
Pro forma (26,547,000) 16,794,000
Earnings per share
As reported
Basic $ (4.82) $ 4.18
Diluted (4.82) 3.48
Pro forma
Basic $ (5.23) 4.10
Diluted (5.23) 3.42
F-56
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
14. Stockholders' The fair value of option grants is estimated on
Equity/Partners' the date of grants utilizing the Black-Scholes
Capital, Stock option-pricing model with the following weighted
Options and average assumptions for grants in 1998 and 1997,
Warrants expected life of options of 8 years for both
(Continued) years, expected volatility of 161% and 50%,
risk-free interest rates of 5.50% and 5.74%, and a
0% dividend yield for both years. The weighted
average fair value at date of grant for options
granted during 1998 and 1997 approximated $16.65
and $9.56 per option.
15. Quarterly Results The unaudited quarterly results of operations for
of Operations 1998 and 1997 are as follows (in $000's):
(Unaudited)
Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
- --------------------------------------------------------------------------------
Interest income $ 3,222 $ 3,562 $ 5,108 $ 4,768
Interest expense 2,116 3,134 3,696 6,268
- --------------------------------------------------------------------------------
Net interest income 1,106 428 1,412 (1,500)
Provision for loan losses 1,413 1,840 (531) (1,408)
Noninterest income 22,805 28,307* (23,058)** 5,734
Noninterest expense 17,140 18,510 18,175 15,573
Income tax benefit (expense) (2,250) (3,563) 16,896 (93)
- --------------------------------------------------------------------------------
Net income (loss) $ 3,108 $ 4,822 $(22,394) $(10,024)
================================================================================
Net income per share:
Basic $ .62 $ .95 $ (4.35) $ (1.95)
Diluted .58 .90 (4.35) (1.95)
Quarter Ended
------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
- --------------------------------------------------------------------------------
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
Noninterest income 13,425 18,308 22,605 27,717***
Noninterest 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
F-57
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
15. Quarterly Results * At June 30, 1998, the Company recorded a
of Operations prefunding receivable of $52,268,000 for
(Unaudited) loans which were pre-sold as part of the June
(Continued) 1998 securitization which resulted in a
$22,635,000 gain on sale of loans. The
prefunding receivable was subsequently
collected in full in August 1998.
** During the quarter ended September 30, 1998
the company recorded a $33,500,000 net
unrealized holding loss which is included in
gain on sale of loans.
*** In the quarter ended December 31, 1997 as a
result of a change in estimate the
interest-only strip receivable was adjusted.
The Company also completed its first direct
securitization offering in the fourth
quarter.
16. Discontinued Effective December 31, 1996, the Company's trustee
Operations 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.
Net assets disposed of were $2,674,000 against
proceeds of $1,748,000 resulting in a loss of
approximately $926,000. The $1,748,000 was
included in accounts receivable at December 31,
1996 and $450,000 was received by early February
1997. The remaining $1,298,000 represented a
secured promissory note and 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.
F-58
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
17. Regulatory Matters Cease and Desist Order by the Federal Deposit
and Capital Insurance Corporation and California Department
Adequacy and of Corporations
Subsequent Events
On April 1, 1996, Pacific Thrift entered into a
Memorandum of Understanding (MOU) with the FDIC
and DOC. The 1996 MOU provided that Pacific Thrift
was required to: (i) maintain Tier 1 capital of
not less than 8.0% of total assets; (ii) maintain
an adequate reserve for loan losses; (iii)
eliminate assets classified "loss" as of September
30, 1995, reduce assets classified "substandard"
as of September 30, 1995 to not more than $4.0
million within 180 days and reduce all users
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 net interest margin on portfolio loans
and develop procedures to implement those
strategies; and (vi) furnish written quarterly
progress reports.
On March 9, 1998, the 1996 MOU was replaced with a
new MOU (the "1998 MOU") between Pacific Thrift
and the FDIC. The 1998 MOU required Pacific Thrift
to: (i) maintain Tier 1 capital of not less than
8.0% of total assets; (ii) by July 7, 1998, have,
and thereafter maintain, risk-based capital of not
less than 10.0% of 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" to $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 strips
receivable, and thereafter obtain an annual
independent valuation of such receivables until
they represent no more than 50% of Tier 1 capital;
(vii) by June 7, 1998, and thereafter quarterly,
perform valuations and cash flow analyses on the
interest-only strips receivable; (viii) by May 8,
1998, eliminate and/or correct certain
transactions between the Company and Pacific
Thrift and develop, adopt and implement a written
policy governing the relationship between the
Company and Pacific Thrift; (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 Pacific Thrift's interest rate risk
process; (x) pay no cash dividends without prior
written FDIC approval; (xi) pay no executive or
director bonuses without prior written FDIC
approval; (xii) by June 7, 1998, submit a
strategic plan covering the period 1998 through
2000 reflecting restricted growth of interest-only
strips receivable; and (xiii) by May 15, 1998, and
thereafter at the end of each quarter, furnish
written progress reports.
F-59
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
17. Regulatory Matters Cease and Desist Order by the Federal Deposit
and Capital Insurance Corpora-tion and California Department
Adequacy and of Corporations (Continued)
Subsequent Events
(continued) On November 6, 1998, Pacific Thrift entered into a
stipulation and consent to an order issued by the
California Department of Financial Institutions
(the "DFI), which assumed jurisdiction over
Pacific Thrift from the DOC in July 1998, under
which Pacific Thrift agreed: (i) that it will not
issue loan commitments without having a clearly
identified and reasonably assured source of funds,
such as deposits, loan sale commitments or other
source of funds, such as deposits, loan sale
commitments or other financing, with which to fund
its loans; (ii) that it will not make any
shareholder distributions except with the prior
written approval of the DFI; and (iii) that it
will discontinue selling loans under conduit loan
sale arrangements. The DFI Order is currently in
effect, and management believes that Pacific
Thrift will be able to comply with all of the
terms of the DFI order.
On December 14, 1998, Pacific Thrift entered into
a stipulation and consent to an Order to Cease and
Desist issued by the FDIC (the "1998 Order") which
replaced the 1998 MOU. Under the 1998 Order,
Pacific Thrift has agreed: (i) to have and retain
qualified management to operate its regulated
business; (ii) to achieve, by January 31, 1999,
and thereafter maintain, Tier 1 capital equal to
or in excess of 8.0 percent of its total assets,
and to achieve, by June 30, 1999, and thereafter
maintain, Tier 1 risk-based capital of no less
than 6.0 percent and total risk-based capital of
no less than 10.0 percent; (iii) to maintain an
adequate allowance for loan losses; (iv) to take
the following steps with regard to its
interest-only strips receivables: (a) by June 30,
1999, reduce the amount of the receivable as a
percentage of total capital to no more than 100%;
(b) not acquire or book any additional
interest-only strips receivable; and (c) obtain
quarterly and annual independent valuations of the
existing interest-only strips receivable; (v) to
prepare and submit a written two-year
business/strategic plan; (vi) by February 27, 1999
eliminate and/or correct violations of Sections
23A and B of the Federal Reserve Act and Sections
18025, 18448 and 18455(b) of the California
Financial Code relating to certain transactions
between the Company and its subsidiary; (vii) by
February 27, 1999, to develop a revised written
asset/liability management policy specifically
addressing interest rate risks associated with the
mortgage banking business; (viii) not to pay cash
dividends or distributions without the prior
written consent of the FDIC;
F-60
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
17. Regulatory Matters Cease and Desist Order by the Federal Deposit
and Capital Insurance Corpora-tion and California Department
Adequacy and of Corporations
Subsequent Events
(continued) (ix) not to enter into any executive compensation
and/or bonus agreements without prior approval of
the FDIC; (x) to develop and implement a written
policy for all intercompany transactions with
affiliates; (xi) to furnish a description of the
Order to its shareholder; and (xii) to furnish
written quarterly progress reports detailing
actions taken to comply with the Order. The 1998
Order is currently in effect, and Pacific Thrift
has taken certain actions to comply with the terms
of the Order including no longer selling loans
under a conduit loan sale agreement.
In March 1999, Pacific Thrift entered into an
additional stipulation and consent to an Order to
Cease and Desist (the 1999 order) issued by the
FDIC under which Pacific agreed to: (i) operate
with a Board of Directors which provides adequate
supervision and direction with respect to the
electronic information systems and other automated
systems (Bank Information Systems); (ii) take
appropriate measures to ensure that the Bank
Information Systems are Year 2000 compliant and in
March 1999, designate an executive officer as the
Year 2000 Officer; (iii) authorize the Year 2000
Officer to appoint additional personnel to assist
in complying with the provisions in this order
relating to Year 2000 readiness; (iv) as long as
this order remains in effect, notify the Regional
Director of the FDIC's Regional Office ("Regional
Director") in writing of any vacancy in the Year
2000 position or change in the person filling the
position; (v) within 15 days from the effective
date of the order, develop and adopt a plan for
achieving Year 2000 readiness ("Year 2000 Plan");
(vi) the Year 2000 Plan to be reviewed and
approved by Pacific Thrift's Board of Directors
prior to adoption, and submit a copy of the plan
to the Regional Director; (vii) by April 15, 1999,
develop and implement a Remediation Contingency
Plan which includes alternate external third party
suppliers or ready replacement computer hardware
or software from alternate sources; (viii) by June
30, 1999, develop a Business Resumption
Contingency Plan; (ix) by no later than June 30,
1999, have in place mission-critical systems that
are Year 2000 ready; (x) for so long as the order
is in effect, acquire or contract for the use of
electronic information systems hardware, operating
systems, and applications software only if this
hardware, systems, and software have been
successfully tested for Year 2000 readiness; (xi)
by April 1999, perform due diligence reviews to
F-61
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
17. Regulatory Matters Cease and Desist Order by the Federal Deposit
and Capital Insurance Corporation and California Department
Adequacy and of Corporations
Subsequent Events
(continued) determine whether the Year 2000 readiness
procedures of its service providers and software
vendors, and the time frames for implementation of
those procedures, are adequate; (xii) by March 31,
1999, implement an internal testing or
verification process; (xiii) in March 1999, amend
its internal and external audit policies to
require periodic audits of the Year 2000 Plan and
its implementation; (xiv) provide monthly status
reports to Pacific Thrift's Board of Directors.
Noncompliance with the terms of the 1998 Order or
1999 Order could result in various regulatory
actions, including the assessment of civil money
penalties, termination of deposit insurance, and
placing Pacific Thrift in conservatorship or
receivership. Management expects that Pacific
Thrift will continue to work toward substantial
compliance with the 1998 Order and the 1999 Order,
however there is no assurance Pacific Thrift will
be able to fully comply with these Orders. These
financial statements do not include any provisions
or adjustments that might result from the outcome
of these uncertainties.
Capital Adequacy
Pacific Thrift is subject to various regulatory
capital requirements administered by the FDIC.
Failure to meet minimum capital requirements can
initiate certain mandatory and possibly
discretionary - actions by the FDIC that, if
undertaken, could have a direct material effect on
the Company's financial statements. The
regulations require Pacific Thrift to meet
specific capital adequacy guidelines that involve
quantitative measures of Pacific Thrift's assets,
liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting
practices. Pacific Thrift's capital classification
is also subject to qualitative judgments by the
regulators about components, risk weightings, and
other factors. At December 31, 1998, Pacific
Thrift did not meet the minimum capital
requirements to be considered "adequately
capitalized" by the FDIC.
F-62
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
17. Regulatory Matters Capital Adequacy (Continued)
and Capital
Adequacy and Quantitative measures established by regulation to
Subsequent Events ensure capital adequacy require Pacific Thrift to
(continued) 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.
According to the following capital ratios, Pacific
Thrift is categorized as "Significantly
Undercapitalized" at December 31, 1998 and
"Undercapitalized" at December 31, 1997 according
to the prompt corrective action provisions of Part
325 of Federal Deposit Insurance Corporation Rules
and Regulations.
(Dollar Amounts in Thousands)
----------------------------------------
For Required Capital
Actual Adequacy Purposes
----------------- -------------------
Amount Ratio Amount Ratio
----------------------------------------------------------------------------
As of December 31, 1998
Total capital (to risk weighted
assets) $14,149 3.6% $31,403 8.0%
Tier 1 capital (to risk weighted
assets) $12,773 3.2% $15,701 4.0%
Tier 1 capital (to average $12,733 6.9% $ 7,403 4.0%
assets)
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 April 9, 1999 Pacific Thrift has not met the
capital requirements specified in the 1998 order.
Other Subsequent Events
In January 1999, the employment of its Senior
Executive Vice President who also served as
President and Chief Operating Officer of Pacific
Thrift was terminated. The Company entered into a
negotiated separation agreement with the officer
dated as of March 9, 1999 which provided for the
officer to receive an unsecured note for $475,000
payable over two years beginning January 1, 2002.
Pacific Thrift entered into a consulting agreement
with the former officer dated March 9, 1999 which
provides for a consulting fee of $10,000 per month
for six months. Both agreements are subject to
approval of the FDIC which has not yet been
received.
On April 9, 1999, Pacific Thrift entered into an
employment agreement with its new President and
Chief Executive Officer. The agreement provides
for a term of one year, with automatic renewal
successive one year terms unless either party
notifies the other of nonrenewal 60 days before
expiration of the current term. This agreement is
subject to approval of the FDIC.
F-63
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
18. Business The Company's loans held for sale and loans
Concentrations and receivable consist of mortgage loans to borrowers,
Off Balance Sheet primarily secured by first or second trust deeds
Risk on California real estate. The loans are
collateralized by the borrowers equity in
single-family residential and other types of real
estate. Loans are expected to be repaid either by
cash from the borrower at maturity or by borrower
refinancing. The Company would incur a loss in the
amount of the loan balance plus accrued interest
to the extent of any collateral deficiency.
The Company has a significant concentration in
interest-only strips receivable which are
dependant on performance of the underlying
mortgages held by the securitization trust.
During 1998, the Company's loan origination 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. 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-64
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule I
Consolidating Schedule - Financial Position
December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific- Reclassifying and
America Thrift America America Eliminating Entries
Money and Loan Money Securities, ----------------------
Center Company Centers, Inc. Inc. Dr Cr Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 304,000 $ 41,312,000 $195,000 $ -- $ -- $ -- $ 41,811,000
Cash - restricted -- 454,000 128,000 -- -- -- 582,000
Accounts receivables -- 132,000 -- -- -- -- 132,000
Accrued interest receivable -- 1,315,000 -- -- -- -- 1,315,000
Refundable income taxes -- -- -- -- -- -- --
Receivable from related parties 134,000 81,000 -- 1,000 -- 1,000 215,000
Loans held for sale -- 72,814,000 -- -- -- -- 72,814,000
Loans receivable 14,000 9,430,000 -- -- -- -- 9,444,000
Other real estate -- 218,000 1,000 -- -- -- 219,000
Interest-only strip receivable 67,023,000 49,605,000 -- -- -- -- 116,628,000
Property and equipment 56,000 4,345,000 20,000 -- -- -- 4,421,000
Deferred tax asset 8,429,000 -- -- -- -- 8,429,000 --
Other assets 466,000 2,089,000 78,000 -- -- -- 2,633,000
Investments in subsidiaries 12,922,000 -- -- -- -- 12,922,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
$89,349,000 $181,794,000 $422,000 $1,000 $ -- $21,352,000 $250,214,000
====================================================================================================================================
</TABLE>
See report of independent certified public accountants and notes to consolidated
financial statements.
F-65
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule I
Consolidating Schedule - Financial Position
December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific- Reclassifying and
America Thrift America America Eliminating Entries
Money and Loan Money Securities, ----------------------
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 $ -- $132,618,000 $ -- $ -- $ -- $ -- $132,618,000
Installment certificates -- 29,692,000 -- -- -- -- 29,962,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total thrift certificates payable -- 162,310,000 -- -- -- -- 162,310,000
Accounts payable and accrued 2,464,000 2,307,000 232,000 -- -- -- 5,003,000
expenses
Accrued interest payable 2,795,000 508,000 -- -- -- -- 3,303,000
Payable to related party (1,000) -- 1,000 -- -- -- --
Notes payable 52,958,000 -- -- -- -- -- 52,958,000
Notes payable - officer 174,000 -- -- -- -- -- 174,000
Deferred income taxes, net 5,678,000 3,936,000 -- -- 8,429,000 -- 1,185,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 64,068,000 169,061,000 233,000 -- 8,429,000 -- 224,933,000
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 52,000 3,000,000 3,000 1,000 3,004,000 -- 52,000
Additional paid-in capital 28,460,000 10,104,000 3,987,000 -- 14,091,000 -- 28,460,000
Retained earnings (3,231,000) (371,000) (3,801,000) -- 7,513,000 11,685,000 (3,231,000)
(accumulated deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 25,281,000 12,733,000 189,000 1,000 24,608,000 11,685,000 25,281,000
- ------------------------------------------------------------------------------------------------------------------------------------
$89,349,000 $181,794,000 $ 422,000 $ 1,000 $33,037,000 $11,685,000 $250,214,000
====================================================================================================================================
</TABLE>
See report of independent certified public accountants and notes to consolidated
financial statements.
F-66
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule II
Consolidating Schedule - Operations
Year Ended December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific- Reclassifying and
America Thrift America America Eliminating Entries
Money and Loan Money Securities, ---------------------
Center Inc. Company Centers, Inc. Inc. Dr Cr Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Loans receivable $ 37,000 $12,079,000 $ 81,000 $ -- $ -- $3,842,000 $16,039,000
Deposits with financial position -- 621,000 -- -- -- -- 621,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 37,000 12,700,000 81,000 -- -- 3,842,000 16,660,000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense
Thrift certificates greater than $100,000 -- 120,000 -- -- -- -- 120,000
Other thrift certificates -- 8,098,000 -- -- -- -- 8,098,000
Notes payable and warehouse financing 3,154,000 -- -- -- 3,842,000 -- 6,996,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,154,000 8,218,000 -- -- 3,842,000 -- 15,214,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest expense 3,117,000 4,482,000 81,000 -- -- -- 1,446,000
Provision for loan losses (65,000) 1,536,000 (157,000) -- -- -- 1,314,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (loss) after
provision for loan losses (3,052,000) 2,946,000 238,000 -- (3,842,000) 3,842,000 132,000
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest income
Other income 159,000 768,000 79,000 -- -- -- 1,006,000
Gain (loss) on sale of loans (17,577,000) 50,831,000 (472,000) -- -- -- 32,782,000
Loan servicing fees -- 71,000 -- -- 71,000 -- --
Equity in income of subsidiaries (7,772,000) -- -- -- -- 7,772,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income (25,190,000) 51,670,000 (393,000) -- 71,000 7,772,000 33,788,000
====================================================================================================================================
</TABLE>
See report of independent certified public accountants and notes to consolidated
financial statements.
F-67
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule II
Consolidating Schedule - Operations
Year Ended December 31, 1998
(Continued)
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific- Reclassifying and
America Thrift America America Eliminating Entries
Money and Loan Money Securities, -------------------
Center Inc. Company Centers, Inc. Inc. Dr Cr Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest expense
Salaries and employee benefits 1,194,000 32,597,000 375,000 -- -- -- 34,166,000
General and administrative expenses 2,574,000 24,871,000 277,000 -- -- 71,000 27,651,000
Occupancy expense 749,000 2,141,000 57,000 -- -- -- 2,947,000
Operations of other real estate -- 153,000 (29,000) -- -- -- 124,000
Depreciation and amortization 31,000 941,000 2,000 -- -- -- 974,000
Restructuring charge 896,000 2,576,000 64,000 -- -- -- 3,536,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 5,444,000 63,279,000 746,000 -- -- 71,000 69,398,000
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (33,686,000) (8,663,000) (901,000) -- 3,913,000 11,685,000 (35,478,000)
Income tax expense (benefit) 9,198,000 2,471,000 (679,000) -- -- -- 10,990,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 24,488,000 $ (6,192,000) $(1,580,000) $ -- $3,913,000 $11,685,000 $(24,488,000)
===================================================================================================================================
</TABLE>
See report of independent certified public accountants and notes to consolidated
financial statements.
F-68
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule III
Consolidating Schedule - Financial Position
December 31, 1997
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific- Reclassifying and
America Thrift America America Eliminating Entries
Money and Loan Money Securities, ----------------------
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 $ 61,004,000 $ 903,000 $ -- $ -- $ -- $ 65,927,000
Cash - restricted -- 133,000 30,000 163,000
Receivables 140,000 1,305,000 164,000 -- -- 77,000 1,532,000
Accrued interest receivable -- 1,174,000 100,000 -- -- -- 1,274,000
Refundable income taxes -- 222,000 -- -- -- -- 222,000
Receivable from related parties 198,000 1,968,000 7,000 1,000 -- 2,091,000 83,000
Notes receivable 1,015,000 -- -- -- -- -- 1,015,000
Loans held for sale -- 35,280,000 -- -- -- -- 35,280,000
Loans receivable 542,000 19,646,000 441,000 -- -- -- 20,629,000
Other real estate -- 1,718,000 310,000 -- -- -- 2,028,000
Interest-only strip receivable 61,132,000 33,292,000 -- -- -- -- 94,424,000
Property and equipment 50,000 3,543,000 3,000 -- -- -- 3,596,000
Other assets 481,000 1,150,000 62,000 -- -- -- 1,693,000
Investments in subsidiaries 20,610,000 -- -- -- -- 20,610,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
$ 88,188,000 $160,435,000 $2,020,000 $ 1,000 $ -- $ 22,778,000 $227,866,000
====================================================================================================================================
</TABLE>
See report of independent certified public accountants and notes to consolidated
financial statements.
F-69
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule III
Consolidating Schedule - Financial Position
December 31, 1997
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific- Reclassifying and
America Thrift America America Eliminating Entries
Money and Loan Money Securities, --------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Total thrift certificates -- 132,524,000 -- -- -- -- 132,524,000
payable
Accounts payable and accrued 3,309,000 2,237,000 575,000 -- -- -- 6,121,000
expenses
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, net 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 -- 27,079,000
Retained 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 report of independent certified public accountants and notes to consolidated
financial statements.
F-70
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule IV
Consolidating Schedule - Operations
Year Ended December 31, 1997
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific- Reclassifying and
America Thrift America America Eliminating Entries
Money and Loan Money Securities, -------------------
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 $ -- $ -- $374,000 $11,707,000
Deposits with financial position -- 397,000 -- -- -- -- 397,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 800,000 10,562,000 368,000 -- -- -- 12,104,000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense
Thrift certificates greater -- 50,000 -- -- -- -- 50,000
than $100,000
Other thrift certificates -- 5,457,000 -- -- -- -- 5,457,000
Notes payable 1,023,000 -- 10,000 -- 374,000 -- 1,407,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,023,000 5,507,000 10,000 -- -- -- 6,914,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (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 27,726,000 53,984,000 -- -- -- -- 81,710,000
Loan servicing fees -- 145,000 -- -- 145,000 -- --
Equity in income of subsidiaries 11,052,000 -- -- -- 11,052,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 38,785,000 54,392,000 75,000 -- 11,197,000 -- 82,055,000
====================================================================================================================================
</TABLE>
See report of independent certified public accountants and notes to consolidated
financial statements.
F-71
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule IV
Consolidating Schedule - Operations
Year Ended December 31, 1997
(Continued)
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Pacific- Pacific- Reclassifying and
America Thrift America America Eliminating Entries
Money and Loan Money Securities, -------------------
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 4,703,000 17,473,000 383,000 -- -- 145,000 22,414,000
expenses
Occupancy expense 208,000 1,479,000 38,000 -- -- -- 1,725,000
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 (878,000) -- 11,197,000 145,000 29,563,000
Income tax expense (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 $ (832,000) $ -- $11,243,000 $5,198,000 $17,095,000
====================================================================================================================================
</TABLE>
See report of independent certified public accountants and notes to consolidated
financial statements.
F-72
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule V
Consolidating Schedule - Operations
Year Ended December 31, 1996
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Lenders Consolidated
America Thrift Consolidated Posting and Reconveyance Pacific-
Money and Loan Reconveyance Publishing Corporation, America
Center Inc. Company Company Company WA Lending
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans receivable $ 614,000 $10,256,000 $ -- $ -- $ -- $ 304,000
Deposits with financial 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 -- -- -- -- 134,000
- -----------------------------------------------------------------------------------------------------------------------------
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 loans 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
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Eliminating Entries
-------------------------
Dr Cr Consolidated
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans receivable $ -- $ -- $11,174,000
Deposits with financial 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-73
<PAGE>
PacificAmerica Money Center, Inc.
and Subsidiaries
Schedule V
Consolidating Schedule - Operations
Year Ended December 31, 1996
(Continued)
================================================================================
<TABLE>
<CAPTION>
Pacific- Pacific Lenders Consolidated
America Thrift Consolidated Posting and Reconveyance Pacific-
Money and Loan Reconveyance Publishing Corporation, America
Center Inc. Company Company Company WA Lending
- ---------------------------------------------------------------------------------------------------------------------------
<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 2,977,000 7,933,000 782,000 142,000 1,000 145,000
Occupancy expense 27,000 934,000 165,000 -- -- 3,000
Related party fees 1,071,000 -- -- -- -- --
Operations of other real estate 102,000 465,000 -- -- -- 114,000
Depreciation and amortization 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
===========================================================================================================================
<CAPTION>
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 10,890,000
Occupancy expense -- -- 1,129,000
Related party fees -- 199,000 872,000
Operations of other real estate -- -- 681,000
Depreciation and amortization -- 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 tax expense (benefit) -- 3,000 1,658,000
- -------------------------------------------------------------------------------------
Income from continuing operations 11,690,000 4,115,000 4,813,000
Loss from discontinued operations 3,917,000 3,266,000 (651,000)
- -------------------------------------------------------------------------------------
Net income $15,607,000 $7,381,000 $ 4,162,000
=====================================================================================
</TABLE>
See report of independent certified public accountants and notes to consolidated
financial statements.
F-74
<PAGE>
Index of Exhibits
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company, incorporated by reference
to Exhibit 3.1 of the Company'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 Company, 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.
10.1 Employment Agreement by and between the Company and Joel R. Schultz,
dated as of January 1, 1998 and approved by the stockholders at the
Annual Meeting held June 12, 1998.
10.2 Employment Agreement by and between the Company and Norman A.
Markiewicz, incorporated by reference to Exhibit 10.4 of the
Registration Statement.
10.3 Employment Agreement by and between the Company and Richard B. Fremed,
incorporated by reference to Exhibit 10.5 of the Registration Statement.
10.4 Employment Agreement by and between the Company and Charles J. Siegel,
incorporated by reference to Exhibit 10.7 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 ("1996 10-K").
10.5 Form of Indemnification Agreement by and between the Company and each of
its directors and executive officers, incorporated by reference to
Exhibit 10.7 of the Registration Statement.
10.6 Stock Option Plan of the Company, dated January 1, 1996, incorporated by
reference to Exhibit 10.8 of the Registration Statement.
10.7 Stock Purchase Plan of the Company, dated January 1, 1996, incorporated
by reference to Exhibit 10.9 of the Registration Statement.
10.8 Supplemental Executive Retirement Plan of the Company, dated January 1,
1996, incorporated by reference to Exhibit 10.10 of the Registration
Statement.
10.9 Master Loan Purchase Agreement dated as of October 31, 1996, by and
between the Company and Aames Capital Corporation, incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the
quarter ended September 30, 1996.
10.10 First and Second Amendments to Master Loan Purchase Agreement by and
between the Company and Aames Capital Corporation, incorporated by
reference to Exhibit 10.13 to 1996 10-K.
10.11 Amended and Restated Corporate Finance Agreement, dated as of January
27, 1997, by and among the Company, Advanta Mortgage Conduit Services,
Inc. and Advanta Mortgage Corp. USA, incorporated by reference to
Exhibit 10.14 of the 1996 10-K.
10.12 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 Company, 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 Company's Report on Form 8-K for December 31,
1996.
S-2
<PAGE>
10.13 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 Company's
Report on Form 8-K for December 18, 1997 (the "December 1997 8-K").
10.14 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 December 1997 8-K.
10.15 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 December
1997 8-K.
10.16 Home Equity Loan Purchase Agreement, dated as of March 19, 1998, by and
among the Company, Merrill Lynch Mortgage Investors, Inc. ("Depositor"),
PacificAmerica Home Equity Loan Trust Series 1998-1, as issuer (the
"Trust"), and Bankers Trust Company of California, N.A. ("Indenture
Trustee"), incorporated by reference to Exhibit 10.1 of the Company's
Report on Form 8-K for March 25, 1998 (the "March 1998 8-K").
10.17 Indenture, dated as of March 1, 1998, between the Trust and the
Indenture Trustee, incorporated by reference to Exhibit 10.2 of the
March 1998 8-K. .
10.18 Amended and Restated Trust Agreement, dated as of March 1, 1998, between
the Depositor and Wilmington Trust Company ("Owner Trustee"),
incorporated by reference to Exhibit 10.3 of the March 1998 8-K.
10.19 Servicing Agreement dated March 1, 1998 by and among the Company, the
Indenture Trustee and the Trust, incorporated by reference to Exhibit
10.3 of the March 1998 8-K.
10.20 Home Equity Loan Purchase Agreement, dated as of June 22, 1998, by and
among the Company, Merrill Lynch Mortgage Investors, Inc. ("Depositor"),
PacificAmerica Home Equity Loan Trust Series 1998-2F, as issuer (the
"Trust"), and Bankers Trust Company of California, N.A. ("Indenture
Trustee"), incorporated by reference to Exhibit 10.1 of the Company's
Report on Form 8-K for June 25, 1998 (the "June 1998 8-K").
10.21 Indenture, dated as of June 1, 1998, between the Trust and the Indenture
Trustee.
10.22 Amended and Restated Trust Agreement, dated as of June 1, 1998, between
the Depositor and Wilmington Trust Company ("Owner Trustee"),
incorporated by reference to Exhibit 10.2 of the June 1998 8-K.
10.23 Servicing Agreement dated June 1, 1998, by and among the Company, the
Indenture Trustee and the Trust, incorporated by reference to Exhibit
10.3 of the June 1998 8-K.
10.24 Secured Promissory Note dated September 17, 1998 of the Company payable
to Fremont Financial Corporation, incorporated by reference to Exhibit
10.1 of the Company's Report on Form 8-K for September 17, 1998 (the
"September 1998 8-K").
10.25 Stock Pledge Agreement between the Company and Fremont Financial
Corporation, incorporated by reference to Exhibit 10.2 of the September
1998 8-K.
21.1 Subsidiaries of the Company, incorporated by reference to Exhibit 21.1
of the Company's 1997 10-K.
27 Financial Data Schedule
S-2
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 41,565
<INT-BEARING-DEPOSITS> 246
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 116,628
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 83,122
<ALLOWANCE> 864
<TOTAL-ASSETS> 250,214
<DEPOSITS> 162,310
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,491
<LONG-TERM> 53,132
0
0
<COMMON> 52
<OTHER-SE> 25,229
<TOTAL-LIABILITIES-AND-EQUITY> 250,214
<INTEREST-LOAN> 16,039
<INTEREST-INVEST> 621
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,660
<INTEREST-DEPOSIT> 8,218
<INTEREST-EXPENSE> 15,214
<INTEREST-INCOME-NET> 1,446
<LOAN-LOSSES> 1,314
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 69,398
<INCOME-PRETAX> (35,478)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,488)
<EPS-PRIMARY> (4.82)
<EPS-DILUTED> (4.82)
<YIELD-ACTUAL> 0.89
<LOANS-NON> 3,841
<LOANS-PAST> 412
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,438
<CHARGE-OFFS> 1,888
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 864
<ALLOWANCE-DOMESTIC> 864
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
