-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Q2TpTGBvd5sybZVBDTJ+hJSZVixM1Kk4hLerN13LB+DN8Frvv1VeT8b7xJgiVS47 ebriZ3Ujz6YfKXo8a5n2yw== 0000356050-94-000009.txt : 19941117 0000356050-94-000009.hdr.sgml : 19941117 ACCESSION NUMBER: 0000356050-94-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941109 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CU BANCORP CENTRAL INDEX KEY: 0000356050 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 953657044 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11008 FILM NUMBER: 94558302 BUSINESS ADDRESS: STREET 1: 16030 VENTURA BLVD CITY: ENCINO STATE: CA ZIP: 91436-4487 BUSINESS PHONE: 8189079122 MAIL ADDRESS: STREET 1: 16030 VENTURA BLVD CITY: ENCINO STATE: CA ZIP: 91436-4487 FORMER COMPANY: FORMER CONFORMED NAME: LINCOLN BANCORP DATE OF NAME CHANGE: 19900814 10-Q 1 Version 3 29 11/2/94 2:12 PM FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. /X/ For the Quarterly Period Ended September 30, 1994, or Transition Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________. Commission File Number 0-11008 CU BANCORP (Exact name of registrant as specified in its charter) California 95-3657044 (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 818-907-9122 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address, and former fiscal year if changes since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of September 30, 1994, the Registrant has outstanding 4,473,312 shares of its Common stock, no par value. CU Bancorp Quarter Ended September 30, 1994 Table of Contents - Form 10-Q Page Part I. Financial Information Item 1. Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operation. 3 Consolidated Statements of Financial Condition: -September 30, 1994, and December 31, 1993. 19 Consolidated Statements of Income: -Three and Nine month Periods Ended September 30, 1994, and September 30, 1993. 20 Consolidated Statements of Cash Flows: -Nine month Periods Ended September 30, 1994, and September 30, 1993. 21 Notes to Consolidated Financial Statements 22 Signatures 25 Part II. Other Information Item 1. Legal Proceedings 26 Item 2. Changes in Securities 26 Item 3. Defaults Upon Senior Securities 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Information 26 Item 6. Exhibits and Filings on Form 8-K 26 Management Discussion and Analysis Overview The Company earned $671 thousand, or $0.14 per share, during the third quarter of 1994, compared to $566 thousand, or $0.13 per share, during the same period in 1993. Third quarter 1994 earnings included profitable performance by the Bank and a gain on the sale of a portion of the mortgage servicing rights retained by the Bank when its mortgage origination network was sold in 1993. The Bank's asset quality ratios continue to be exceptionally strong. At September 30, 1994, nonperforming assets were $113 thousand, down $0.9 million, or 89%, from the prior quarter, and $0.9 million, or 89% from the third quarter of 1993. At September 30, 1994, the Bank did not have any real estate acquired through foreclosure. The Bank's allowance for loan losses as a percent of both nonperforming loans and nonperforming assets at the end of the third quarter of 1994 was 6611%, compared to third quarter 1993 levels of 536% and 142%, respectively. The allowance for loan losses as a percentage of nonperforming loans and assets has increased as both nonperforming categories were reduced. During the first nine months of 1994, the Bank enjoyed a net recovery as recoveries exceeded chargeoffs for the third consecutive quarter. Net recoveries further increase the allowance's coverage of the nonperforming loans and assets. Capital ratios are strong, substantially exceeding levels required to be in the "well capitalized" category established by bank regulators. The Total Risk-Based Capital Ratio was 16.9%, the Tier 1 Risk-Based Capital Ratio was 15.6%, and the Leverage Ratio was 10.6% at September 30, 1994, compared to 16.7%, 15.4%, and 9.2%, respectively, at year-end 1993. Regulatory requirements for Total Risk-Based, Tier 1 Risk-Based, and Leverage capital ratios are a minimum of 8%, 4%, and 3%, respectively, and for classification as well capitalized, 10%, 6%, and 5%, respectively. The successful results in 1993 and 1994 concerning asset quality, regulatory relations, growth of middle market lending and strategic focus make expansion and growth possible. Two new loan production offices were opened in January 1994. These offices have allowed expanded market penetration and commercial portfolio diversification. Both offices have since been converted to branches. On April 1, 1994, the Bank acquired the deposits of the Encino branch of Mechanics National Bank from the FDIC, to expand and improve deposit mix. In October 1994, another loan production office was opened in Camarillo, California to be the Ventura County regional center. Balance Sheet Analysis Loan Portfolio Composition and Credit Risk Significant improvements in loan portfolio composition and credit quality are the result of management's commitment to middle market commercial lending and a strong credit culture. The credit standards established over two years ago have allowed creation of a high quality commercial loan portfolio and nearly eliminated non performing assets. Real estate concentrations established before that time have been reduced to the point that they are no longer concentrations. Concentrations of loans in any industry or collateral are now discouraged and limited by the Bank's credit policy. The Bank's focus on middle market lending, in its infancy at year-end 1992, gained momentum in 1993 and has further accelerated in 1994. Total loans increased over $19 million from December 31, 1993 to September 30, 1994. Offsetting this, the remaining Held for Sale mortgages of $10.4 million at December 31, 1993 were sold in the first quarter of 1994. Excluding this planned liquidation, loans increased by almost $30 million, or 23%, for the nine months ended September 30, 1994. Table 1 Loan Portfolio Composition
Amounts in thousands of dollars September 30, December 31, September 30, 1994 1993 1993 Commercial & Industrial Loans $152,548 $120,513 $119,285 Real Estate Loans: Held for Sale 0 10,426 93,999 Mortgages 6,383 8,496 9,183 Construction 18 1,226 232 Other Loans 861 0 187 Total loans net of unearned fees $159,810 $140,661 $222,886
Historically, the Bank's real estate loans secured by single family residences were principally mortgages held for sale that were originated by the Mortgage Banking Operation. These were sold to investors through firm commitments, generally in less than 90 days. The loans amounted to $10.4 million, or 7.4% of the December 31, 1993, loan portfolio. This part of the loan portfolio historically presented almost no credit risk. The sale of the mortgage origination operation eliminated this loan concentration. The remainder of real estate loans are generally collateralized by a first or second trust deed position. Lending efforts have been directed away from commercial real estate, as well as construction and multifamily lending. The Bank is now focused on business lending to middle market customers. Current credit policy in general now permits commercial real estate lending only as part of a complete commercial banking relationship with a middle market customer. Existing commercial real estate loans, 13% of the loan portfolio, or $21 million at September 30, 1994, compared to $27 million at year-end 1993, are secured by first or second liens on office buildings and other structures. The loans are secured by real estate that had appraisals in excess of loan amounts at origination. Monitoring and controlling the Bank's allowance for loan losses is a continuous process. All loans are assigned a risk grade, as defined by credit policies, at origination and are monitored to identify changing circumstances that could modify their inherent risks. These classifications are one of the criteria considered in determining the adequacy of the allowance for loan losses. The amount and composition of the allowance for loan losses is as follows: Table 2 Allocation of Allowance for Loan Losses
Amounts in thousands of dollars September 30, December 31, September 30, 1994 1993 1993 Commercial & Industrial Loans $6,916 $5,699 $4,923 Real estate loans - Held for Sale 0 67 67 Real estate loans - Mortgages 197 225 196 Real estate loans - Construction 0 10 28 Other loans 0 0 17 Loans 7,115 6,001 5,231 Unfunded commitments and letters 355 512 478 of credit Total Allowance for loan losses $7,470 $6,513 $5,709
Adequacy of the allowance is determined using management's estimates of the risk of loss for the portfolio and individual loans. Included in the criteria used to evaluate credit risk are, wherever appropriate, the borrower's cash flow, financial condition, management capabilities, and collateral valuations, as well as industry conditions. A portion of the allowance is established to address the risk inherent in general loan categories, historic loss experience, portfolio trends, economic conditions, and other factors. Based on this assessment, a provision for loan losses may be charged against earnings to maintain the adequacy of the allowance. The allocation of the allowance based upon the risks by type of loan, as shown in Table 2, implies a degree of precision that is not possible when using judgment. While the systematic approach used does consider a variety of segmentations of the portfolio, management considers the allowance a general reserve available to address risks throughout the entire loan portfolio. Activity in the allowance, classified by type of loan, is as follows: Table 3 Analysis of the Changes in the Allowance for Loan Loss
Amounts in thousands of dollars For the Periods Ended September 30, December 31, September 30, 1994 1993 1993 Balance at January 1 $6,513 $12,986 $12,986 Loans charged off: Real estate secured loans 486 3,266 3,266 Commercial loans secured and unsecured 574 6,582 6,203 Loans to individuals, installment and 99 901 484 other loans Total charge-offs 1,159 10,749 9,953 Recoveries of loans previously charged off: Real estate secured loans 545 393 135 Commercial loans secured and unsecured 1,568 3,189 1864 Loans to individuals, installment and 3 244 227 other loans Total recoveries of loans previously 2,116 3,826 2,226 charged off Net charge-off (recovery) (957) 6,923 7,727 Provision for loan losses 0 450 450 Balance at end of period $7,470 $6,513 $5,709 Net loan charge-offs (recoveries) as a percentage of average gross loans outstanding during the period ended (0.48%) 3.49% 2.98%
The Bank's policy concerning nonperforming loans is more conservative than is generally required. It defines nonperforming assets as all loans ninety days or more delinquent, loans classified nonaccrual, and foreclosed, or in substance foreclosed real estate. Nonaccrual loans are those whose interest accrual has been discontinued because the loan has become ninety days or more past due or there exists reasonable doubt as to the full and timely collection of principal or interest. When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against operating results. Subsequent payments on nonaccrual loans are treated as principal reductions. At September 30, 1994, nonperforming loans amounted to $113 thousand, down 93% from $1.4 million at December 31, 1993. Table 4: Nonperforming Assets
Amounts in thousands of dollars September 30, December 31, September 30, 1994 1993 1993 Loans not performing (1) $113 $1,378 $1,065 Other real estate owned 0 920 2,968 Total nonperforming assets $113 $2,298 $4,033 Allowance for loan losses as a percent of: Nonperforming loans 6611% 473% 536% Nonperforming assets 6611% 283% 142% Nonperforming assets as a 0.0% 0.8% 3.3% percent of total assets Nonperforming loans as a 0.1% 1.0% 3.0% percent of total loans Note 1: Loans not performing Performing as agreed $113 $9 $937 Partial performance 0 369 6 Not performing 0 1000 122 $113 $1,378 $1,065 Nonaccrual: Loans $113 $378 $1,065 Troubled debt restructurings 0 0 0
Securities The securities portfolio at September 30, 1994, totaled $64 million, compared to $88 million at year-end 1993. The securities are all held in a Held for Investment portfolio. This portfolio is recorded at amortized cost. It is the Bank's intention to hold these securities to their individual maturity dates. There was no Held for Sale portfolio at September 30, 1994 or year-end 1993. There have been no realized gains or losses on securities in the first nine months of 1994. Gains of $77 thousand were realized in the first nine months of 1993. At September 30, 1994, there were unrealized gains of $16 thousand and losses of $1.7 million in the securities portfolio. Additional information concerning securities is provided in the footnotes to the accompanying financial statements. Other Real Estate Owned At September 30, 1994, there was no Other Real Estate Owned on the Bank's balance sheet, compared with $920 thousand at December 31, 1993. The carrying values of these properties are at fair value, which is determined using recent appraisal values adjusted, if necessary, for other market conditions. Loan balances in excess of fair value are charged to the allowance for loan losses when the loan is reclassified to other real estate. Subsequent declines in fair value are charged against an allowance for real estate owned losses created by charging a provision to other operating expenses. During the third quarter of 1994, the bank sold one property held as Other Real Estate Owned, realizing a gain of $494 thousand, bringing year to date gains on real estate sales to $585 thousand. There were no comparable sales in 1993. Expenses related to Other Real Estate Owned were $21 thousand in the nine months ended September 30, 1994, with $9 thousand incurred in the third quarter. This compares to $74 thousand and $232 thousand in the three and nine month periods ended September 30, 1993. Deposit Concentration Due to its historic focus on real estate related activities, the Bank developed a concentration of deposit accounts from title insurance and escrow companies. These deposits are generally noninterest bearing transaction accounts that contribute to the Bank's interest margin. Noninterest expense related to these deposits is included in other operating expense. The Bank monitors the profitability of these accounts through an account analysis procedure. The Bank offers products and services allowing title insurance and escrow customers to operate with increased efficiency. A substantial portion of the services, provided through third party vendors, are automated data processing and accounting for trust balances maintained on deposit at the Bank. These and other banking related services, such as messenger and deposit courier services, will be limited or charged back to the customer if the deposit relationship profitability does not meet the Bank's expectations. Noninterest bearing deposits represent nearly the entire title and escrow relationship. These balances have been reduced substantially as the Bank focused on middle market business loans. The balance at September 30, 1994, was $39 million compared to $58 million at December 31, 1993. Costs relative to servicing the above relationships are the significant portion of the Bank's customer data processing and messenger and courier costs. There have been no significant changes in these costs in the first nine months of 1994. The Bank had $20.4 million in certificates of deposit larger than $100 thousand dollars at September 30, 1994. The maturity distribution of these deposits is relatively short term, with $15.7 million maturing within 3 months and the balance maturing within 12 months. Liquidity and Interest Rate Sensitivity The objective of liquidity management is to ensure the Bank's ability to meet cash requirements. The liquidity position is managed giving consideration to both on and off-balance sheet sources and demands for funds. Sources of liquidity include cash and cash equivalents (net of Federal Reserve requirements to maintain reserves against deposit liabilities), securities eligible for pledging to secure borrowings from dealers pursuant to repurchase agreements, loan repayments, deposits, and borrowings from a $20 million overnight federal funds line available from a correspondent bank. Potential significant liquidity requirements are withdrawals from noninterest bearing demand deposits and funding of commitments to loan customers. During 1993, the Bank maintained a $20 million line of credit with a major purchaser of the mortgage loans originated by the mortgage origination operation. This warehouse line was terminated in conjunction with the sale of that operation. From time to time the Bank may experience liquidity shortfalls ranging from one to several days. In these instances, the Bank will either purchase federal funds, and/or sell securities under repurchase agreements. These actions are intended to bridge mismatches between funding sources and requirements, and are designed to maintain the minimum required balances. The Bank had no Federal Funds purchased or borrowings under repurchase agreements in the first nine months of 1994. The Bank's portfolio of large certificates of deposit (those of $100 thousand or more) at September 30, 1994 was 8.4% of total deposits, compared to 8.1% at December 31, 1993. This funding source has traditionally been used to manage liquidity needs within the deposit portfolio. Table 6 Interest Rate Maturities of Earning Assets and Funding Liabilities at September 30, 1994
Amounts in thousands of dollars Amounts Maturing or Repricing in More Than 3 More Than 6 More Than 9 Months But Months But Months But Less Than Less Than Less Than Less than 12 Months 3 Months 6 Months 9 Months 12 Months & Over Earning Assets Gross Loans $148,940 $1,692 $4,231 $105 $4,842 Securities 4,388 3,009 3,000 3,002 51,052 Federal funds sold & other 12,000 --- --- --- --- Total earning assets 165,328 4,701 7,231 3,107 57,271 Interest-bearing deposits: Now and money market 77,393 Savings 10,337 Time certificates of deposit: Under $100 14,296 1,879 1,530 2,600 96 $100 or more 15,709 2,857 1,335 400 105 Non interest-bearing demand deposits 35,397 --- --- --- --- Total funding liabilities 153,132 4,736 2,865 3,000 201 Interest rate sensitivity gap 12,196 (35) 4,366 107 57,070 Cumulative interest rate sensitivity gap 12,196 12,161 16,527 16,634 73,704 Off balance sheet financial instruments 0 0 0 0 0 Net cumulative gap $12,196 $12,161 $16,527 $16,634 $73,704 Adjusted cumulative ratio of rate sensitive assets to rate sensitive liabilities (1) 1.08% 1.08% 1.10% 1.10% 1.45%
(1) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios less than 1.0 indicate a liability sensitive position. A ratio of 1.0 indicates a risk neutral position. Assets and liabilities shown on Table 6 are categorized based on contractual maturity dates. Maturities for those accounts without contractual maturities are estimated based on the Bank's experience with these customers. Noninterest bearing deposits of title and escrow companies, having no contractual maturity dates, are considered subject to more volatility than similar deposits from commercial customers. The net cumulative gap position shown in the table above indicates that the Bank does not have a significant exposure to interest rate fluctuations during the next twelve months. Capital Total shareholders' equity was $29.0 million at September 30, 1994, compared to $27.0 million at year-end 1993. This increase was due to earnings, plus the exercise of stock options. The Bank is guided by statutory capital requirements, which are measured with three ratios, two of which are sensitive to the risk inherent in various assets and which consider off-balance sheet activities in assessing capital adequacy. During 1994 and 1993, the Bank's capital levels exceeded the "well- capitalized" standards, the highest classification established by bank regulators. Table 7 Capital Ratios
Regulatory Standards September 30, December 31, Adequately Well 1994 1993 Capitalized Capitalized Total Risk Based Capital 16.9% 16.7% 8.0 % 10.0% Tier 1 Risk Base Capital 15.6 15.4 4.0 6.0 Leveraged Capital 10.6 9.2 4.0 5.0
No dividends have been paid in 1994 or 1993. Capital being generated by current earnings is currently expected to be used to support anticipated growth of the Bank. The common stock of the Company is listed on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market Systems where it trades under the symbol CUBN. Table 8 Stock Prices
1994 1993 High Low High Low First Quarter $7.50 $6.50 $6.25 $3.38 Second Quarter 7.00 5.75 7.00 4.75 Third Quarter 7.50 6.00 6.25 5.00 Fourth Quarter --- --- 7.25 5.75 Earnings by Line of Business Prior to the sale of the mortgage origination network in November, 1993, the Bank operated a commercial bank and a mortgage bank as two distinct business segments. In 1994, real estate lending is generally only done as part of a commercial banking relationship. For 1994, therefore, the Bank consists of only a single segment, the commercial banking operation. Tables 9A and 9B show the pre-tax operating contributions by the Commercial Banking and Mortgage Banking divisions for the three and nine months ended September 30, 1994 and 1993. Table 9A Pre-tax operating contribution by line of business (i)
Amounts in thousands of dollars
For the three For the three months ended months ended September 30, September 30, 1993 1994 Commercial Mortgage Consolidated Consolidated Banking Banking Net interest income $3,702 $3,863 $3,556 $307 Provisions for loan losses 0 150 75 75 Risk adjusted net interest income 3,702 3,713 3,481 232 Noninterest revenue 1041 8242 284 7,958 Total revenues 4,743 11,955 3,765 8,190 Salaries and related benefits 1,599 2,867 1,447 1,420 Restructuring charge 600 0 0 0 Other operating expenses 1,985 8,141 1,900 6,203 Total operating expenses 4,184 11,008 3,347 7,623 Operating income 559 947 418 567 Gain on sale of mortgage servicing portfolio 625 --- --- --- Income before taxes $1,184 $947 $418 $567 (i) Inter-divisional transactions for 1993 have been eliminated at the
division level. Table 9B Pre-tax operating contribution by line of business (i) Amounts in thousands of dollars
For the nine For the nine months ended months ended September 30, September 30, 1993 1994 Commercial Mortgage Consolidated Consolidated Banking Banking Net interest income $9,774 $11,507 $10,562 $945 Provisions for loan losses 0 450 300 150 Risk adjusted net interest income 9,774 11,507 10,262 795 Noninterest revenue 2,536 18,575 746 17,829 Total revenues 12,310 29,632 11,008 18,624 Salaries and related benefits 4,678 8,129 4,649 3,480 Restructuring charge 600 0 0 0 Other operating expenses 5,943 18,978 5,633 13,218 Total operating expenses 11,221 27,107 10,282 16,698 Operating income 1,089 2,525 726 1,926 Gain on sale of mortgage servicing portfolio 2,183 --- --- --- Income before taxes $ 3,272 $ 2,525 $ 726 $1,926
(i) Inter-divisional transactions for 1993 have been eliminated at the division level. The Bank continues to take steps to facilitate the expansion and market penetration of the commercial bank including the creation of loan production offices, establishment of a Small Business Administration ("SBA") loan production group, and development of an international trade services group. Branches have been established in two strategic locations in Southern California. These will serve the San Gabriel Valley area and the South Bay area. The offices are staffed with seasoned commercial lenders whose primary focus is business development. Such offices are cost effective approaches to business development and allow the Bank access to wider market exposure. While these offices are primarily staffed with existing personnel, when appropriate, key people with specific market knowledge and experience have been hired. In October 1994, the Bank opened a loan production office in Camarillo, California as its regional center for Ventura County. The Bank has established a group of lenders to focus on the production of commercial loans that can be participated with the SBA. These loans are subject to the same credit quality policies and procedures as all commercial loan production. Fees generated from the sale of the guaranteed portion of the loans will be an important new source of noninterest income. Another new product was added with the creation of an international trade services group. Many of the Bank's existing commercial customers and prospects are involved in import and/or export. This product line includes letters of credit, foreign exchange, and foreign collections, and is another important element in the total banking relationship offered to our business customers. Net Interest Income and Interest Rate Risk Net interest income is the difference between interest and fees earned on earning assets and interest paid on funding liabilities. Net interest income was $3.7 million and $9.8 million for the three and nine month periods ended September 30, 1994, compared to $3.9 million and $11.5 million for the comparable periods in 1993. The change is primarily attributable to changes in volume. As a result of efforts to deal with credit quality issues and refocus the Bank on middle market business customers, loans outside target markets have been motivated to leave the Bank. Initially this has an adverse affect on net interest margin but subsequent growth of the middle market loan portfolio replaces these assets and provides a more reliable and valuable source of interest margin. Table 10 Analysis of Changes in Net Interest Income (1)
Amounts in thousands of dollars Nine months ended September 30, Nine months ended September 30, 1994 compared to 1993 1993 compared to 1992 Increases(Decreases) Volume Rate Total Volume Rate Total Interest Income Loans, net $(3,936) $423 $(3,513) $(2,943) $(133) $(3,076) Investments 826 75 901 (1,063) (541) (1,604) Federal Funds Sold 221 132 353 (358) (114) (472) Total interest income (2,889) 630 (2,259) (4,364) (788) (5,152) Interest Expense Interest-bearing deposits: Demand and Savings 70 (95) (25) (305) (531) (836) Time Certificates of deposit Under $100 (226) 27 (199) 409 (53) 356 $100 or more (234) 62 (172) (349) (197) (546) Federal funds purchased / Repos (22) (22) (43) (11) (9) (20) Other borrowings (92) 5 (87) 341 0 341 Total interest expense (503) (23) (526) 84 (789) (705) Net interest income $(2,386) $653 $(2,765) (4,448) 1 (4,447)
(1) The change in interest income or interest expense that is attributable to both change in average balance and average rate has been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of the changes in each. Yields on earning assets were approximately 7.7% and 7.4% for the three and nine months ended September 30, 1994, compared to 7.7% and 8.0% for the comparable periods in 1993. The lower average yield on earning assets in 1994 is largely due to the higher mix of Fed Funds and government securities held in 1994 compared with higher concentrations of mortgage loans in 1993. Through October 8, 1993, net interest income continued to benefit from an interest rate swap agreement, discussed below. Rates on interest-bearing deposits resulted in an average cost of funds of 2.7% in 1994, compared to 2.9% for the same period in 1993. Shrinkage in the Bank's earning asset and funding liability portfolios contributed to the reduction in net interest income. Average loans during the third quarter of 1994 decreased $44 million from $187 million in the third quarter of 1993. As previously discussed, this resulted from the sale of the held for sale mortgage loans, discussed below, and management's efforts to improve the quality of the loan portfolio and redirect production to middle market commercial loans. Earning assets averaged $224 million in 1994, down $21 million from $245 million in the same period of 1993. Table 11 Average Balance Sheets and Analysis of Net Interest Income
Nine months ended Nine months ended Amounts in thousands of dollars ----September 30, 1994---- ----September 30, 1993----- Interest Annual Interest Annual Income Yield or Income Yield or Balance or Rate Balance or Rate Expense Expense Interest Earning Assets Loans, Net $134,840 $9,660 9.55% $189,955 $13,173 9.25% Investments 65,511 2,059 4.19 35,781 1,100 4.10 Certificates of Deposit in other banks 1,183 46 5.10 4,615 104 3.00 Federal Funds Sold 22,804 656 3.83 14,291 303 2.83 Total Earning Assets 224,338 12,421 7.38 244,642 14,680 8.00 Non Earning Assets Cash & Due From Banks 29,306 44,008 Other Assets 7,825 16,602 Total Assets $261,469 $305,252 Interest-bearing Liabilities Demand and savings $80,938 1,427 2.35 $77,107 1,452 2.51 Time Certificates of Deposits Less Than $100 17,829 509 3.80 25,777 708 3.66 More Than $100 17,535 457 3.47 26,705 629 3.14 Fed Funds Purchased / Repos --- -- --- 1,908 43 3.10 Total interest-bearing 116,302 2,393 2.74 131,497 2,832 2.87 Noninterest-bearing Deposits 109,505 139,110 Total Deposits 225,807 2,393 1.41 270,607 2,832 1.40 Other Borrowings 5,184 254 6.53 7,057 341 6.44 Total Funding Liabilities 230,991 2,647 1.53 277,664 3,173 1.52 Other Liabilities 2,878 2,159 Shareholders' Equity 27,600 25,429 Total Liabilities and Shareholders' Equity $261,469 $305,252 Net Interest Income $9,774 5.81% $11,507 6.27% Shareholders' Equity to Total Assets 10.56% 8.17%
Expressing net interest income as a percent of average earning assets is referred to as margin. Margin was 6.18% and 5.81% for the three and nine months ended September 30, 1994, compared to 6.00 and 6.27% for the same periods in 1993. The Bank's margin is strong because it has funded itself with a significant amount of noninterest bearing deposits. The lower margin in 1994 is largely due to the maturing of the interest rate swap discussed below. Through October 8, 1993, the Bank continued to benefit from an interest rate swap agreement entered into October 8, 1991, which had a notional value of $100 million. Under this arrangement, the Bank received a fixed rate of 8.18% and paid interest at prime rate, which was 6.0% during 1993. The income earned from the interest rate swap agreement was $550 thousand and $1.6 million in the three and nine month periods ending September 30, 1993. Other Operating Income The majority of other operating income in prior years was earned as the Mortgage Banking Operation originated and sold mortgage loans. The trends and composition of other operating income are shown in the following table. Table 12A Other operating income
Amounts in thousands of dollars For the three --------- For the three--------- months ended ----------months ended---------- September 30, September 30, 1993 1994 Commercial Mortgage Consolidated Consolidated Banking Banking Processing fees $363 $363 Capitalization of excess 9 9 servicing rights Fees on loans sold 232 232 Premium on sales of mortgage 6,479 6,479 loans Servicing income 247 495 495 Documentation fees 29 281 19 262 Other service fees and charges 271 383 265 118 Securities & other nonoperating gains 0 0 0 0 Gain on sale of real estate owned 494 Gain on sale of mortgage servicing portfolio 625 --- --- --- Total $1,666 $8,242 $284 $7,958
Table 12B Other operating income
Amounts in thousands of dollars For the nine For the nine months ended months ended September 30, September 30, 1993 1994 Commercial Mortgage Consolidated Consolidated Banking Banking Processing fees $929 $959 Capitalization of excess 207 207 servicing rights Fees on loans sold $15 938 938 Premium on sales of mortgage loans 83 9,357 9,357 Servicing income 961 1,498 1,498 Documentation fees 73 766 79 687 Other service fees and charges 819 888 590 298 Securities & other nonoperating gains 0 77 77 Gain on sale of real estate owned 585 Gain on sale of mortgage servicing portfolio 2,183 --- --- --- Total $4,719 $18,575 $746 $17,829
The Mortgage Banking Operation earned fee income on loans originated, and gains as loans were sold to permanent investors. Loans for which servicing was retained are conventional mortgages under approximately $200 thousand which were sold to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and other institutional investors. Excess servicing rights were capitalized, and related gains recognized, based on the present value of the servicing cash flows discounted over a period of seven years. When loan prepayments occur within this period, the remaining capitalized cost associated with the loan is written off. The servicing rights were retained by the bank following sale of the mortgage origination operation. The Bank has entered into an agreement with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to dispose of any remaining portion of this portfolio by the end of 1994 because, with the sale of the mortgage origination operation, the Bank is no longer a qualified seller/servicer of such loans. During the first nine month of 1994, the bank sold a portion of the retained servicing rights realizing a gain of $2,183, including a gain of $625 thousand in the current quarter. Operating Expense The Bank restructured its branch operations functions in the third quarter of 1994, re-engineering its entire work flow and information handling activities. This resulted in a one time charge of $600 thousand for severance pay and other expenses associated with the changes to the operating policies and procedures. Operating expense for the commercial bank excluding this charge was $3.6 million and $10.6 million in the three and nine months ended September 30, 1994, compared to $3.3 million and $10.3 million for the same periods in 1993. Operating expenses for the consolidated Bank have declined in 1994, primarily due to the sale of the mortgage origination operation at the end of 1993. Provision for Loan Losses The Bank has made no provision for loan losses in 1994 compared with $150 thousand and $450 thousand for the three and nine month periods ended September 30, 1993. This change in provision was made possible by the significant reduction of nonperforming loans. The relationship between the level and trend of the allowance for loan losses and nonperforming assets, combined with the results of the ongoing review of credit quality, determine the level of provisions. Legal and Regulatory Matters In June 1992, the Bank entered into an agreement with the Office of the Comptroller of the Currency (OCC), the Bank's primary federal regulator, which required the implementation of certain policies and procedures for the operation of the bank to improve lending operations and management of the loan portfolio. In November 1993, after completion of its annual examination, the OCC released the Bank from the Formal Agreement. Following this, the Federal Reserve Bank of San Francisco ("Fed") notified the Company on November 29, 1993, that the Memorandum of Understanding, which it had signed, was terminated because the requirements of the agreement were satisfied. Consolidated Statements of Financial Condition CU Bancorp and Subsidiary
Amounts in thousands of dollars Sept.30, December 31, 1994 1993 Assets Cash and due from banks $43,228 $18,440 Federal funds sold 12,000 28,000 Total cash and cash equivalents 55,228 46,440 Time deposits with other financial institutions 397 1,377 Investment securities (Market value of $62,787 and $87,889 at September 30, 1994 and December 31, 1993, respectively) 64,451 88,034 Loans, (Net of allowance for loan losses of $7,470 and $6,513 at September 30, 1994, and December 31, 1993, respectively) 152,340 134,148 Premises and equipment, net 779 924 Other real estate owned, net 0 920 Accrued interest receivable and other assets 7,241 7,363 Total Assets $280,436 $279,206 Liabilities and Shareholders' equity Deposits: Demand deposits $113,995 $125,665 Savings deposits 87,730 66,214 Time deposits under $100 20,401 27,753 Time deposits of $100 or more 20,406 19,296 Total deposits 242,532 238,928 Accrued interest payable and other liabilities 8,878 13,288 Total liabilities 251,410 252,216 Shareholders' equity: Preferred stock, no par value: Authorized -- 10,000,000 shares No shares issued or outstanding in 1994 or 1993 --- Common stock, no par value: Authorized - 20,000,000 shares Issued and outstanding - 4,473,312 in 1994, and 4,424,306 in 1993 . 26,429 26,250 Retained earnings 2,597 740 Total Shareholders' equity 29,026 26,990 Total Liabilities and Shareholders' equity $280,436 $279,206
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Income CU Bancorp and Subsidiary
Amounts in thousands of dollars, except per share data For the three months For the nine months ended Sept.30, ended Sept. 30, 1994 1993 1994 1993 Revenue from earning assets: Interest and fees on loans $3,617 $3,821 $9,660 $11,542 Benefits of interest rate hedge transactions 0 550 0 1,631 Interest on taxable investment securities 761 263 2,049 1,068 Interest on tax exempt investment securities 8 9 10 32 Interest on time deposits with other financial institutions 14 33 46 104 Interest on federal funds sold 257 200 656 303 Total revenue from earning assets 4,657 4,876 12,421 14,680 Cost of funds: Interest on interest-bearing demand deposits 481 400 1,259 1,193 Interest on savings deposits 67 85 168 259 Interest on time deposits under $100 160 273 509 708 Interest on time deposits of $100 or more 181 156 457 629 Interest on federal funds purchased & securities sold under agreements to repurchase 0 0 0 43 Interest on other borrowings 66 99 254 341 Total cost of funds 955 1,013 2,647 3,173 Net revenue from earning assets before provision for loan losses 3,703 3,863 9,774 11,507 Provision for loan losses 0 150 0 450 Net revenue from earning assets 3,703 3,713 9,774 11,057 Other operating revenue: Capitalization of excess servicing rights 0 9 0 207 Servicing income - mortgage loans sold 247 495 961 1,498 Other fees & charges - commercial 296 283 735 667 Fees on loans sold 0 232 15 938 Premium on sales of mortgage loans 0 6,479 83 13,272 Other fees and charges - mortgage 4 744 157 1,916 Gain on sale of mortgage servicing portfolio 625 --- 2183 --- Gain on sale of real estate owned 494 585 Gain on sale of investment securities (before taxes of $0, and $11, in 1994, 1993, respectively) 0 0 0 28 Gain on sale of securities held for sale (before taxes of $0 and $20 in 1994 and 1993, respectively) 0 0 0 49 Total other operating revenue 1,666 8,242 4,719 18,575 Other operating expenses: Salaries and related benefits 1,599 2,867 4,678 8,129 Selling expenses - mortgage loans 87 4,436 333 9,621 Restructuring charge 600 0 600 0 Other operating expenses 1,898 3,705 5,610 9,357 Total operating expenses 4,184 11,008 11,221 27,107 Income before provision for income taxes 1,184 947 3,272 2,525 Provision for income taxes 513 381 1,415 1,019 Net income $671 $566 $1,857 $1,507 Earnings per share $0.14 $0.13 $0.40 $0.34
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statement of Cash Flows CU Bancorp and Subsidiary
Amounts in thousands of dollars --For the nine months ended-- Sept. 30, 1994 1993 Increase(decrease) in cash and cash equivalents Cash flows from operating activities Net income $1,857 $1,507 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 349 630 Amortization of real estate mortgage servicing rights 15 243 Provision for losses on loans and other real estate owned 0 450 Gain on sale of investment securities, net 0 (49) (Increase) decrease in other assets 1,997 (1,104) (Decrease) in other liabilities (4,386) (1,556) (Increase) Decrease in accrued interest receivable (970) (397) Increase in deferred loan fees 181 24 Capitalization of excess mortgage servicing rights 0 207 (Decrease) in accrued interest payable (24) (133) Net amortization of premium on securities 813 148 Accrued benefits from interest rate hedge transactions 0 36 Total adjustments (2,025) (1,501) Net cash provided by operating activities (168) 6 Cash flows from investing activities Proceeds from investment securities sold or matured 52,861 16,362 Proceeds from held for sale securities sold 0 41,755 Purchase of investment securities (30,091) 0 Net decrease in time deposits with other financial institutions 0 (1,516) Net (increase) decrease in loans (18,373) (24,008) (Purchases) of premises and equipment, net (204) (493) Net cash provided by (used in) investing activities 4,193 32,100 Cash flows from financing activities Net increase (decrease) in demand and savings deposits 9,846 (60,355) Net increase (decrease) in time certificates of deposit (5,261) 3,004 Proceeds from exercise of stock options and director warrants 179 190 Net cash provided (used) by financing activities 4,764 (57,161) Net increase in cash and cash equivalents 8,789 (25,055) Cash and cash equivalents at beginning of year 46,440 55,989 Cash and cash equivalents at end of year $55,229 $30,934
The accompanying notes are an integral part of these consolidated financial statements. Notes to Consolidated Financial Statements September 30, 1994 UNAUDITED Note A. BASIS OF PRESENTATION The accounting and reporting policies of CU Bancorp ("the Company") and its wholly owned subsidiary, California United Bank, N.A. ("the Bank"), are prepared in accordance with generally accepted accounting principles used in the banking industry. All material inter company balances have been eliminated and all material interim period adjustments which, in the opinion of management, are necessary for a fair presentation of financial condition, results of operations, and cash flow have been made. Note B. EARNINGS PER SHARE Net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented, except when the effect of the latter would be anti- dilutive. NOTE C. SECURITIES The Bank has the intent and ability to hold its investment securities until maturity. Accordingly, investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts on a straight-line basis, which approximates the effective interest method. Gains and losses recognized on the sale of investment securities are based upon the adjusted cost and determined using the specific identification method. The Bank has no securities classified as "held for sale", indicating the willingness to sell these securities under certain conditions. These securities would be carried at current market value with unrealized gains or losses not recognized as current income, but reported as an increase or decrease to capital in the statements of financial condition and in the statements of shareholders' equity. The following tables set forth the book value and market value, of investment securities at Sept. 30, 1994. Gross Gross
Book Unrealized Unrealized Market (Thousands of dollars) Value Gains Losses Value U.S. Treasury Securities $57,418 $(1,602) $55,816 U.S. Government Agency Securities 5,850 (78) 5,772 State and Municipal Securities 750 $16 766 Federal Reserve Bank Stock 433 - - 433 Total $64,451 $16 $(1,680) $62,787
At June 30, 1994, investment securities with a book value of $43.3 million were pledged to secure U.S. District Court deposits and for other purposes as required or permitted by law. Included in interest on investment securities is $10 thousand of interest from tax-exempt securities. Note D. AVERAGE FEDERAL RESERVE BALANCES The average cash reserve required to be maintained at the Federal Reserve Bank was approximately $5.9 million, $9.0 million, and $8.0 million for the periods ending September 30, 1994 and December 31 and September 30, 1993, respectively. Note E. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is also computed using the straight-line method over the shorter of the useful life of the improvement or the term of the lease. Note F. OTHER REAL ESTATE OWNED Real estate owned, acquired either through foreclosure or deed in lieu of foreclosure, is carried at the lower of cost or fair value. When acquired, any excess of the loan amount over the fair value is charged to the allowance for loan losses. Subsequent write-downs, if any, are charged to operation expenses in the periods that they become known. There was no other real estate owned as of September 30, 1994. Other real estate owned at December 31, and September 30, 1993 was $0.9 million and $3.0 million, respectively. Note G. INCOME TAXES Effective January 1, 1993, the Bank implemented the provisions of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The implementation had no significant impact on the financial condition or operations of the Bank. SFAS No. 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. Note H. LOANS Loans are carried at face amount, less payments collected, allowance for loan losses, and unamortized deferred fees. Interest on loans is accrued monthly on a simple interest basis. The general policy of the Bank is to discontinue the accrual of interest and transfer loans to nonaccrual (cash basis) status where reasonable doubt exists with respect to the timely collectibility of such interest. Payments on nonaccrual loans are accounted for using a cost recovery method. Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can reasonably be anticipated. Management considers current economic conditions, historical loan loss experience, and other factors in determining the adequacy of the allowance. The allowance is based on estimates and ultimate losses may differ from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are charged to earnings in the period in which they become known. The allowance is increased by provisions charged to operating expenses, increased for recoveries of loans previously charged-off, and reduced by charge-offs. Note I. RESTRUCTURING CHARGE The Bank restructured its branch operations functions in the third quarter of 1994, re-engineering its entire work flow and information handling activities. This resulted in a one time charge of $600 thousand for severance pay and other expenses associated with the changes to the operating policies and procedures. Note J. RECLASSIFICATIONS Certain items have been reclassified in the prior period financial statements presented herein, in order to conform to classifications followed for September 30, 1994. Note K. LEGAL MATTERS In the normal course of business the Bank occasionally becomes a party to litigation. In the opinion of management, based upon consultation with legal counsel, other than as set forth below, pending or threatened litigation involving the Bank will have no adverse material effect upon its financial condition, or results of operations. The Bank is a defendant in multiple lawsuits related to the failure of two real estate investment companies, Property Mortgage Company, Inc., ("PMC") and S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a federal action by investors in PMC and SLGH (the "Federal Investor Action"), at least three state court actions by groups of Investors (the "State Investor Actions"), and an action filed by the Resolution Agent for the combined and reorganized bankruptcy estate of PMC and SLGH (the "Neilson" Action). An additional action was filed by an individual investor and his related pension and profit sharing plans (the "Individual Investor Action"). Other defendants in these multiple actions and in related actions include financial institutions, title companies, professionals, business entities and individuals, including the principals of PMC and SLGH. The Bank was a depository bank for PMC, SLGH and related companies and was a lender to certain principals of PMC and SLGH ("Individual Loans"). Plaintiffs allege that PMC/SLGH was or purported to be engaged in the business of raising money from investors by the sale and issuance of interests in loans evidenced by promissory notes secured by real property. Plaintiffs allege that false representations were made, and the investment merely constituted a "Ponzi" scheme. Other charges relate to the Bank's conduct with regard to the depository accounts, the lending relationship with the principals and certain collateral taken , pledged by PMC and SLGH in conjunction with the Individual Loans. The lawsuits allege inter alia violations of federal and state securities laws, fraud, negligence, breach of fiduciary duty, and conversion as well as conspiracy and aiding and abetting counts with regard to these violations. The Bank denies the allegations of wrongdoing. Damages in excess of $100 million have been alleged, and compensatory and punitive damages have been sought generally against all defendants, although no specific damages have been prayed for with regard to the Bank, nor has there been any apportioning of liability among defendants or attributable to the various claims asserted. A former officer and director of the Bank has also been named as a defendant. The Bank and the named officer/director have notified the Bank's insurance carriers of the various lawsuits. In August 1994, the Bank entered into a settlement agreement with the representatives of the various plaintiffs, which, if approved as more fully set forth below, will dismiss all of the above referenced cases, with prejudice, against the Bank, its officers and directors, with the exception of the officer/director previously named. In connection with the settlement, the Bank will release its security interest in certain disputed collateral and cash proceeds thereof, which the Bank received from PMC, SLGH, or the principals, in connection with the Individual Loans. This collateral has been a subject of dispute in the Neilson Action, with both the Bank and the representatives of PMC/SLGH asserting the right to such collateral. All the loans have been charged off, previously. The Bank will also make a cash payment to the Plaintiffs in connection with the settlement. In connection with the settlement the Bank will assign its rights, if any, under various insurance policies, to the Plaintiffs. The settlement does not resolve the claims asserted against the officer/director. The settlement requires the approval of each of the courts in which actions have been filed. The Federal Bankruptcy Court approved the settlement in October, 1994. There are a number of technical issues related to the settlement which must be resolved prior to its effectiveness. Note K. REGULATORY MATTERS On November 2, 1993, the Office of the Comptroller of the Currency ("OCC"), after completion of their annual examination of the Bank, terminated the Formal Agreement entered into in June, 1992. In December 1993, the Fed terminated the Memo of Understanding (MOU) entered into in August, 1992. The Formal Agreement and the MOU required the implementation of certain policies and procedures for the operation of the Bank and the Company to improve lending operations and management of the loan portfolio. SIGNATURES Pursuant to the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CU BANCORP November 9, 1994 By:_Patrick Hartman________ Patrick Hartman Chief Financial Officer Part II - Other Information Item 1. Legal Proceedings Please refer to Notes J and K, on pages 23 and 24 above, for a complete discussion of both legal and regulatory matters. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Filings on Form 8-K (a) Exhibits: (10) Material Contracts (i) Mortgage Servicing Purchase and Sale Agreement Dated August 31, 1994 pg. 27 (b) Reports on Form 8-K: None. EX-10 2 MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT # 1 between California United Bank and Temple Inland Mortgage Corporation Dated as of: August 31, 1994 MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT This Mortgage Servicing Purchase and Sale Agreement (the "Sale Agreement") is dated as of the 31st day of August , 19 94 , by and between Temple Inland Mortgage Corporation, a Nevada Corporation with offices located at 901 South MoPac Expressway, Suite 300, Austin, TX, 78746 (the "Purchaser") and California United Bank , a National bank, with offices located at 16030 Ventura Blvd., Encino, California 91436-4487 (the "Seller"). W I T N E S S E T H: WHEREAS, Seller owns the right to service approximately 853 single family mortgage loans described in Exhibit A attached hereto (collectively the "Mortgages" or individually the "Mortgage") having an aggregate outstanding principal balance of 118,407,520 as of May 31 , 1994 which are owned by the Federal National Mortgage association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") (FNMA and FHLMC are hereinafter collectively referred to as the "Agencies" and individually as an "Agency"). WHEREAS, the rights and responsibilities of Seller with respect to servicing the Mortgages under the Servicing Agreements and the maintenance and servicing of the related escrow accounts are sometimes hereinafter referred to as the "Servicing": WHEREAS, it is contemplated that FNMA and FHLMC will consent to the assumption of the Servicing by Purchaser and to Seller's transfer or assignment of the Servicing to Purchaser as provided herein; and WHEREAS, Purchaser desires to purchase and Seller desires to sell all right, title and interest in and to the Servicing in accordance with the terms and conditions of this Sale Agreement; NOW, THEREFORE, in consideration of the mutual covenants made herein and for other good and valuable consideration the sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1.1 "Agency" or "Agencies": FNMA and/or FHLMC as applicable. 1.2 "Business Day": any day other than (a) a Saturday or Sunday, or (b) a day on which banking institutions in the State of Texas are authorized or obligated by law or by executive order to be closed. 1.3 "Delinquent Mortgage": A Mortgage which is two (2) payments or more past due, the subject matter of filed or pending litigation, in bankruptcy, foreclosed or in foreclosure as of the Sale Date, not including loans on Exhibit H. 1.4 "Economic Benefits": All economic rights and benefits in connection with the Servicing, including without limitation all rights to servicing fees, late charges, fees related to the sale or administration of insurance policies associated with the Mortgages, management of escrow accounts and other financial benefits. 1.5 "FHLMC": As defined in the recitals hereof. 1.6 "FNMA": As defined in the recitals hereof. 1.7 "Legal Title": All indicia of legal ownership to the Servicing, including without limitation Agency seller/servicer status, mortgagee-of-record status, and all other legal rights, obligations and duties with respect to the Servicing of the Mortgages. 1.8 "Mortgage": As defined in the recitals hereof. 1.9 "PMI": A policy of mortgage guaranty insurance issued by a qualified insurer with respect to certain mortgage loans. 1.10 "Prior Servicer": All servicers who serviced any of the Mortgages prior to Seller. 1.11"Purchase Price": As defined in Paragraph 3.1 hereof. 1.12 "Purchase Price Percentage": As defined in Paragraph 3.1 hereof. 1.13 "Purchaser": As defined in the recitals hereof or its assigns. 1.14 "Recourse Mortgage": A Mortgage as to which the Agency has recourse against the servicer, whether by way of repurchase or reimbursement, as to expenses and/or losses, other than ordinary Agency limitations on expense reimbursement arising out of a mortgagor's default with respect to the Mortgage. 1.15 "Related Escrow Accounts": Mortgage escrow/impound and suspense accounts maintained by Seller relating to the Servicing. 1.16 "Sale Agreement": As defined in the first paragraph of this agreement. 1.17 "Sale Date": August 31, 1994 1.18 "Seller": As defined in the first paragraph of this Agreement. 1.19 "Servicing": As defined in the recitals hereof. 1.20 "Servicing Agreements": The mortgage loan servicing agreements applicable to the Servicing including the Agency regulations, contracts guidelines and directives of the Agencies pursuant to which Seller is currently servicing the Mortgages. 1.21 "Subservicing Period": As defined in paragraph 2.6(b). 1.22 "Transfer Date": October 1, 1994 with regard to FNMA loans and October 16, 1994 with regard to FHLMC loans. ARTICLE II SALE AND TRANSFER OF SERVICING 2.1 Items to be Sold. Subject to, and upon the terms and conditions of this Sale Agreement, Seller shall, as hereinafter provided, sell, transfer, assign and deliver to Purchaser all right, title and interest in and to (a) the Servicing and (b) Related Escrow Accounts. 2.2 Sale Date. On the Sale Date title to the Servicing shall pass to Purchaser and Seller shall assign to Purchaser the right to receive the Economic Benefit on such Mortgages subject to the compensation provided for subservicing the Mortgages as provided in Section 2.6(b). Seller shall retain Agency servicer status and mortgagee of record status until the Transfer Date. 2.3 Transfer Date. On the Transfer Date, Purchaser shall assume all servicing responsibilities related to, and Seller shall cease all servicing responsibilities related to, the Mortgages sold pursuant to Section 2.2. Legal Title including mortgagee of record status where applicable, shall be transferred to Purchaser. 2.4 Actions Required Prior to the Transfer Date. The following actions shall be taken with respect to Mortgages and the related pools for which the servicing is being sold to Purchaser: (a) Prior to the Transfer Date, Seller shall, subject to Agency requirements purchase all Mortgages having defects which will prevent, recertification, and/or that are the subject matter of filed or pending litigation materially impairing the related Servicing or Mortgages for which a repurchase notice or requirement by the Agency exists. (b) On or prior to the Transfer Date (except that Seller shall have fifteen days after the Transfer Date to prepare and send assignments where required to the appropriate recorder's office for recording with a certified copy to Purchaser) Seller shall at its sole cost and expense: (i) Assign to Purchaser by appropriate endorsements and individual assignments, all of Seller's right, title and interest in and to the Servicing Agreements and the pools, notes and mortgages (or deeds of trust) related to the Servicing as required by appropriate Investor requirements. Seller shall prepare and record the assignments including intervening assignments if not previously prepared and recorded. Seller shall also prepare assignments of mortgages from Purchaser to Agencies in accord with Agency requirements, and form reasonably acceptable to Purchaser and Purchaser's custodian and provide such assignments and copies of executed assignments required by the first two sentences of this subparagraph (with a certification that each assignment has been submitted for recording) to Purchaser. Additionally, Seller shall deliver such other appropriately executed and authenticated instruments of sale, assignment, transfer and conveyance to Purchaser including limited powers of attorney as Purchaser, or its counsel, may reasonably request in order to accomplish the transfer to Purchaser of all of Seller's rights related to the Servicing (for example, Seller's rights with respect to foreclosures, bankruptcies and insurance/ guarantee claims). Such instruments provided by Purchaser must be approved in form by the Seller and its counsel, such approval not to be unreasonably withheld. (ii) Cause its document custodian to deliver to Purchaser's document custodian a complete custodial file for each Mortgage for which documents are required by the Agency to be held by a custodian. Each such custodial file shall contain all documents required by applicable regulations and contractual provisions. In the event all required documents are not contained in a custodial file and are not provided by Seller or Seller's custodian or otherwise satisfied in accord with Agency requirements within sixty (60) days following written request by Purchaser, Seller, upon Agency approval if required, shall repurchase such Mortgage as provided in Paragraph 10.4 hereof. (iii) With respect to each Mortgage Loan for which the servicer maintains the original documents, create a separate document file identified by mortgagor name and loan number containing only the original documents, i.e. note (if held by servicer), mortgage/deed of trust, mortgage insurance certificate, loan guarantee certificate, complete chain of assignments and loan title policy. 2.5 Examination of Mortgage Documents. Purchaser shall, during the period prior to the Transfer Date, have reasonable access during business hours to Seller's books, servicing system, records and accounts with respect to the Mortgages. In the event Purchaser's examination reveals that any information contained in any of the Exhibits or the offering documents is not true and correct in all material respects or any of the representations contained herein concerning a Mortgage is not true and accurate, Seller shall have ten (10) Business Days following receipt of notice from Purchaser to cure all defects in the Mortgage or repurchase such Mortgage as provided in Paragraph 10.4 hereof. Seller shall provide Purchaser, within five (5) Business Days after request with all information reasonably requested of Seller with respect to the Mortgages and the Servicing. Any such review or examination shall not affect Seller's obligations or responsibilities with respect to the Servicing or information provided as set forth in this Sale Agreement. 2.6 Obligations of Seller. (a) Seller covenants and agrees, from the date hereof until the Transfer Date that Seller shall pay, perform and discharge all liabilities and obligations relating to ownership of the Servicing and all the rights obligations and duties with respect to the Related Escrow Accounts until the transfer of such items on the Transfer Date. (b) For the period between the Sale Date and the Transfer Date ("Subservicing Period"), Seller agrees to service the Mortgages on behalf of Purchaser for a fee of $5.00 per Mortgage per month, prorated for any partial months, with Seller retaining ancillary income exclusive of late charges collected with respect to the Servicing during the Subservicing Period. During such period Seller agrees to service the Mortgages in accordance with all applicable Agency requirements and shall at all times service the Mortgages in accordance with all applicable statutes, federal and state regulations, contractual provisions of the Servicing Agreements and PMI insurers, and in accordance with prudent mortgage banking practices. It is understood and agreed that Servicer shall exercise the same standard of care that it exercises in the servicing of mortgages for its own account. Seller shall pay at Seller's expense any compensating or paid-in-full interest required to be paid in addition to the interest received from the mortgagor with respect to any Mortgage for which payoff funds are received within thirty (30) days of the Sale Date. During the Subservicing Period Seller shall remit servicing fees and late charges collected due the Purchaser, together with supporting documentation, not later than the tenth Business Day of each month covering the prior month's servicing and shall provide Purchaser with reports and supervised on-line system access at the Seller's offices, and access to the servicing operation and related documentation, as it relates to the portfolio the Purchaser is acquiring, as Purchaser reasonably requests, to monitor the portfolio and confirm Seller's adherence to this section during the Subservicing Period. 2.7 Undertaking by Purchaser. Purchaser covenants and agrees, upon acceptance of the assignment of the Servicing and Related Escrow Accounts, to service the same in accordance with the terms and conditions of the Servicing Agreements. Purchaser shall not be responsible for the acts and omissions of Seller or Prior Servicers nor for any other obligations or liabilities of Seller or Prior Servicers or the loan originator whatsoever, except those obligations or liabilities in the Servicing Agreements which are assumed by Purchaser. 2.8 Approval of the Agencies. Processing of the request for approval by the Agencies shall take place as follows: (a) Seller shall be responsible for obtaining approvals from the applicable Agencies. Seller shall prepare the requests for approval in a manner to secure from the applicable Agency, a prompt written determination of the acceptability of the transfer of Servicing. (b) Seller shall prepare all forms, documents and other information requested by the Agencies. 2.9 Cooperation. The parties hereto shall, to the extent such is reasonable and practical, cooperate with and assist each other, as requested, in carrying out the other's covenants, agreements, duties and responsibilities under this Sale Agreement and related matters. ARTICLE III CONSIDERATION 3.1 Purchase Price. In full consideration for the sale of the Servicing as specified in Article II hereof, and upon the terms and conditions of this Sale Agreement Purchaser shall pay to Seller the purchase price (the "Purchase Price") as follows: (a) 103 basis points (1.03%) (the "Purchase Price Percentage") of the aggregate unpaid principal balance of the Mortgages, excluding any Delinquent Mortgages, as of the Sale Date. (b) It is understood and agreed that if the principal balance of any of the Mortgages used in computing the amount of the Purchase Price shall be found to be incorrectly computed or that the principal balance of a Delinquent Mortgage was included in the computation of the Purchase Price, the Purchase Price shall be promptly and appropriately adjusted on the basis of the Purchase Price Percentage and payment shall be promptly made by the appropriate party. (c) It is understood and agreed that if the service fee rate or any other material characteristic of the aggregate mortgage loans specified in the offering documents or the exhibits shall be found to be incorrectly stated as to any Mortgages on the Sale Date or the Transfer Date, the Purchase Price shall be promptly and appropriately reduced. (d) The Purchase Price with respect to any Mortgage for which payoff funds are received within thirty (30) days of the Sale Date and the Purchase Price with respect to any mortgage that a payoff statement was sent by the seller prior to the Sale Date for which payoff funds are received within ninety (90) days of the Sale Date ("Payoff Refund") shall be refunded to Purchaser as provided below. (e) The Servicing as to any Mortgage for which Agency approval of the transfer is not received by the Transfer Date shall not transfer and the Purchase Price shall be reduced accordingly. 3.2 Payment. The Purchase Price shall be paid by wire transfer of immediately available funds as follows: (a) On the Sale Date Purchaser will pay funds to Seller which total twenty percent (20%) of the estimated Purchase Price. (b) Seller shall remit funds held in the various servicing accounts and Related Escrow Accounts no later than three (3) Business Days of the applicable Transfer Date which may be remitted net of the collectable receivables referred to in Section 5.19. Within three (3) Business Days after the Seller's timely delivery in all material respects of the funds information and data covering the Servicing and the Related Escrow Accounts, the Purchaser shall remit an amount which when added to the amount previously paid will equal ninety percent (90%) of the Purchase Price applicable to that Transfer Date. (c) The remaining ten percent (10%) of the Purchase Price less the Payoff Refund will be remitted to the seller the latter of, fifteen (15) business days of the receipt of all loan documents including a copy of the assignments sent to be recorded and unrecorded assignments as applicable, or January Seventh (7), 1995. (d) The requirements of this paragraph concerning payment shall not apply if the transfer of Servicing is not completed on the Transfer Date. In the event Seller in all material respects, has not complied with all provisions hereof, and provided all requested information to Purchaser on or before the Transfer Date, or in a timely manner thereafter for items to be subsequently delivered, Purchaser's obligation to pay the Purchase Price for any such affected Mortgage shall be postponed until all required performance and all requested information is provided by Seller. 3.3 Other Costs. (a) Seller shall bear the entire cost of securing Agency approval of the transfer of Servicing from Seller to Purchaser including all transfer fees due to the Agencies. (b) Seller shall comply, at its sole cost and expense, with Purchaser's reasonable requirements pertaining to the processing and shipping of loan files, insurance files, tax records and collection records which are reasonably necessary to service the Mortgages or are required to be maintained by the Agency(s), including but not limited to the relabeling of each loan file and creating separate document files. ARTICLE IV GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to Purchaser to enter into this Sale Agreement Seller represents and warrants as follows (it being acknowledged that each such representation and warranty relates to material matters upon which Purchaser relied, and it being understood that each such representation and warranty is made to the Purchaser as of the Sale Date and the Transfer Date): 4.1 Organization. Seller is duly organized and validly existing under the laws of the United States , and is qualified or licensed to do business in all states in which its activities with respect to the Mortgages or the Servicing require it to be qualified or licensed. 4.2 Authority and Capacity. Seller has all requisite power, authority and capacity to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 4.3 Defaults. Subject to the receipt of all prior Agency(s) approvals and consents necessary to effect the Sale, the execution, delivery and performance of this Agreement by Seller does not and the consummation of the transactions contemplated hereby will not (a) violate any material provision of law applicable to Seller, (b) conflict with any of the terms of (i) Seller's Charter, Articles of Incorporation or Bylaws, or (ii) any other governing instrument relating to the conduct of Seller's business or the ownership of its properties, or (c) result in a material breach of any other agreement to which Seller is a party or by which it is bound with respect to the Servicing. No event has occurred and not been cured which would constitute an event of default under any Servicing Agreement related to the Servicing, or result in the cancellation of PMI insurance with respect to any Mortgage. The Seller has not been the subject of an audit by the Agencies in which allegations were made concerning Seller's failure to comply with applicable loan origination, servicing or claims procedures, which resulted in a refusal to purchase any mortgages, honor a claim, refusal of conveyance or reconveyance, or a request for indemnification in connection with any mortgage. 4.4 Binding Agreement. The Agreement has been duly authorized and, subject to the Agency's approval of the assignment of the servicing rights from Seller to Purchaser, is a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms (except as enforcement thereof may be limited by applicable bankruptcy, insolvency or similar laws affecting the rights of creditors generally or the application of general principles of equity). ARTICLE V REPRESENTATIONS AND WARRANTIES AS TO SERVICING AND THE MORTGAGES As further inducement to Purchaser to enter into this Sale Agreement, Seller represents and warrants to Purchaser as of the Sale Date and the Transfer Date, except as to Section 5.3 which is made as of the Sale Date only,with respect to the Servicing and each Mortgage as follows: 5.1 Title. Seller is the lawful owner of the Servicing. Subject to the receipt of all Agency approvals and consents necessary to effect the Sale, the Sale and transfer of the Servicing by Seller to Purchaser in accordance with the terms and subject to the conditions of this Agreement will give Purchaser good and marketable title to the Servicing, free and clear of any and all valid claims, charges, defenses, offsets and encumbrances of any kind or nature except as is set forth in the related Servicing Agreements. 5.2 Mortgage Documents. The Mortgage documents are genuine, legally valid, binding and enforceable obligations of the borrower and have been duly executed by a borrower of legal capacity, and all insertions in any Mortgage document were correct when made. The Mortgage documents were in compliance with applicable law, PMI requirements, and Agency(s) requirements, guidelines and directives upon origination and are complete in all material respects with regard to origination and servicing activity. 5.3 Physical Damage. There exists no physical damage to the collateral securing the Mortgage from fire, flood, windstorm, earthquake, tornado, hurricane or any other similar casualty which physical damage would cause any Mortgage to become delinquent or adversely affect the value or marketability of any Mortgage, the related Servicing or the collateral, except those mortgage loans listed on Exhibit H. 5.4 Application of Funds. All monies received with respect to each Mortgage have been accounted for and applied in accordance with generally accepted accounting practices. 5.5 Certification. The Mortgage documents for each Mortgage will contain, upon transfer of the Servicing to Purchaser, all items required by applicable Agency regulations, and such documents and Servicing records will be complete and in compliance with all applicable Agency and PMI requirements and guidelines. All Mortgages shall be, when transferred to Purchaser eligible for applicable recertification by Purchaser's custodian, and Seller will be responsible for the costs of curing any deficiencies that must be cured in order for Purchaser to obtain such recertification. The principal balance outstanding and owing on the Mortgages equals or exceeds the amount owing to the corresponding agency. 5.6 Litigation and Compliance with Law. There is no litigation or governmental investigation pending or threatened, nor is there any order, injunction or decree outstanding against or relating to Seller, which could have a material adverse effect upon the Servicing, Mortgages, or the Seller's ability to comply with the Seller's obligations to Purchaser, established by this Agreement, nor any material basis for any such litigation. Neither Seller nor any prior servicer or originator has violated any applicable law, regulation, ordinance, order, injunction or decree, or any other requirement of any governmental body, court or Agency or insurer in connection with the origination or servicing of the Mortgages, the violation of which would have a material adverse effect on any of the Servicing, the Mortgages, or the Seller's ability to comply with the Seller's obligations to the Purchaser established by this Agreement. 5.7 Statements Made. No representation, warranty or statement made by Seller in this Agreement, in any Exhibit, the offering documents the Servicing records and documents provided pursuant to Exhibits C and D or any written statement or certificate furnished by Seller to Purchaser in connection with the transactions contemplated hereby, including specifically the servicing fee rate applicable to the Mortgages, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. 5.8 Mortgage Disbursement. Seller warrants that any and all Mortgages were fully disbursed and made or consummated in accordance with applicable law and regulations, a violation of which would have a material adverse effect on the Servicing. 5.9 Unpaid Balances. The amount of the unpaid balance for each Mortgage is correct as set forth in the trial balance provided and there are no defenses, setoffs or counterclaims against such Mortgages. 5.10 Security Interests. The security interest granted by the borrower in the collateral is a valid first priority lien on the collateral. Neither the collateral nor any party to any related security agreement has been released, with the exception of partial releases, releases required by divorce decree and releases required by assumptions. 5.11 Payment of Taxes Insurance Premiums. etc. The responsibilities of Seller and Prior Servicers with respect to all applicable taxes, special assessments, ground rents, flood insurance premiums, hazard insurance premiums and PMI premiums that are related to the Mortgages have been met. 5.12 Effective Insurance. All required insurance policies, including PMI, remain in full force and effect. Seller, the originator, and any prior servicer, has complied with all insurance contract obligations which, if not complied with, might have a material adverse effect on the Servicing. 5.13 Tax Identifications. All tax identifications and property descriptions contained in any Mortgage document are complete and legally sufficient. 5.14 Compliance with Contractual Obligations. Seller, and all Prior Servicers and originators have complied with all of their contractual obligations including all applicable Agency and PMI requirements, which relate to the origination, underwriting or the prior servicing of each Mortgage, the breach of which might adversely affect the Servicing. 5.15 Filing of Reports. Seller has filed or will have filed by the Transfer Date all reports required by any Agency any PMI, and any federal, state or municipal law, regulation or ordinance, except where any failure to do so would not have a material adverse effect on the Servicing, Mortgages or the Related Escrow Accounts. 5.16 Escrow Accounts. Seller is the lawful fiduciary of all Related Escrow Accounts, and such Accounts are being maintained in accordance with applicable law the terms of the Servicing Agreements related to the Servicing and the Mortgage documents, and, where applicable, in accordance with the regulations of the Agency(s), insurers and other governmental agencies having jurisdiction. Except for payments which are past due under the terms of the Mortgage documents, all escrow balances required by the Mortgage documents and paid to Seller for the account of the mortgagors and Seller are on deposit in the appropriate escrow accounts. 5.17 No Accrued Liabilities. Except for such transfer and termination fees as may be imposed in connection with the Sale and which are to be paid by Seller, there are no accrued liabilities of Seller with respect to the Mortgages or the Servicing and there are no circumstances or events existing that could result in any such accrued liabilities arising against Purchaser as successor to the Servicing. 5.18 No Recourse; Residential Loans. No Mortgage is either (i) a Recourse Mortgage or (ii) secured by a property that does not qualify as a single family (1-4 unit) property, and all mortgages are first liens. 5.19 Collectable Receivables. All advances and other receivables associated with the Servicing for which Purchaser pays funds to Seller pursuant to paragraph 3.2(b) have been properly made and are documented and reasonable and are reimbursable in full under the applicable Servicing Agreement. 5.20 Interest on Escrows. Seller has credited to the account of mortgagors all interest required to be paid on any escrow/impound account through the Transfer Date. Evidence of such credit shall be provided to Purchaser upon written request. 5.21 Agency Agreements. No Mortgage is subject to any special underwriting provision or specially negotiated contract terms which materially increases servicer's risk, servicing responsibilities, or recourse responsibility with respect to the Mortgage from that assumed under a standard Agency nonrecourse contract. 5.22 Adjustable Rate Mortgages. All adjustable rate loans were originated and set-up on the sellers servicing system according to agency guidelines in strict adherence to the mortgage documents. All rate adjustments made prior to Transfer Date have been made in accordance with agency guidelines, the mortgage documents and all Federal requirements. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER As an inducement to Seller to enter into this Sale Agreement, Purchaser represents and warrants as follows (it being acknowledged that each such representation and warranty relates to material matters upon which Seller relied, and it being understood that each such representation and warranty is made to the Seller as of the Sale Date and the Transfer Date): 6.1 Due Incorporation and Good Standing. Purchaser is a corporation duly organized and validly existing under the laws of the State of Nevada. Purchaser is qualified or licensed to transact business in each jurisdiction in which its activities with respect to the Mortgages or the Servicing require it to be qualified or licensed. 6.2 Authority and Capacity. Purchaser has all requisite power, authority and capacity to enter into this Sale Agreement and to perform the obligations required of it hereunder and thereunder. The execution and delivery of this Sale Agreement and the consummation of the transactions contemplated hereby, have each been duly and validly authorized by all necessary corporate action. This Sale Agreement constitutes valid and legally binding agreements of Purchaser enforceable in accordance with their terms, and no offset, counterclaim or defense exists to the full performance of this Sale Agreement. 6.3 Effective Agreement. The execution, delivery and performance of this Sale Agreement by Purchaser, its compliance with the terms hereof and the consummation of the transactions contemplated hereby will not violate, conflict with, result in a breach of, constitute a default under, be prohibited by, or require any additional approval under the certificate of incorporation, bylaws or any instrument or agreement to which it is a party or by which it is bound or which affects the Servicing, or any state or federal law, rule or regulation or any judicial or administrative decree, order, ruling or regulation applicable to it or to the Servicing. 6.4 Good Standing. Purchaser is a mortgage lender and servicer in good standing with all appropriate regulatory authorities and agencies. ARTICLE VII COVENANTS 7.1 Notice to Mortgagors. Seller shall, at Seller's expense, mail to the mortgagor of each Mortgage no later than fifteen (15) days prior to the Transfer Date a letter advising the mortgagor of the transfer of Servicing to Purchaser; provided, however, the content and format of the letter shall have the prior written approval of Purchaser. 7.2 Notice to Mortgage and Hazard Insurers. Seller shall, at Seller's expense, notify all relevant mortgage insurance companies and PMI companies not later than the Transfer Date, by certified mail, return receipt requested, that all insurance premium billings for the Mortgages must thereafter be sent to Purchaser. Seller shall provide Purchaser with copies of the certified receipts. Additionally, Seller shall, prior to the Transfer Date, obtain the written consent of any PMI insurance companies which have the contractual right to approve transfer of the Servicing. No later than the Transfer Date Seller shall, at Seller's expense, transmit to the applicable hazard and flood companies and/or agents notification of the assignment of the Servicing to Purchaser, directions to name Purchaser as mortgagee and notice to deliver all notices and premium billings to Purchaser from and after the Transfer Date. Seller shall maintain a record of such notification. 7.3 Delivery of Servicing Records. Seller shall forward to Purchaser on the Transfer Date all servicing records in Seller's possession relating to each Mortgage, including the information enumerated in Exhibit C and any other record which is to be maintained pursuant to the Servicing Agreements. 7.4 Delivery of Loan Documents. Seller shall provide Purchaser on the Transfer Date the loan documentation described in Exhibit D. 7.5 Escrow/Impound Balances: Unearned Fees. Seller shall provide Purchaser within three (3) Business Days of the Transfer Date, with immediately available funds in the amount of: (a) The escrow, suspense balances and other servicing account balances associated with the Mortgages net of the collectible receivables. Seller shall provide Purchaser with an accounting statement of escrow and suspense balances and loss draft balances sufficient to enable Purchaser to reconcile the amount of such payment with the accounts of the Mortgages; and (b) All collected but unearned assumption or service fees as of the Transfer Date. 7.6 Mortgage Payments Received Prior to Transfer Date. Prior to the Transfer Date, all payments received by Seller on each Mortgage shall be properly applied by Seller to the account of the particular mortgagor. 7.7 Mortgage Payments Received After Transfer Date. The amount of any Mortgage payments received by Seller after the Transfer Date shall be forwarded to Purchaser by overnight mail within three (3) Business Days of the date of receipt for a period of sixty (60) days after the Transfer Date; provided, however Seller will forward with payments sufficient information to permit processing of the payment by Purchaser. After sixty (60) days Seller shall return the payments to the mortgagor with instructions to make the payments to Purchaser. 7.8 Misapplied Payments. Misapplied payments shall be processed as follows: (a) Both parties shall cooperate in correcting misapplication errors. (b) The party receiving notice of a misapplied payment occurring prior to the Transfer Date and discovered after the Transfer Date shall immediately notify the other party. (c) If a misapplied payment which occurred prior to the Transfer Date cannot be identified by either party and said misapplied payment has resulted in a shortage in a Mortgage account, Seller shall be liable for the amount of such shortage. Seller shall reimburse Purchaser for the amount of such shortage within thirty (30) days after receipt of written demand therefor from Purchaser. (d) If a misapplied payment has created an improper Purchase Price as the result of an inaccurate outstanding principal balance, a check shall be issued to the party shorted by the improper payment application within ten (10) Business Days after notice thereof by the other party. (e) Any check issued under the provisions of this Paragraph 7.8 shall be accompanied by a statement indicating the purpose of the check, the mortgagor and property address involved, and the corresponding Seller and/or Purchaser account number. 7.9 Approvals. Seller shall, at its expense as provided in Paragraphs 8.4 hereof receive the Agencies approval of the transfer of Servicing from Seller to Purchaser pursuant hereto on or before the Transfer Date. 7.10 Review of Mortgage Files. Seller shall provide Purchaser between the contract date and Transfer Date during regular business hours reasonable access to the books, records, servicing system and accounts of Seller with respect to the Mortgages. 7.11 Taxes. No later than the Transfer Date Seller shall at Seller's expense, provide for transfer of the life of loan tax service contract for each Mortgage to Purchaser's account and provide purchaser with a loan level audit tape including all mortgages. With regard to all escrowed mortgage loans, Seller shall pay all taxes which have a "tax due date", which is defined as the date by which taxes must be paid to avoid loss of any discount or accrual of any penalty or interest, within sixty (60) days of the Transfer Date. If bills for such taxes are not available prior to the Transfer Date, Seller shall provide Purchaser with such tax bills not less than fifteen (15) days prior to such tax due date. If such taxes are not paid or bills are not delivered Seller shall reimburse Purchaser for any penalty and costs incurred plus a fifty dollar ($50) administration fee for each Mortgage Loan involved. ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER The obligations of Purchaser under this Sale Agreement are subject, at Purchaser's option, to the satisfaction at or prior to the Transfer Date of each of the following conditions: 8.1 Delivery of Servicing Data and Records. Seller shall provide Purchaser with servicing information consisting of a master loan tape, a history tape, and a Solomon style format tape. A set of tapes shall be sent as reasonably requested by the purchaser including upon execution of this Sale Agreement. A final set of tapes shall be sent on the Transfer Date. Seller shall cooperate with Purchaser's efforts to establish an efficient and accurate conversion of tape data to Purchaser's system. The tapes shall be accompanied with a hard copy trial balance and related reports and shall include the information set forth in Exhibit C. On the Transfer Date Seller shall deliver to Purchaser the servicing files containing the documentation set forth in Exhibit D, including copies of original loan documents maintained in custodian files, and, in separately identified boxes or transmittal, the original document custodial file for each mortgage created pursuant to Section 2.4(b)(iii). Seller acknowledges that failure to provide the information or documents on Exhibits C and D may give rise to a claim under Section 10.2 to the extent such failure results in a loss, expense, cost or other damage to Purchaser. 8.2 Correctness of Representations and Warranties. The representations and warranties made by Seller in this Sale Agreement are true and correct in all material respects and shall continue to be true and correct on the Sale Date and the Transfer Date. 8.3 Compliance with Conditions. All of the terms, covenants and conditions of this Sale Agreement required to be complied with and performed by Seller at or prior to the Transfer Date shall have been duly complied with and performed in all material respects. 8.4 Regulatory Approval. Seller shall, at its expense, obtain approval from the Agencies for the transfer of the Servicing from Seller to Purchaser pursuant hereto. 8.5 Books and Records. Purchaser shall have determined to its reasonable satisfaction that: (a) The books, records and accounts of Seller with respect to the Mortgages are in order pursuant to Agency and PMI requirements; (b) The information provided in Exhibit A is substantially correct; (c) The Mortgages have been originated, pooled and serviced in accordance with Agency requirements and sound and prudent mortgage banking practice. In this connection Purchaser shall perform its due diligence review pursuant to Section 2.5 and, if any material noncompliance is determined to exist such as materially impair the value of the Servicing, Seller shall correct such noncompliance. 8.6 Contingency Purchase. The execution of a second Purchase and Sale Agreement by the Seller and the Purchaser with regard to a second portfolio of mortgage servicing rights whose characteristics and size have no significant variance from those mortgage servicing rights contained in this Purchase and Sale Agreement, and whose Sale Date will occur within thirty-two days of this Agreement and whose Transfer Date(s) will coincide with this Agreement. ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER The obligations of Seller under this Sale Agreement are subject, at Seller's option, to the satisfaction at or prior to the Transfer Date of each of the following conditions: 9.1 Correctness of Representations and Warranties. The representations and warranties made by Purchaser in this Sale Agreement are true and correct and shall continue to be true and correct on the Transfer Date. 9.2 Compliance with Conditions. All of the terms, conditions and covenants of this Sale Agreement required to be complied with and performed by Purchaser at or prior to the Transfer Date shall have been duly complied with and performed. ARTICLE X MISCELLANEOUS 10.1 Costs and Expenses. Costs and expenses incurred in connection with the transactions contemplated hereby shall be paid as follows: (a) Seller shall pay all the reasonable costs associated with the transfer of the Servicing to Purchaser involving the costs of shipping files to Purchaser and to Purchaser's custodian, any recording or filing fees, Agency transfer fees, Seller custodian charges, and all other costs associated with the preparation, filing and due recording of Mortgage assignments including intervening assignments, and any other expenses incurred by Seller or its affiliates; and (b) Except as provided in (a) above, Purchaser shall pay the expenses incurred by it or its affiliates in connection with the transactions contemplated hereby. 10.2 Indemnification by Seller. Seller shall indemnify and hold Purchaser harmless from and shall reimburse Purchaser for any losses, damages, deficiencies, claims, causes of action or expenses of any nature (including reasonable attorneys' fees, investigative expenses and operational costs) incurred by Purchaser before or after the Sale Date which: (a) Result from any breach or violation of any representation or warranty made by Seller in Articles IV and V including Section 5.3 and the mortgages listed on Exhibit H of this Sale Agreement; as to any representation or warranty Seller shall be obligated to indemnify Purchaser as to any such matter regardless of whether Seller did or did not have knowledge of such matter; (b) Result from the non-fulfillment of any covenant or condition of Seller contained in this Sale Agreement or in any schedule, written statement or certificate furnished by Seller pursuant to this Sale Agreement; (c) Result from litigation existing or pending on the Sale Date involving the Servicing or any of the Mortgages or litigation arising out of matters occurring prior to the Transfer Date; or (d) Result from missing servicing records or documents not included in the servicing file or Seller's failure to timely provide such records. 10.3 Indemnification by Purchaser. Purchaser shall indemnify and hold Seller harmless from and shall reimburse Seller for any losses, damages, deficiencies, claims, causes of action or expenses of any nature (including reasonable attorneys' fees, investigative expenses and operational costs) incurred by Seller and arising after the Transfer Date, or in regard to Subsection (b) are incurred by Seller and arise after the Sale Date, which: (a) Result from any misrepresentation made by Purchaser in this Sale Agreement, or in any schedule, written statement or certificate furnished by Purchaser pursuant to this Sale Agreement; (b) Result from any breach of warranty by Purchaser, or the non-fulfillment of any covenant of Purchaser contained in this Sale Agreement, or in any schedule, written statement or certificate furnished by Purchaser pursuant to this Sale Agreement; (c) Result from errors of Purchaser in servicing any of the Mortgages after the Transfer Date; or (d) Result from litigation arising out of matters occurring subsequent to the Transfer Date involving the Servicing or any of the Mortgages. 10.4 Repurchase of Servicing. In the event Purchaser discovers that any of the representations and warranties contained in Articles IV and V excluding section 5.3 unless demand for repurchase is made by an agency, hereof were not accurate in material respects at the time they were made by Seller whether or not Seller had knowledge of such inaccuracy, Purchaser shall give prompt written notice of such fact to Seller, and subject to Seller having an opportunity to cure any such defect or violation as is reasonable under the circumstances then existing and is permitted by the applicable Agency, Purchaser may demand that Seller repurchase from Purchaser the right to service those Mortgages which are affected by the inaccurate representation and warranty or, in the event such Mortgages are required to be repurchased by the Agency, Seller shall pay to Purchaser the cost to repurchase such Mortgages. When Seller is required by this paragraph to repurchase servicing rights related to a Mortgage from Purchaser or pay the cost to repurchase a Mortgage, Seller shall pay Purchaser a repurchase price for the related servicing equal to 108 Basis Points (1.08%) of the then outstanding principal balance for such Mortgages. The repurchase price of a Mortgage shall be the unpaid principal balance plus accrued interest at the applicable note rate plus any outstanding advances and uncollected receivables. When Seller is required to either provide for repurchase of a Mortgage or repurchase servicing of a Mortgage from Purchaser, such repurchase shall be accomplished within the time period permitted or required by the Agency and such repurchase shall be accomplished within fifteen (15) Business Days following receipt from Purchaser of written demand and support documentation from Purchaser pursuant hereto. Upon completion of such purchase or repurchase by Seller, Purchaser shall promptly forward to Seller at Purchaser's cost and expense all servicing records and all documents relating to such repurchased Mortgages or Servicing. 10.5 Supplementary Information. From time to time prior to and after the Transfer Date, Seller shall furnish Purchaser such incidental information, which is reasonably available to Seller, supplementary to the information contained in the documents and schedules delivered pursuant hereto and shall file such reports as Purchaser may reasonably request to service in accordance with applicable Agency requirements. 10.6 Access to Information. Seller shall give to Purchaser and its counsel, accountants and other representatives reasonable access during normal business hours throughout the period prior to the Transfer Date, to all of Seller's files, books and records relating to the Servicing and Related Escrow Accounts provided Purchaser has provided Seller reasonable notice. 10.7 Confidentiality of Information: Prohibition on Solicitation. (a) Seller and Purchaser and their affiliates shall, and shall cause their respective directors, officers, employees and authorized representatives to hold in strict confidence and not use or disclose to any other party without the prior written consent of the other party all information concerning customers or proprietary business procedures, servicing fees or prices, policies or plans of the other party or any of its affiliates received by them from the other party in connection with the transactions contemplated hereby. (b) Seller shall not use, and shall prohibit its affiliates, successors or assigns from using, the mortgagor list of the Mortgages or other data or information related to the Mortgages for purposes of soliciting a refinancing of the Mortgages or conducting marketing programs of any type, such list, data and information after the Sale Date being the sole property of Purchaser. Seller shall not take any action which would permit use of such list, information or data by a third party. 10.8 No Broker's Fees. Each party hereto represents and warrants to the other that it has made no agreement to pay any agent, finder, or broker or any other representative, any fee or commission in the nature of a finder's or originator's fee arising out of or in connection with the subject matter of this Sale Agreement other than Seller's agreement with Hamilton, Carter, Smith & Co., Incorporated. Seller agrees to indemnify and hold Purchaser harmless from any liability in connection with its agreement with Hamilton, Carter, Smith & Co., Incorporated and both the parties hereto covenant with each other and agree to indemnify and hold each other harmless from and against any such obligation or liability and any expense incurred in investigation or defending (including reasonable attorneys' fees) any claim based upon the other party's actions in connection with such obligation. 10.9 Survival of Representations and Warranties. Each party hereto covenants and agrees that the representations and warranties in this Sale Agreement, and in any document delivered or to be delivered pursuant hereto, shall survive the Sale Date and Transfer Date; provided that Seller's obligation to indemnify Purchaser under Section 10.2(a) shall terminate as to any matter for which notice of a breach or violation of a representation and warranty is not given within fifteen (15) years of the Transfer Date. 10.10 Form of Payment to be Made. Purchaser shall pay to Seller the amounts required by Article III by wire of Fed funds to Seller's account at California United Bank , ABA 1222-3911-5 , for the account of California United Bank , Acct. 03-910-3002, Attn: Greg Tipton or other account as specified by Seller in writing. 10.11 Notices. All notices, requests, demands and other communications which are required or permitted to be given under this Sale Agreement shall be in writing and shall be deemed to have been duly given upon the delivery, express mail delivery or mailing thereof by registered or certified mail, return receipt requested, postage prepaid: (a) If to the Purchaser, to: Mr. Richard K. Magel Senior Vice President Temple Inland Mortgage Corporation 301 Congress Avenue, Suite #304 Austin, TX 78701 CC: Mr. Joe Farr Executive Vice President and CFO Temple Inland Mortgage Corporation 901 South MoPac Expressway, Ste. 300 Austin, TX 78746 (b) If to the Seller, to: Mr. Pat Hartman CFO 16030 Ventura Blvd. Encino, CA 91436-4487 CC: Ms. Anita Wohlman General Counsel 16030 Ventura Blvd. Encino, CA 91436-4487 or to such other address as Purchaser or Seller shall have specified in writing to the other. 10.12 Waivers. Either Purchaser or Seller may, by written notice to the other: (a) Extend the time for the performance of any of the obligations or other transactions of the other; and (b) Waive compliance with any of the terms, conditions or covenants required to be complied with by the other hereunder. The waiver by any party hereto of a breach of any provision of this Sale Agreement shall not operate or be construed as a waiver of any other subsequent breach. 10.13 Entire Agreement: Amendment. This Sale Agreement constitutes the entire agreement between the parties with respect to the sale of the Servicing and supersedes all prior agreements with respect thereto. This Sale Agreement may be amended and any provision hereof waived, but only in writing signed by the party against whom such amendment or waiver is sought to be enforced. 10.14 Binding Effect. This Sale Agreement shall inure to the benefit of and be binding upon the parties hereto and their successors and assigns. Seller agrees that Purchaser may assign this Agreement to a successor or affiliate so long as such assignment cannot reasonably be deemed to have an adverse affect on Seller and that such assignment does not occur prior to the Transfer Date. Nothing in this Sale Agreement, express or implied, is intended to confer on any person, other than the parties hereto, and their successors and assigns, any rights, obligations, remedies or liabilities. 10.15 Headings. Headings on the Articles and Paragraphs in this Sale Agreement are for reference purposes only and shall not be deemed to have any substantive effect. 10.16 Applicable Laws. This Sale Agreement shall be construed in accordance with the laws of the State of Texas without reference to its principles of conflict of laws. 10.17 Incorporation of Exhibits. Exhibits A through H attached hereto shall be incorporated herein and shall be understood to be a part hereof as though included in the body of this Sale Agreement. 10.18 Counterparts. This Sale Agreement may be executed in counterparts, each of which, when so executed and delivered, shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement. IN WITNESS WHEREOF, each of the undersigned parties to this Sale Agreement has caused this Sale Agreement to be duly executed in its corporate name by one of its duly authorized officers, all as of the date first above written. "PURCHASER" _Joe Farr___________________________ Joe Farr Chief Financial Officer Temple-Inland Mortgage Corporation "SELLER" _Pat Hartman__________________________ Pat Hartman Chief Financial Officer California United Bank EXHIBIT A Description of Mortgage Loans Date of Information August 31, 1994 Principal Balance $231,566,758.80 Number of Loans 1675 Weighted Average Note Rate 7.468% Weighted Average Net Servicing Fee .2995% Weighted Average Original Term 228 Weighted Average Time to Maturity 209 Monthly T&I Escrow Constant $38,740.14 P&I Constant $1,831,226.34 Total Delinquency 1.73% = 29 Loans (13 Loans=30 Days Delinq. 4 Loans=60 Days Delinq. 3 Loans=90 Days Delinq. 9 Loans=120 Days Delinq.) List of Loan Numbers with Name and Address SEE ATTACHMENT EXHIBIT B Schedule of Prior Servicers (To be supplied by Seller) None EXHIBIT C Schedule of Servicing Information The following information with respect to each Mortgage in a paper/report format and in a format sufficient to enable its tape-to-tape transmission to Purchaser: 1. Mortgaged Property Address 2. Mortgagor's Name and any Co-Mortgagor's Name 3. Mailing Address 4. Mortgage Loan Number 5. Current Mortgage Interest Rate 6. Current Principal Balance 7. Original Principal Balance 8. First Payment Due Date 9. Total Interest Due 10. Next Due Date 11. Loan Type 12. Original Term of Loan 13. Maturity Date of Loan 14. Delinquency Pattern 15. Late Charges Due 16. Current Monthly Payment 17. Current Monthly Escrow Deposit 18. Current Escrow Balance 19. Social Security Number of Mortgagor and Co-Mortgagor(s) 20. Most recent twelve (12) month history 21. First or Next Interest Adjustment Date 22. Loan-to-Value Ratio at Origination or Appraised Value at Origination 23. Payment Adjustment Date 24. Current Index 25. Lifetime Rate Cap 26. Gross Margin 27. Periodic Rate Cap 28. Payment Cap 29. Code Identifying any Conversion Option 30. Code Identifying whether Mortgaged Property is Owner-Occupied 31. Code Identifying Type of Residential Dwelling 32. Investor, Pool Data and Certificateholders 33. Investor Loan Number 34. Tax Servicer 35. Tax Data, including legal, parcel, due date, payee and last disbursement date and amount 36. Hazard Insurance Data, including insurance company, policy number, due date, premium amount, coverage amount, and last disbursement date and amount 37. Private Mortgage Insurance Policy and Mortgage Insurance Data, including case number, anniversary month, annual or monthly premium, company, certificate number, monthly deposit, and last disbursement date and amount. 38. Identifier to distinguish between one time and monthly FHA premium. EXHIBIT D Additional Information/Documentation to be Delivered A. The following information and documents with respect to each Mortgage: 1. Two (2) year transaction history file (available in hard copy, fiche or film) as available. 2. Collection records and Mortgaged Property address listing 3. All tax records including prior year receipts or deliver these individually as Purchaser reasonably requests as needed after the Transfer Date. 4. Optional Insurance Certificates 5. All title policies and title opinions 6. Microfilm, fiche or hard copy of loan files 7. Copy of form of letter sent to appropriate insurance companies/agents requesting endorsements to reflect transfer to Purchaser and new address with a listing of addresses 8. Other documents or information that Purchaser may reasonably request which are reasonably available to Seller 9. Copy of Mortgage Note and recorded Mortgage or certified copy of recorded Mortgage 10. Copy of letter to the appropriate taxing service notifying them of the transfer of Servicing to Purchaser 11. Copy of original credit package 12. Available information concerning all pending items, including but not limited to partial releases, mortgage life or mortgage disability claims, litigation, assumptions, and loss drafts. 13. Detail foreclosure information on loans in foreclosure and loans foreclosed. 14. Detail bankruptcy information on loans in bankruptcy. On an aggregate basis, a schedule enumerating each Mortgage which requires special handling with a statement of the reasons therefor and all relevant documentation attached. EXHIBIT E Schedule of Pending Litigation EXHIBIT F Schedule of Delinquent Mortgages Indicating Number of Payments Due and including Loan No. and UPB SEE ATTACHMENT EXHIBIT G SCHEDULE OF MORTGAGES FOR WHICH A PAYOFF QUOTE WAS ISSUED PRIOR TO SALE DATE EXHIBIT H MORTGAGES LOANS WITH PHYSICAL DAMAGE DUE TO AN EARTHQUAKE EX-27 3
9 9-MOS DEC-31-1994 SEP-30-1994 43228 397 12000 0 0 64451 62787 152340 7470 280436 242532 0 8878 0 26429 0 0 2597 280436 9660 2715 46 12421 2393 2647 9774 0 0 11221 3272 1857 0 0 1857 .40 .40 5.81 113 0 1757 0 6513 1159 2116 7470 7470 0 0
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