-----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, qgajjRtAznT6OFI4vt5+qbtTOSAE1Ul0hh+oiLvcZS9yPDmAbH0gQxJZTVIX7frm 94NmSfO8PdW0hYfrM7aiwA== 0000356050-94-000007.txt : 19940816 0000356050-94-000007.hdr.sgml : 19940816 ACCESSION NUMBER: 0000356050-94-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 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: 94543222 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 FORM 10-Q FOR PERIOD ENDED 6/30/94 26 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. /X/ For the Quarterly Period Ended June 30, 1994, or Transition Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________. Commission File Number 0-11008 CU BANCORP (Exact name of registrant as specified in its charter) California 95-3657044 (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 818-907-9122 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address, and former fiscal year if changes since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of June 30, 1994, the Registrant has outstanding 4,437,312 shares of its Common stock, no par value. CU BANCORP Quarter Ended June 30, 1994 Table of Contents - Form 10-Q 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: -June 30, 1994, and December 31, 1993. 21 Consolidated Statements of Income: -Three and Six Month Periods Ended June 30, 1994, and June 30, 1993. 22 Consolidated Statements of Cash Flows: -Six Month Periods Ended June 30, 1994, and June 30, 1993. 23 Notes to Consolidated Financial Statements 24 Signatures 27 Part II. Other Information Item 1. Legal Proceedings 28 Item 2. Changes in Securities 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits and Filings on Form 8-K 28
MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW The Company earned $608 thousand, or $0.13 per share, during the second quarter of 1994, compared to $557 thousand, or $0.12 per share, during the same period in 1993. This represented the sixth consecutive quarter of increased profits. Second quarter 1994 earnings included profitable performance by the bank and a gain on the sale of a portion of the mortgage servicing rights retained by the Bank when its mortgage origination network was sold in 1993. The Bank's asset quality ratios continue to be exceptionally strong. At June 30, 1994, nonperforming assets were $1.0 million, down $0.1 million, or 9%, from the prior quarter, and nearly $9.0 million, or 90% from the second quarter of 1993. At June 30, 1994, the Bank did not have any real estate acquired through foreclosure. The improvement in asset quality over the past year is illustrated by Graph 1: Nonperforming Assets. The Bank's allowance for loan losses as a percent of both nonperforming loans and nonperforming assets at the end of the second quarter of 1994 was 699%, compared to second quarter 1993 levels of 118% and 77%, respectively. This trend can be seen in Graph 2: Ratio of Allowance for Loan Losses to Nonperforming Assets. GRAPH 1 DATA: NONPERFORMING ASSETS June 30, September 30, December 31, March 31, June 30, 1993 1993 1993 1994 1994 ------ ------ ------ ------ ------ Nonperforming Loans $6,530 $1,065 $1,378 $1,108 $1,042 Nonperforming Assets 9,988 4,034 2,298 1,108 1,042
The allowance for loan losses as a percentage of nonperforming loans and assets has increased as both nonperforming categories were reduced. During the first half of 1994, the Bank enjoyed a net recovery as recoveries exceeded chargeoffs for the second consecutive quarter. Net recoveries further increase the allowance's coverage of the nonperforming loans and assets. GRAPH 2 DATA: ALLOWANCE FOR LOAN LOSSES TO NONPERFORMING ASSETS June 30, September 30, December 31, March 31, June 30, 1993 1993 1993 1994 1994 ---- ---- ---- ---- ---- Allowance to: Nonperforming Loans 118% 536% 473% 652% 699% Nonperforming Assets 77% 142% 283% 652% 699%
Capital ratios are strong, substantially exceeding levels required to be in the "well capitalized" category established by bank regulators. The Total Risk-Based Capital Ratio was 17.2%, the Tier 1 Risk-Based Capital Ratio was 15.9%, and the Leverage Ratio was 10.6% at June 30, 1994, compared to 16.7%, 15.4%, and 9.2%, respectively, at year-end 1993. Regulatory requirements for Total Risk-Based, Tier 1 Risk-Based, and Leverage capital ratios are a minimum of 8%, 4%, and 3%, respectively, and for classification as well capitalized, 10%, 6%, and 5%, respectively. The successful results in 1993 concerning asset quality, regulatory relations, growth of middle market lending and strategic focus make expansion and growth possible in 1994. Two new loan production offices were opened in January 1994. These offices will allow expanded market penetration and commercial portfolio diversification. On April 1, 1994, the Bank acquired the deposits of the Encino branch of Mechanics National Bank from the FDIC, to expand and improve deposit mix. BALANCE SHEET ANALYSIS LOAN PORTFOLIO COMPOSITION AND CREDIT RISK Loan portfolio quality continues to be a focal point of management's attention. As a result, considerable improvements have been made. Credit policies have been established to promote quality production. Target markets have been redefined to emphasize middle market commercial lending and reduce real estate concentrations. Further, the Bank's credit policy limits concentrations of loans in any industry or collateral. The Bank's focus on middle market lending, in its infancy at year-end 1992, gained momentum in 1993 and 1994. While total loans decreased from December 31, 1993 to June 30, 1994 the assets of the core commercial bank increased. Offsetting this, the remaining Held for Sale mortgages of $10.4 million at December 31, 1993 were sold in the first quarter of 1994. Excluding this planned liquidation, loans increased by $13 million, or 9%, for the six months ended June 30, 1994. TABLE 1 LOAN PORTFOLIO COMPOSITION Amounts in thousands of dollars June 30, December 31, June 30, 1994 1993 1993 -------- -------- -------- Commercial & Industrial Loans $135,725 $120,513 $125,583 Real Estate Loans: Held for Sale 0 10,426 59,032 Mortgages 6,456 8,496 11,578 Construction 846 1,226 244 Other Loans 223 0 481 -------- -------- -------- Total loans net of unearned fees $143,250 $140,661 $196,918 ======== ======== ========
Historically, the Bank's real estate loans secured by single family residences were principally mortgages held for sale that were originated by the Mortgage Banking Operation. These were sold to investors through firm commitments, generally in less than 90 days. The loans amounted to $10.4 million, or 7.4% of the December 31, 1993, loan portfolio. This part of the loan portfolio historically presents almost no credit risk. The mortgage origination operation sale eliminated this loan concentration. The remainder of real estate loans are generally collateralized by a first or second trust deed position. Lending efforts have been directed away from commercial real estate, as well as construction and multifamily lending. The Bank is now focused on business lending to middle market customers. Current credit policy now permits commercial real estate lending generally only as part of a complete commercial banking relationship with a middle market customer. Existing commercial real estate loans, 16% of the loan portfolio, or $23 million at June 30, 1994, compared to $27 million at year-end 1993, are secured by first or second liens on office buildings and other structures. The loans are secured by real estate that had appraisals in excess of loan amounts at origination. Monitoring and controlling the Bank's allowance for loan losses is a continuous process. All loans are assigned a risk grade, as defined by credit policies, at origination and are monitored to identify changing circumstances that could modify their inherent risks. These classifications are one of the criteria considered in determining the adequacy of the allowance for loan losses. The amount and composition of the allowance for loan losses is as follows: TABLE 2 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES Amounts in thousands of dollars June 30, December 31, June 30, 1994 1993 1993 ------ ------ ------ Commercial & Industrial Loans $5,971 $5,699 $6,672 Real estate loans - Held for Sale 0 67 238 Real estate loans - Mortgages 643 225 407 Real estate loans - Construction 100 10 37 Other loans 2 0 11 ------ ------ ------ Loans 6,716 6,001 7,365 Unfunded commitments and letters of credit 563 512 368 ------ ------ ------ Total Allowance for loan losses $7,279 $6,513 $7,733 ====== ====== ======
Adequacy of the allowance is determined using management's estimates of the risk of loss for the portfolio and individual loans. Included in the criteria used to evaluate credit risk are, wherever appropriate, the borrower's cash flow, financial condition, management capabilities, and collateral valuations, as well as industry conditions. A portion of the allowance is established to address the risk inherent in general loan categories, historic loss experience, portfolio trends, economic conditions, and other factors. Based on this assessment a provision for loan losses may be charged against earnings to maintain the adequacy of the allowance. The allocation of the allowance based upon the risks by type of loan, as shown in Table 2, implies a degree of precision that is not possible when using judgments. While the systematic approach used does consider a variety of segmentations of the portfolio, management considers the allowance a general reserve available to address risks throughout the entire loan portfolio. Activity in the allowance, classified by type of loan, is as follows: TABLE 3 ANALYSIS OF THE CHANGES IN THE ALLOWANCE FOR LOAN LOSS Amounts in thousands of dollars For the Periods Ended June 30, December 31, June 30, 1994 1993 1993 ------- ------- ------- Balance at January 1 $6,513 $12,986 $12,986 ------- ------- ------- Loans charged off: Real estate secured loans 361 3,266 2,223 Commercial loans secured and unsecured 501 6,582 4,614 Loans to individuals, installment and other loans 0 901 339 ------- ------- ------- Total charge-offs 862 10,749 7,176 ------- ------- ------- Recoveries of loans previously charged off: Real estate secured loans 519 393 2 Commercial loans secured and unsecured 1,106 3,189 1,434 Loans to individuals, installment and other loans 3 244 187 ------- ------- ------- Total recoveries of loans previously charged off 1,628 3,826 1,623 ------- ------- ------- Net charge-off (recovery) (766) 6,923 5,553 Provision for loan losses 0 450 300 ------- ------- ------- Balance at end of period $7,279 $6,513 $7,733 ======= ======= ======= Net loan charge-offs (recoveries) as a percentage of average gross loans outstanding during the period ended (0.56%) 3.49% 2.68% ======= ======= =======
The Bank's policy concerning nonperforming loans is more conservative than is generally required. It defines nonperforming assets as all loans ninety days or more delinquent, loans classified nonaccrual, and foreclosed, or in substance foreclosed real estate. Nonaccrual loans are those whose interest accrual has been discontinued because the loan has become ninety days or more past due or there exists reasonable doubt as to the full and timely collection of principal or interest. When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against operating results. Subsequent payments on nonaccrual loans are treated as principal reductions. At June 30, 1994, nonperforming loans amounted to $1.0 million, down 24% from $1.4 million at December 31, 1993. TABLE 4: NONPERFORMING ASSETS Amounts in thousands of dollars June 30, December 31, June 30, 1994 1993 1993 ------ ------ ------ Loans not performing (1) $342 $378 $3,853 Insubstance foreclosures 700 1,000 2,677 ------ ------ ------ Total nonperforming loans 1,042 1,378 6,530 Other real estate owned 0 920 3,458 ------ ------ ------ Total nonperforming assets $1,042 $2,298 $9,988 ====== ====== ====== Allowance for loan losses as a percent of: Nonperforming loans 699% 473% 118% Nonperforming assets 699% 283% 77% Nonperforming assets as a percent of total assets 0.4% 0.8% 3.3% Nonperforming loans as a percent of total loans 0.7% 1.0% 3.0% Note 1: Loans not performing Performing as agreed $118 $9 $1,361 Partial performance 99 369 2,415 Not performing 125 0 77 ------ ------ ------ $342 $378 $3,853 ====== ====== ====== Nonaccrual: Loans $342 $378 $3,071 Troubled debt restructurings 0 0 782 (a) Past due with respect to principal and/or interest and continuing to accrue interest.
SECURITIES The securities portfolio at June 30, 1994, totaled $58 million, compared to $88 million at year-end 1993. The securities are all held in a Held for Investment portfolio. This portfolio is recorded at amortized cost. It is the Bank's intention to hold these securities to their individual maturity dates. There was no held for sale portfolio at June 30, 1994 or year-end 1993. There have been no realized gains or losses on securities in the first half of 1994. Gains of $77 thousand were realized in the first six months of 1993. At June 30, 1994, there were unrealized gains of $22 thousand and losses of $1.5 million in the securities portfolio. Additional information concerning securities is provided in the footnotes to the accompanying financial statements. OTHER REAL ESTATE OWNED At June 30, 1994, there was no Other Real Estate Owned on the Bank's balance sheet, compared with $920 thousand at December 31, 1993. The carrying values of these properties are at fair value, which is determined using recent appraisal values adjusted, if necessary, for other market conditions. Loan balances in excess of fair value are charged to the allowance for loan losses when the loan is reclassified to other real estate. Subsequent declines in fair value are charged against an allowance for real estate owned losses created by charging a provision to other operating expenses. Expenses related to Other Real Estate Owned were $12 thousand in the six months ended June 30, 1994, with no expenses incurred in the second quarter. This compares to $75 thousand and $88 thousand in the three and six month periods ended June 30, 1993. DEPOSIT CONCENTRATION Due to its historic focus on real estate-related activities, the Bank developed a concentration of deposit accounts from title insurance and escrow companies. These deposits are generally noninterest bearing transaction accounts that contribute to the Bank's interest margin. Noninterest expense related to these deposits is included in other operating expense. The Bank monitors the profitability of these accounts through an account analysis procedure. The Bank offers products and services allowing customers to operate with increased efficiency. A substantial portion of the services, provided through third party vendors, are automated data processing and accounting for trust balances maintained on deposit at the Bank. These and other banking related services, such as messenger and deposit courier services, will be limited or charged back to the customer if the deposit relationship profitability does not meet the Bank's expectations. Noninterest bearing deposits represent nearly the entire title and escrow relationship. These balances have been reduced substantially as the Bank focused on middle market business loans. The balance at June 30, 1994, was $60.9 million compared to $58.1 million at December 31, 1993. Costs relative to servicing the above relationships are the significant portion of the Bank's customer data processing and messenger and courier costs. There have been no significant changes in these costs in the first six months of 1994. TABLE 5 REAL ESTATE ESCROW AND TITLE INSURANCE COMPANY DEPOSITS Average Balance Six Months Ended Six months ended Amounts in thousands of dollars June 30, 1994 June 30, 1994 Percent of Percent of Amount Total Percent of Amount Total Percent of Deposits Class Deposits Class -------- -------- -------- -------- -------- -------- June 30, 1994 Balances Noninterest bearing demand deposits $60,904 25% 49% $51,112 23% 47% Interest-bearing demand & savings deposits 1,063 1% 1% 2,227 1% 2% -------- -------- -------- -------- -------- -------- Total deposit concentration $61,967 26% $53,339 24% ======== ======== ======== December 31, 1993 - Year to Date Balances $58,943 25% $70,238 26% ======== ======== ======== ========
The Bank had $15.9 million in certificates of deposit larger than $100 thousand dollars at June 30, 1994. The maturity distribution of these deposits is relatively short term, with $11.2 million maturing within 3 months and the balance maturing within 12 months. LIQUIDITY AND INTEREST RATE SENSITIVITY The objective of liquidity management is to ensure the Bank's ability to meet cash requirements. The liquidity position is managed giving consideration to both on and off-balance sheet sources and demands for funds. Sources of liquidity include cash and cash equivalents (net of Federal Reserve requirements to maintain reserves against deposit liabilities), securities eligible for pledging to secure borrowings from dealers pursuant to repurchase agreements, loan repayments, deposits, and borrowings from a $20 million overnight federal funds line available from a correspondent bank. Potential significant liquidity requirements are withdrawals from noninterest bearing demand deposits and funding of commitments to loan customers. During 1993, the Bank maintained a $20 million line of credit with a major purchaser of the mortgage loans originated by the mortgage origination operation. This warehouse line was terminated in conjunction with the sale of that operation. From time to time the Bank may experience liquidity shortfalls ranging from one to several days. In these instances, the Bank will either purchase federal funds, and/or sell securities under repurchase agreements. These actions are intended to bridge mismatches between funding sources and requirements, and are designed to maintain the minimum required balances. The Bank had no Federal Funds purchased or borrowings under repurchase agreements in the first six months of 1994. The Bank's historical portfolio of large certificates of deposit (those of $100 thousand or more) has not been significant relative to the total deposit base. At June 30, 1994 this funding source was 6.5% of average deposits, compared to 7.3% at December 31, 1993. This funding source has traditionally been used to manage liquidity needs within the deposit portfolio. TABLE 6 INTEREST RATE MATURITIES OF EARNING ASSETS AND FUNDING LIABILITIES AT JUNE 30, 1994 Amounts in thousands of dollars Amounts Maturing or Repricing in More Than 3 More Than 6 More Than 9 Months But Months But Months But Less Than Less Than Less Than Less than 12 Months 3 Months 6 Months 9 Months 12 Months & Over --------- --------- --------- --------- --------- Earning Assets Gross Loans $134,149 $803 $2,178 $423 $5,697 Securities 3,036 4,391 3,000 3,003 45,953 Federal funds sold & other 33,000 --- --- --- --- --------- --------- --------- --------- --------- Total earning assets 170,185 5,194 5,178 3,426 51,650 --------- --------- --------- --------- --------- Interest-bearing deposits: Now and money market 81,346 Savings 8,951 Time certificates of deposit: Under $100 8,397 2,650 1,225 1,399 106 $100 or more 11,156 3,181 600 835 105 Non interest-bearing demand deposits 45,159 --- --- --- --- --------- --------- --------- --------- --------- Total funding liabilities 155,009 5,831 1,825 2,234 211 --------- --------- --------- --------- --------- Interest rate sensitivity gap 15,176 (637) 3,353 1,192 51,439 --------- --------- --------- --------- --------- Cumulative interest rate sensitivity gap 15,176 14,539 17,892 19,084 70,523 Off balance sheet financial instruments 0 0 0 0 0 --------- --------- --------- --------- --------- Net cumulative gap $15,176 $14,539 $17,892 $19,084 $70,523 ========= ========= ========= ========= ========= Adjusted cumulative ratio of rate sensitive assets to rate sensitive liabilities (1) 1.10% 1.09% 1.11% 1.12% 1.43% ========= ========= ========= ========= ========= (1) Ratios greater than 1.0 indicate a net asset sensitive position. Ratios less than 1.0 indicate a liability sensitive position. A ratio of 1.0 indicates a risk neutral position.
Assets and liabilities shown on Table 6 are categorized based on contractual maturity dates. Maturities for those accounts without contractual maturities are estimated based on the Bank's experience with these customers. Noninterest bearing deposits of title and escrow companies, having no contractual maturity dates, are considered subject to more volatility than similar deposits from commercial customers. The net cumulative gap position shown in the table above indicates that the Bank does not have a significant exposure to interest rate fluctuations during the next twelve months. CAPITAL Total shareholders' equity was $28.2 million at June 30, 1994, compared to $27.0 million at year-end 1993. This increase was due to earnings, plus the exercise of stock options. The Bank is guided by statutory capital requirements, which are measured with three ratios, two of which are sensitive to the risk inherent in various assets and which consider off- balance sheet activities in assessing capital adequacy. During 1994 and 1993, the Bank's capital levels exceeded the "well-capitalized" standards, the highest classification established by bank regulators. TABLE 7 CAPITAL RATIOS Regulatory Standards June 30, December 31, Adequately Well 1994 1993 Capitalized Capitalized ---- ---- ---- ---- Total Risk Based Capital 17.2% 16.7% 8.0% 10.0% Tier 1 Risk Base Capital 15.9 15.4 4.0 6.0 Leveraged Capital 10.6 9.2 4.0 5.0
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 - UNAUDITED 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 --- --- 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 six months ended June 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 June 30, 1994 June 30, 1993 ------------- ------------- Commercial Mortgage Consolidated Consolidated Banking Banking ------------ ------------ ------- ------- Net interest income $3,320 $3,830 $3,479 $351 Provisions for loan losses 0 150 75 75 ------ ------ ------ ----- 3,320 3,680 3,404 276 Noninterest revenue 592 5,985 179 5,806 ------ ------ ------ ----- Total revenues 3,912 9,665 3,583 6,082 ------ ------ ------ ----- Salaries and related benefits 1,536 2,822 1,648 1,174 Other operating expenses 2,016 5,906 1,845 4,061 ------ ------ ------ ----- Total operating expenses 3,552 8,728 3,493 5,235 ------ ------ ------ ----- Operating income 360 937 90 847 Gain on sale of mortgage servicing portfolio 720 --- --- --- ------ ------ ------ ----- Income before taxes $1,080 $937 $90 $847 ====== ====== ====== ====== (i) Inter-divisional transactions have been eliminated at the division level.
TABLE 9B PRE-TAX OPERATING CONTRIBUTION BY LINE OF BUSINESS (I) Amounts in thousands of dollars For the six For the six months ended months ended June 30, 1994 June 30, 1993 ------------- ------------- Commercial Mortgage Consolidated Consolidated Banking Banking ------------ ------------ ------- ------- Net interest income $6,072 $7,644 $7,006 $638 Provisions for loan losses 0 300 225 75 ------ ------ ------ ------ 6,072 7,344 6,781 563 Noninterest revenue 1,495 10,334 463 9,871 ------ ------ ------ ------ Total revenues 7,567 17,678 7,244 10,434 ------ ------ ------ ------ Salaries and related benefits 3,079 5,303 3,243 2,060 Other operating expenses 3,958 10,796 3,782 7,014 ------ ------ ------ ------ Total operating expenses 7,037 16,099 7,025 9,074 ------ ------ ------ ------ Operating income 530 1,579 219 1,360 Gain on sale of mortgage servicing portfolio 1,558 --- --- --- ------ ------ ------ ------ Income before taxes $2,088 $1,579 $219 $1,360 ====== ====== ====== ====== (i) Inter-divisional transactions have been eliminated at the division level.
The Bank continues to take steps to facilitate the expansion and market penetration of the commercial bank including the creation of loan production offices, establishment of a Small Business Administration ("SBA") loan production group, and development of an international trade services group. Loan production offices have been established in two strategic locations in southern California. These will serve the San Gabriel Valley area and the South Bay area. The offices are staffed with seasoned commercial lenders whose primary focus is business development. Such offices are cost effective approaches to business development and allow the Bank access to wider market exposure. While these offices are primarily staffed with existing personnel, when appropriate, key people with specific market knowledge and experience have been hired. The Bank has established a group of lenders to focus on the production of commercial loans that can be participated with the SBA. These loans are subject to the same credit quality policies and procedures as all commercial loan production. Fees generated from the sale of the guaranteed portion of the loans will be an important new source of noninterest income. Another new product was added with the creation of an international trade services group. Many of the Bank's existing commercial customers and prospects are involved in import and/or export. This product line includes letters of credit, foreign exchange, and foreign collections, and is another important element in the total banking relationship offered to our business customers. NET INTEREST INCOME AND INTEREST RATE RISK Net interest income is the difference between interest and fees earned on earning assets and interest paid on funding liabilities. Net interest income was $3.3 million and $6.1 million for the three and six month periods ended June 30, 1994, compared to $3.8 million and $7.6 million for the comparable periods in 1993. The change is primarily attributable to changes in volume. As a result of efforts to deal with credit quality issues and refocus the Bank on middle market business customers, loans outside target markets have been motivated to leave the Bank. Initially this has an adverse affect on net interest margin but subsequent growth of the middle market loan portfolio replaces these assets and provides a more reliable and valuable source of interest margin. Table 10 Analysis of Changes in Net Interest Income (1) Amounts in thousands of dollars Six months ended June 30, Six months ended June 30, 1994 compared to 1993 1993 compared to 1992 --------------------- --------------------- Increases(Decreases) Volume Rate Total Volume Rate Total ------- ------- ------- ------- ------- ------- Interest Income Loans, net $(2,811) $52 $(2,759) $(2,634) $(92) $(2,726) Investments 449 (25) 424 (652) (532) (1,184) Federal Funds Sold 256 39 295 (305) (102) (407) ------- ---- ------- ------- ------- ------- Total interest income (2,106) 66 (2,040) (3,591) (726) (4,317) ------- ---- ------- ------- ------- ------- Interest Expense Interest-bearing deposits: Demand 56 (72) (16) (185) (348) (533) Savings (70) (3) (73) (62) (77) (139) Time Certificates of deposit: Under $100 (84) (1) (85) 262 (47) 215 $100 or more (209) 12 (197) (202) (167) (369) Federal funds purchased / Repos 0 (43) (43) (16) (4) (20) Other borrowings (60) 6 (54) 0 242 242 ------- ---- ------- ------- ------- ------- Total interest expense (367) (101) (468) (203) (401) (604) ------- ---- ------- ------- ------- ------- Net interest income $(1,739) $167 $(1,572) $(3,388) $(325) $(3,713) ======= ==== ======= ======= ======= (1) The change in interest income or interest expense that is attributable to both change in average balance and average rate has been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of the changes in each.
Yields on earning assets were approximately 7.5% and 7.1% for the three and six months ended June 30, 1994, compared to an 8.1% yield for both periods in 1993. The lower average yield on earning assets in 1994 is largely due to the higher mix of Fed Funds and government securities held in 1994 compared with higher concentrations of mortgage loans in 1993. Through October 8, 1993, net interest income continued to benefit from an interest rate swap agreement, discussed below. Rates on interest-bearing deposits resulted in an average cost of funds of 2.7% in 1994, compared to 2.9% for the same period in 1993. Shrinkage in the Bank's earning asset and funding liability portfolios contributed to the reduction in net interest income. Average loans during the second quarter of 1994 decreased $60 million from $191 million in the second quarter of 1993. As previously discussed, this resulted from the sale of the held for sale mortgage loans, discussed below, and management's efforts to improve the quality of the loan portfolio and redirect production to middle market commercial loans. Earning assets averaged $220 million in 1994, down $23 million from $243 million in the same period of 1993. Following the sale of the mortgage origination operation, the Bank's funded warehouse inventory was sold in the normal course of business. The liquidation of this mortgage loan portfolio is being used to increase the Bank's investment portfolio and liquidity position. This liquidity will fund the expected growth of the Bank's core commercial loan portfolio. While this transition will have a temporary adverse impact on net interest margin, it facilitates the commercial loan growth planned for 1994. TABLE 11 AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME Six months ended Six months ended Amounts in thousands of dollars June 30, 1994 June 30, 1993 ------------- ------------- Interest Interest Income or Annual Income or Annual Balance Expense Yield or Rate Balance Expense Yield or Rate -------- -------- ------------- -------- -------- ------------- Interest Earning Assets Loans, Net $130,601 $6,043 9.25% $191,361 $8,802 9.20% Investments 65,755 1,290 3.92 40,486 826 4.08 Certificates of Deposit in other banks 1,377 32 4.65 3,903 72 3.69 Federal Funds Sold 22,594 399 3.53 7,652 104 2.72 -------- -------- ---- -------- -------- ---- Total Earning Assets 220,327 7,764 7.05 243,402 9,804 8.06 Non Earning Assets Cash & Due From Banks 28,762 49,440 Other Assets 8,009 16,795 -------- -------- Total Assets $257,098 $309,637 Interest-bearing Liabilities Demand $66,945 778 2.32 $62,384 794 2.55 Savings 8,283 101 2.44 14,082 174 2.47 Time Certificates of Deposits Less Than $100 19,260 349 3.62 23,932 434 3.63 More Than $100 17,318 276 3.19 30,454 473 3.11 Fed Funds Purchased / Repos --- --- --- 2,588 43 3.32 -------- -------- ---- -------- -------- ---- Total Interest-bearing Liabilities 111,806 1,504 2.69 133,440 1,918 2.87 Noninterest-bearing Deposits 109,787 141,375 -------- -------- Total Deposits 221,593 1,504 1.36 274,815 1,918 1.40 Other Borrowings 5,476 188 6.87 7,221 242 6.70 -------- -------- ---- -------- -------- ---- Total Funding Liabilities 227,069 1,692 1.49 282,036 2,160 1.53 Other Liabilities 2,812 2,306 Shareholders' Equity 27,217 25,295 -------- -------- Total Liabilities and Shareholders' Equity $257,098 $309,637 ======== ======== Net Interest Income $6,072 5.51% $7,644 6.28% ======== ==== ======== ==== Shareholders' Equity to Total Assets 10.59% 8.17% ===== =====
Expressing net interest income as a percent of average earning assets is referred to as margin. Margin was 6.03% and 5.51% for the three and six months ended June 30, 1994, compared to 6.30 and 6.28% for the same periods in 1993. The Bank's margin is strong because it has funded itself with a significant amount of noninterest bearing deposits. The lower margin in 1994 is largely due to the maturing of the interest rate swap discussed below. Through October 8, 1993, the Bank continued to benefit from an interest rate swap agreement entered into October 8, 1991, which had a notional value of $100 million. Under this arrangement, the Bank received a fixed rate of 8.18% and paid interest at prime rate, which was 6.0% during 1993. The income earned from the interest rate swap agreement was $543 thousand and $1.1 million in the three and six month periods ending June 30, 1993. OTHER OPERATING INCOME The majority of other operating income in prior years was earned as the Mortgage Banking Operation originated and sold mortgage loans. The trends and composition of other operating income are shown in the following table. TABLE 12A OTHER OPERATING INCOME Amounts in thousands of dollars For the three For the three months ended months ended June 30, 1994 June 30, 1993 ------------- ------------- Commercial Mortgage Consolidated Consolidated Banking Banking ------------ ------------ ------- ------- Processing fees $333 $333 Capitalization of excess servicing rights 128 128 Fees on loans sold $15 311 311 Premium on sales of mortgage loans 15 4,168 4,168 Servicing income 249 523 523 Documentation fees 22 277 $27 250 Other service fees and charges 291 245 160 85 Securities & other nonoperating gains 0 0 0 0 Gain on sale of mortgage servicing portfolio 720 --- --- --- ------ ------ ------ ------ Total $1,312 $5,985 $187 $5,798 ====== ====== ====== ======
TABLE 12B OTHER OPERATING INCOME Amounts in thousands of dollars For the six For the six months ended months ended June 30, 1994 June 30, 1993 ------------- ------------- Commercial Mortgage Consolidated Consolidated Banking Banking ------------ ------------ ------- ------- Processing fees $566 $566 Capitalization of excess servicing rights 199 199 Fees on loans sold $15 708 708 Premium on sales of mortgage loans 83 6,793 6,793 Servicing income 714 1,003 1,003 Documentation fees 44 485 $60 425 Other service fees and charges 639 503 324 179 Securities & other nonoperating gains 0 77 77 0 Gain on sale of mortgage servicing portfolio 1,558 --- --- --- ------- ------- ------- ------- Total $3,053 $10,334 $461 $9,873 ======= ======= ======= =======
The Mortgage Banking Operation earned fee income on loans originated, and gains as loans were sold to permanent investors. Loans for which servicing was retained are conventional mortgages under approximately $200 thousand which were sold to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and other institutional investors. Excess servicing rights were capitalized, and related gains recognized, based on the present value of the servicing cash flows discounted over a period of seven years. When loan prepayments occur within this period, the remaining capitalized cost associated with the loan is written off. The servicing rights were retained by the bank following sale of the mortgage origination operation. The Bank has entered into an agreement with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to dispose of any remaining portion of this portfolio by the end of 1994 because, with the sale of the mortgage origination operation, the Bank is no longer a qualified seller/servicer of such loans. During the first half of 1994, the bank sold a portion of the retained servicing rights realizing gains of $838 thousand in the first quarter and $720 thousand in the second quarter. OPERATING EXPENSE Total operating expense for the commercial bank was $3.6 million and $7.0 million in the three and six months ended June 30, 1994, compared to $3.5 million and $7.0 million for the same periods in 1993. Operating expenses for the consolidated Bank have declined in 1994, primarily due to the sale of the mortgage origination operation at the end of 1993. The current level of operating expense is deemed to be adequate and will be leveraged further as the core middle market business is expanded. PROVISION FOR LOAN LOSSES The Bank's made no provision for loan losses in 1994 compared with $150 thousand in the second quarter of 1993. This change in provision was made possible by the significant reduction of nonperforming loans. The relationship between the level and trend of the allowance for loan losses and nonperforming assets, combined with the results of the ongoing review of credit quality, determine the level of provisions. LEGAL AND REGULATORY MATTERS In June 1992, the Bank entered into an agreement with the Office of the Comptroller of the Currency (OCC), the Bank's primary federal regulator, which required the implementation of certain policies and procedures for the operation of the bank to improve lending operations and management of the loan portfolio. In November 1993, after completion of its annual examination, the OCC released the Bank from the Formal Agreement. Following this, the Federal Reserve Bank of San Francisco ("Fed") notified the Company on November 29, 1993, that the Memorandum of Understanding, which it had signed, was terminated because the requirements of the agreement were satisfied. Consolidated Statements of Financial Condition CU Bancorp and Subsidiary Amounts in thousands of dollars June 30, December 31, 1994 1993 Assets ---- ---- Cash and due from banks $42,500 $18,440 Federal funds sold 33,000 28,000 ------ ------ Total cash and cash equivalents 75,500 46,440 Time deposits with other financial institutions 1,377 1,377 Investment securities (Market value of $56,502 and $87,889 June 30, 1994 and December 31, 1993, respectively) 58,005 88,034 Loans, (Net of allowance for loan losses of $7,279 and $6,513 at June 30, 1994, and December 31, 1993, respectively) 135,971 134,148 Premises and equipment, net 790 924 Other real estate owned, net 0 920 Accrued interest receivable and other assets 6,754 7,363 -------- -------- Total Assets $278,397 $279,206 ======== ======== Liabilities and Shareholders' equity Deposits: Demand deposits $122,739 $125,665 Savings deposits 90,297 66,214 Time deposits under $100 13,777 27,753 Time deposits of $100 or more 15,877 19,296 ------- ------- Total deposits 242,690 238,928 Accrued interest payable and other liabilities 7,477 13,288 ------- ------- Total liabilities 250,167 252,216 ------- ------- Shareholders' equity: Preferred stock, no par value: Authorized -- 10,000,000 shares No shares issued or outstanding in 1994 or 1993 --- --- Common stock, no par value: Authorized - 20,000,000 shares Issued and outstanding - 4,437,312 in 1994, and 4,424,306 in 1993. 26,304 26,250 Retained earnings 1,926 740 ------- ------- Total Shareholders' equity 28,230 26,990 -------- -------- Total Liabilities and Shareholders' equity $278,397 $279,206 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Income CU Bancorp and Subsidiary Amounts in thousands of dollars, For the three months For the six months except per share data ended June 30, ended June 30, 1994 1993 1994 1993 ---- ---- ---- ---- Revenue from earning assets: Interest and fees on loans $3,211 $3,948 $6,043 $7,721 Benefits of interest rate hedge transactions 0 543 0 1,081 Interest on taxable investment securities 647 343 1,288 805 Interest on tax exempt investment securities 1 11 2 21 Interest on time deposits with other financial institutions 16 35 32 72 Interest on federal funds sold 252 58 399 104 ----- ----- ----- ----- Total revenue from earning assets 4,127 4,938 7,764 9,804 ----- ----- ----- ----- Cost of funds: Interest on interest-bearing demand deposits 417 375 778 794 Interest on savings deposits 56 82 101 174 Interest on time deposits under $100 135 272 349 434 Interest on time deposits of $100 or more 133 273 276 473 Interest on federal funds purchased & securities sold under agreements to repurchase 0 16 0 43 Interest on other borrowings 66 90 188 242 Total cost of funds 807 1,108 1,692 2,160 ----- ----- ----- ----- Net revenue from earning assets before provision for loan losses 3,320 3,830 6,072 7,644 Provision for loan losses 0 150 0 300 ----- ----- ----- ----- Net revenue from earning assets 3,320 3,680 6,072 7,344 ----- ----- ----- ----- Other operating revenue: Capitalization of excess servicing rights 0 128 0 199 Servicing income - mortgage loans sold 249 523 714 1,003 Other fees & charges - commercial 301 179 530 385 Fees on loans sold 15 311 15 708 Premium on sales of mortgage loans 15 4,168 83 6,793 Other fees and charges - mortgage 12 676 153 1,169 Gain on sale of mortgage servicing portfolio 720 --- 1,558 --- Gain on sale of investment securities (before taxes of $0, and $11, in 1994, 1993, respectively) 0 0 0 28 Gain on sale of securities held for sale (before taxes of $0 and $20 in 1994 and 1993, respectively) 0 0 0 49 ----- ----- ----- ------ Total other operating revenue 1,312 5,985 3,053 10,334 ----- ----- ----- ------ Other operating expenses: Salaries and related benefits 1,536 2,822 3,079 5,261 Selling expenses - mortgage loans 120 3,081 246 5,169 Other operating expenses 1,896 2,825 3,712 5,669 ----- ----- ----- ------ Total operating expenses 3,552 8,728 7,037 16,099 ----- ----- ----- ------ Income before provision for income taxes 1,080 937 2,088 1,579 Provision for income taxes 472 380 902 638 ----- ----- ------ ------ Net income $608 $557 $1,186 $941 ===== ===== ====== ====== Earnings per share $0.13 $0.12 $0.26 $0.21 ===== ===== ====== ====== The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statement of Cash Flows CU Bancorp and Subsidiary Amounts in thousands of dollars For the six months ended June 30, Increase(decrease) in cash and cash equivalents 1994 1993 ---- ---- Cash flows from operating activities Net income $1,186 $940 ------ ------ Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 251 416 Amortization of real estate mortgage servicing rights 15 183 Provision for losses on loans and other real estate owned -- 300 Gain on sale of investment securities, net 0 (77) (Increase) decrease in other assets 1,686 (4,167) (Decrease) in other liabilities (5,759) (2,436) (Increase) Decrease in accrued interest receivable (172) 549 Increase in deferred loan fees 84 62 Capitalization of excess mortgage servicing rights 0 (199) (Decrease) in accrued interest payable (52) (4) Net amortization of premium on securities 592 149 Accrued benefits from interest rate hedge transactions 0 34 Total adjustments (3,355) (5,190) ------ ------ Net cash provided by operating activities (2,169) (4,250) ------ ------ Cash flows from investing activities Proceeds from investment securities sold or matured 49,851 58,115 Purchase of investment securities (20,414) 0 Net decrease in time deposits with other financial institutions 0 (2,901) Net (increase) decrease in loans (1,907) 4,096 (Purchases) of premises and equipment, net (117) (256) ------ ------ Net cash provided by (used in) investing activities 27,413 59,054 ------ ------ Cash flows from financing activities Net increase (decrease) in demand and savings deposits 21,157 (32,700) Net increase (decrease) in time certificates of deposit (17,395) 11,087 Proceeds from exercise of stock options and director warrants 54 190 ------ ------- Net cash provided (used) by financing activities 3,816 (21,423) ------ ------- Net increase in cash and cash equivalents 29,060 33,381 Cash and cash equivalents at beginning of year 46,440 55,989 ------- ------- Cash and cash equivalents at end of year $75,500 $89,370 ======= ======= The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements June 30, 1994 UNAUDITED Note A. BASIS OF PRESENTATION The accounting and reporting policies of CU Bancorp ("the Company") and its wholly owned subsidiary, California United Bank, N.A. ("the Bank"), are prepared in accordance with generally accepted accounting principles used in the banking industry. All material inter company balances have been eliminated and all material interim period adjustments which, in the opinion of management, are necessary for a fair presentation of financial condition, results of operations, and cash flow have been made. Note B. EARNINGS PER SHARE Net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented, except when the effect of the latter would be anti- dilutive. NOTE C. SECURITIES The Bank has the intent and ability to hold its investment securities until maturity. Accordingly, investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts on a straight-line basis, which approximates the effective interest method. Gains and losses recognized on the sale of investment securities are based upon the adjusted cost and determined using the specific identification method. The Bank has no securities classified as "held for sale", indicating the willingness to sell these securities under certain conditions. These securities would be carried at current market value with unrealized gains or losses not recognized as current income but reported as an increase or decrease to capital in the statements of financial condition and in the statements of shareholders' equity. The following tables set forth the book value and market value, of investment securities at June 30, 1994. Gross Gross Book Unrealized Unrealized Market (Thousands of dollars) Value Gains Losses Value ------- ------ -------- ------- U.S. Treasury Securities $50,960 $(1,488) $49,472 U.S. Government Agency Securities 5,862 (37) 5,825 State and Municipal Securities 750 $22 772 Federal Reserve Bank Stock 433 433 ------- --- ------- ------- Total $58,005 $22 $(1,525) $56,502 ======= === ======= =======
At June 30, 1994, investment securities with a book value of $40.5 million were pledged to secure U.S. District Court deposits and for other purposes as required or permitted by law. Included in interest on investment securities is $2 thousand of interest from tax-exempt securities. Note D. AVERAGE FEDERAL RESERVE BALANCES The average cash reserve required to be maintained at the Federal Reserve Bank was approximately $5.8 million, $9.0 million, and $8.8 million for the periods ending June 30, 1994 and December 31 and June 30, 1993, respectively. Note E. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is also computed using the straight-line method over the shorter of the useful life of the improvement or the term of the lease. Note F. OTHER REAL ESTATE OWNED Real estate owned, acquired either through foreclosure or deed in lieu of foreclosure, is carried at the lower of cost or fair value. When acquired, any excess of the loan amount over the fair value is charged to the allowance for loan losses. Subsequent write-downs, if any, are charged to operation expenses in the periods that they become known. There was no other real estate owned as of June 30, 1994. Other real estate owned at December 31, and June 30, 1993 was $0.9 million and $3.5 million, respectively. Note G. INCOME TAXES Effective January 1, 1993, the Bank implemented the provisions of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The implementation had no significant impact on the financial condition or operations of the Bank. SFAS No. 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. Note H. LOANS Loans are carried at face amount, less payments collected, allowance for loan losses, and unamortized deferred fees. Interest on loans is accrued monthly on a simple interest basis. The general policy of the Bank is to discontinue the accrual of interest and transfer loans to nonaccrual (cash basis) status where reasonable doubt exists with respect to the timely collectibility of such interest. Payments on nonaccrual loans are accounted for using a cost recovery method. Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can reasonably be anticipated. Management considers current economic conditions, historical loan loss experience, and other factors in determining the adequacy of the allowance. The allowance is based on estimates and ultimate losses may differ from current estimates. These estimates are reviewed periodically and as adjustments become necessary, they are charged to earnings in the period in which they become known. The allowance is increased by provisions charged to operating expenses, increased for recoveries of loans previously charged-off, and reduced by charge-offs. Note I. RECLASSIFICATIONS Certain items have been reclassified in the prior period financial statements presented herein, in order to conform to classifications followed for June 30, 1994. Note J. LEGAL MATTERS In the normal course of business the Bank occasionally becomes a party to litigation. In the opinion of management, based upon consultation with legal counsel, other than as set forth below, pending or threatened litigation involving the Bank will have no adverse material effect upon its financial condition, or results of operations. The Bank is a defendant in multiple lawsuits related to the failure of two real estate investment companies, Property Mortgage Company, Inc., ("PMC") and S.L.G.H., Inc. ("SLGH"). The lawsuits, consist of a federal action by investors in PMC and SLGH (the "Federal Investor Action"), at least three state court actions by groups of Investors (the "State Investor Actions"), and an action filed by the Resolution Agent for the combined and reorganized bankruptcy estate of PMC and SLGH (the "Neilson" Action). An additional action was filed by an individual investor and his related pension and profit sharing plans (the "Individual Investor Action"). Other defendants in these multiple actions and in related actions include financial institutions, title companies, professionals, business entities and individuals, including the principals of PMC and SLGH. The Bank was a depository bank for PMC, SLGH and related companies and was a lender to certain principals of PMC and SLGH ("Individual Loans"). Plaintiffs allege that PMC/SLGH was or purported to be engaged in the business of raising money from investors by the sale and issuance of interests in loans evidenced by promissory notes secured by real property. Plaintiffs allege that false representations were made, and the investment merely constituted a "Ponzi" scheme. Other charges relate to the Bank's conduct with regard to the depository accounts, the lending relationship with the principals and certain collateral taken , pledged by PMC and SLGH in conjunction with the Individual Loans. The lawsuits allege inter alia violations of federal and state securities laws, fraud, negligence, breach of fiduciary duty, and conversion as well as conspiracy and aiding and abetting counts with regard to these violations. The Bank denies the allegations of wrongdoing. Damages in excess of $100 million have been alleged, and compensatory and punitive damages have been sought generally against all defendants, although no specific damages have been prayed for with regard to the Bank, nor has there been any apportioning of liability among defendants or attributable to the various claims asserted. A former officer and director of the Bank has also been named as a defendant. The Bank and the named officer/director have notified the Bank's insurance carriers of the various lawsuits. In August 1994, the Bank entered into a settlement agreement with the representatives of the various plaintiffs, which, if approved as more fully set forth below, will dismiss all of the above referenced cases, with prejudice, against the Bank, its officers and directors, with the exception of the officer/director previously named. In connection with the settlement, the Bank will release its security interest in certain disputed collateral and cash proceeds thereof, which the Bank received from PMC, SLGH, or the principals, in connection with the Individual Loans. This collateral has been a subject of dispute in the Neilson Action, with both the Bank and the representatives of PMC/SLGH asserting the right to such collateral. All the loans have been charged off, previously. The Bank will also make a cash payment to the Plaintiffs in connection with the settlement. In connection with the settlement the Bank will assign its rights, if any, under various insurance policies, to the Plaintiffs. The settlement does not resolve the claims asserted against the officer/director. The settlement requires the approval of each of the courts in which actions have been filed, and the Federal Bankruptcy Court. There are a number of technical issues related to the settlement which must be resolved prior to its effectiveness. Note K. REGULATORY MATTERS On November 2, 1993, the Office of the Comptroller of the Currency ("OCC"), after completion of their annual examination of the Bank, terminated the Formal Agreement entered into in June, 1992. In December 1993, the Fed terminated the Memo of Understanding entered into in August, 1992. The Formal Agreement had been entered into in June 1992 and required the implementation of certain policies and procedures for the operation of the Bank to improve lending operations and management of the loan portfolio. The Memorandum of Understanding was executed in August 1992. SIGNATURES Pursuant to the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CU BANCORP August 11, 1994 By: PATRICK HARTMAN --------------- Patrick Hartman Chief Financial Officer Part II - Other Information Item 1. Legal Proceedings Please refer to Notes J and K, on page 26 above, for a complete discussion of both legal and regulatory matters. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Filings on Form 8-K (a) Exhibits: (10) Material Contracts (i) Mortgage Servicing Purchase and Sale Agreement Dated April 1, 1994 pg. 29 (b) Reports on Form 8-K: None. EX-10 2 MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT between HAMILTON FINANCIAL CORPORATION (PURCHASER) and CALIFORNIA UNITED BANK, N.A. (SELLER) Dated: April 1, 1994 CONTENTS ARTICLE 1 DEFINITIONS 2 ARTICLE 2 SALE AND TRANSFER OF SERVICING 5 ARTICLE 3 PURCHASE PRICE 7 ARTICLE 4 GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER 10 ARTICLE 5 REPRESENTATIONS AND WARRANTIES AS TO LOANS 16 ARTICLE 6 PURCHASER'S REPRESENTATIONS AND WARRANTIES 17 ARTICLE 7 COVENANTS 20 ARTICLE 8 INTERIM SERVICING 26 ARTICLE 9 CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER 31 ARTICLE 10 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER 32 ARTICLE 11 TERMINATION 34 ARTICLE 12 MISCELLANEOUS 36
THIS MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT (the "Agreement") is made and entered into April 1, 1994 by and between HAMILTON FINANCIAL CORPORATION, a California corporation ("Purchaser") and CALIFORNIA UNITED BANK, N.A. ("Seller"). R E C I T A L S: A. Purchaser and Seller have entered into a Letter of Intent effective as of March 18, 1994 (the "Letter"), pursuant to which Seller agreed to sell to Purchaser the right to service approximately 755 mortgage loans serviced by Seller with an aggregate principal balance of approximately $ 103,805,000 (collectively hereinafter the "Loans") and more particularly described on Exhibit "A" attached hereto. B. Purchaser agreed in the Letter to acquire all right, title and interest in and to, and to assume the duties relating to, Seller's Servicing rights, all on the terms and conditions described herein, which supersede in their entirety the terms and conditions set forth in the letter. C. Buyer and Seller wish to set forth the terms and conditions of the sale and transfer of the Servicing. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, Purchaser and Seller agree as follows: ARTICLE 1 DEFINITIONS Unless the context in which it is used clearly requires otherwise, as used herein: 1.1 "Advances" means amounts that, as of the Transfer Date, have been advanced in connection with servicing the Loans (including, without limitation, principal, interest, taxes and insurance premiums) and which are required to be paid by Seller as the servicer for the Loans pursuant to applicable Investor requirements and the terms of the applicable Servicing Agreements. 1.2 "Agreement" means this Purchase and Sale Agreement and all Exhibits hereto as the same may from time to time be amended or supplemented by one or more instruments executed by all Parties hereto. 1.3 "Agreement Date" means the date of execution of this Agreement by all parties hereto. 1.4 "Business Day" means any day other than (a) a Saturday or Sunday, or (b) a day on which banking institutions in the state of California are authorized or obligated by law or by executive order to be closed. 1.5 "CPI" means Computer Power, Inc. the computer service bureau for Purchaser and Seller. 1.6 "Delinquent Mortgage" means a mortgage that is ninety (90) calendar days or more past due. 1.7 "FHLMC" means Federal Home Loan Mortgage Corporation, or any Successor thereto. 1.8 "FHLMC Loans" are those certain FHLMC mortgage loans serviced by Seller, described on Exhibit "A" hereof and the servicing of which is intended by Seller to be sold to Purchaser. 1.9 "FNMA" means the Federal National Mortgage Association, or any Successor thereto. 1.10 "FNMA Loans" are those certain FNMA mortgage loans serviced by Seller, described on Exhibit "A" hereof and the servicing of which is intended by Seller to be sold to Purchaser. 1.11 "Foreclosure Mortgage" shall mean a Mortgage as of the Sale Date (1) as to which a summons and complaint have been filed against the Mortgagor seeking foreclosure of the mortgage, (2) on which publication in a proceeding to foreclosure by advertisement against the Mortgagor has occurred, (3) which has been referred to legal counsel for foreclosure, (4) on which any action has been taken to obtain title to the mortgage property through exercise of a power of sale or (5) in respect of which one or more of the obligors thereunder is in a proceeding under Chapters 7, 11, 12 or 13, or any successor provisions thereof, of the Bankruptcy Code. 1.12 "Investor" means FNMA or FHLMC, as the case may be, who owns any of the Loans or holds beneficial title to the Loans. 1.13 "Loans" means the Loans set forth on Exhibit "A". 1.14 "Mortgage" means the mortgage, deed of trust or other instrument creating a first lien or a first priority ownership or security interest in an estate in fee simple (except for loans secured by condominiums in states where such ownership interest is not considered to be a fee simple interest in real property securing a loan). The term also includes the related promissory note secured by the Mortgage and is sometimes used synonymously with the term "Loan" depending on the context. 1.15 "Mortgagor" means the person or persons shown as mortgagors on the Mortgage, and the borrowers under the related loan. 1.16 "Prior Servicer" means the servicers who serviced any of the Mortgage Loans prior to Seller, if any. 1.17 "Purchase Price" is as defined in Section 3.1 hereof. 1.18 "Purchaser" means HAMILTON FINANCIAL CORPORATION. 1.19 "Related Escrow Accounts" means Mortgage escrow/impound accounts maintained by Seller relating to the Servicing. 1.20 "Sale Date" means April 1, 1994. 1.21 "Seller" means CALIFORNIA UNITED BANK, N.A. 1.22 "Seller's Knowledge" or "Best of Seller's Knowledge" mean the actual knowledge of the senior officers of Seller or that knowledge that such an officer would have obtained upon a reasonable examination of the official corporate records of Seller. 1.23 "Servicer" means the party responsible for Servicing a Loan. 1.24 "Servicing" means all of Seller's right, title and interest in and to the Loans, including its rights and duties as servicer of FHLMC/FNMA Loans pursuant to the servicing agreements between Seller & FHLMC/FNMA relating to the Loans. 1.25 "Servicing Agreements" means the respective mortgage loan servicing agreements between Seller and FHLMC or FNMA pursuant to which Seller performs mortgage servicing with respect to any of the Loans. 1.26 "Total Servicing Fee" means that with respect to each Loan, the amount of interest received on a loan by the Seller exceeding the amount of interest and guaranty fees the Seller is contractually obligated to remit to FHLMC or FNMA. 1.27 "Transfer Date" means the date on which Purchaser shall assume the actual performance of the duties under the Servicing Agreements from Seller at the end of the "Interim Period" as defined in Section 8.1 hereof, and shall be September 16th (for FHLMC), October 1, 1994 (for FNMA). ARTICLE 2 SALE AND TRANSFER OF SERVICING 2.1 Sale of Right to Servicing. Subject to and upon the terms and conditions of this Agreement, Seller as of the Sale Date does hereby sell, transfer, assign and deliver to Purchaser all beneficial right, title and interest in and to the Servicing, including without limitation, the right to receive servicing fees on the Loans. 2.2 Transfer Date. On the applicable Transfer Date: (a) Purchaser shall assume and Seller shall cease all servicing responsibilities related to the Loans owned by FHLMC or FNMA for which servicing responsibility is transferred; and (b) Seller shall transfer to Purchaser the right to all accrued receivables relating to the Loans including but not limited to accrued late charge balances and impound/escrow advances. 2.3 Obligations of Seller. Seller covenants and agrees that: (a) from the Sale Date until the applicable Transfer Date, that Seller shall pay, perform and discharge all of its liabilities and obligations relating to ownership of the Servicing and all the rights, obligations and duties with respect to the Related Escrow Accounts, in accordance with the terms and conditions of Article 8 hereof, until the transfer of such items on the applicable Transfer Date; and (b) On or prior to the applicable Transfer Date, Seller shall assign to Purchaser, by appropriate endorsements and assignments, all of Seller's rights, title and interest in and to the Servicing, and the promissory notes and Loans as required by FHLMC or FNMA as reasonably requested by Purchaser. Seller shall execute or cause to be executed assignments for each Mortgage as Purchaser may reasonably request. Seller shall prepare and record the assignments at its sole cost and expense. Seller shall also prepare assignments of Loans from Purchaser to FHLMC or FNMA, if required by FHLMC or FNMA. 2.4 Obligations of Purchaser. Purchaser covenants and agrees, that from and after the applicable Transfer Date it shall service the Loans for which servicing responsibility is transferred on such date in accordance with the terms and conditions of the Servicing Agreements, all applicable statutes, regulations and contractual provisions, and prudent mortgage banking practices. Purchaser shall not be responsible for the acts or omissions of Seller or prior servicers, nor for any other obligations or liabilities of Seller or prior servicers whatsoever, except those obligations or liabilities which would not have occurred but for the acts or neglect of the Purchaser. 2.5 Approval to Transfer Servicing. (a) Seller shall obtain FHLMC or FNMA approvals and any other approvals necessary to transfer the Servicing from Seller to Purchaser; provided that any corporate, regulatory or other approvals which apply only to Purchaser, shall be obtained by Purchaser. Seller shall prepare the requests for approval in a manner to secure from FHLMC or FNMA a prompt written determination of the acceptability of the transfer of Servicing. (b) On or before the applicable Transfer Date, Seller shall prepare and execute all forms, documents and other information reasonably requested by FHLMC or FNMA or others in connection with the transfer of the Servicing. 2.6 Cooperation. Purchaser and Seller shall cooperate with and assist each other, and use their best efforts to assure the orderly transfer of the Servicing from Seller to Purchaser under this Agreement. Seller and Purchaser shall execute and deliver all documents, provide all information which is not confidential, and take or forebear from all such action as may be reasonably necessary, convenient or appropriate to achieve the purposes of this Agreement. Each party shall designate an employee to coordinate and be responsible for the orderly transfer of the Servicing. ARTICLE 3 PURCHASE PRICE 3.1 Purchase Price. The purchase price for the Servicing shall be the product of multiplying 1.0291% by the unpaid principal balance as of the Sale Date of all Loans other than Loans which, as of the Sale Date, are (a) more than 60 days past due, (b) in litigation, (c) in foreclosure, (d) in which a bankruptcy action has been filed, (e) are subject to forbearance or modification agreements less than 180 days old. Loans which are the subject of a standard earthquake forbearance arrangement in which no more than three monthly payments have been deferred, to repaid in full on or by March 1995, shall not be considered a part of the excluded Loans per a, b, c, d, or e above for purposes of this agreement. Notwithstanding same, on March 1, 1995 these Loans (as detailed on Exhibit B) shall be reviewed for current status and if delinquent will have their purchase price refunded to Purchaser within 5 business days. Such purchase price will be calculated by multiplying .8336% by the unpaid balance as reported on Exhibit B. 3.2 Payment. Payment of the purchase price will be as follows: a. On the Sale Date, Purchaser will wire twenty percent (20%) of the estimated total purchase price to an account designated by Seller. b. Thirty five percent (35%) of the purchase price shall be wired to the Seller to an account designated by Seller on June 30, 1994. c. Thirty five percent (35%) of the purchase price shall be wired to the Seller to an account designated by Seller within 3 business days of receipt of the final transfer reports. d. Ten percent (10%) of the purchase price minus final adjustments will be wired to Purchaser within 15 days of the Transfer Date(s) upon a successful reconciliation of all transfer balances. e. Prepayment protection. The purchase price will be reduced by .8336% of all loans that pay off in full between Sale Date and May 31, 1994. The purchase price will also be reduced by .8336% of all loans in another transaction (the "First Quarter Transaction") between the parties hereto that will be consummated on or about March 31, 1994 for the servicing to approximately $151,863,473, that pay off in full between March 31, 1994 and May 31, 1994. f. As a penalty for deficient subservicing after the Sale Date, Seller shall pay a penalty of 4.926 basis points (.04926%) of the aggregate principal balance of the Loans for each integral increase of 0.50% of the total delinquency rate (including 30, 60, and 90 day delinquencies, foreclosures and loans in bankruptcy, but excluding delinquent loans the subject of an earthquake forbearance) for the Loan balances for this transaction and the "First Quarter Transaction" if the aggregate exceeds 1.71% measured at Transfer Date(s). 3.3 Other Costs. (a) Seller shall bear the entire cost of securing any approvals of the transfer of Servicing from Seller to Purchaser, including all transfer fees due to FHLMC or FNMA; provided that any corporate, regulatory or other approvals applicable only to Purchaser shall be obtained at the sole cost and expense of Purchaser. (b) Seller shall comply, at its sole cost and expense, with Purchaser's reasonable requirements pertaining to the processing and shipping of loan files, insurance files, tax records and collection records which are reasonably necessary to service the Loans. ARTICLE 4 GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to Purchaser to enter into this Agreement, Seller represents and warrants with the knowledge that each such representation and warranty relates to material matters upon which Purchaser has relied, and it being further understood that each such representation and warranty is made to the Purchaser as of the Sale Date except with respect to Sections 4.8 and 4.10 - 4.19. 4.1 Due Incorporation and Good Standing. Seller is properly licensed and qualified to transact business in all appropriate jurisdictions to conduct all activities performed with respect to origination and servicing of the Loans, except where the failure to be so licensed or qualified would not have a material adverse effect thereon. 4.2 Authority and Capacity. Seller has all requisite corporate power, authority and capacity to enter into this Agreement and to perform the obligations required of it hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, have each been duly and validly authorized by all necessary corporate action. This Agreement constitutes the valid and legally binding Agreement of Seller enforceable in accordance with its terms, except to the extent enforceability may be limited by applicable bankruptcy, insolvency or other laws affecting creditors rights generally and by general principles of equity. 4.3 Effect. The execution, delivery and performance of this Agreement by Seller, its compliance with the terms hereof and the consummation of the transactions contemplated hereby (assuming receipt of the various consents necessary to consummate this Agreement) will not violate, conflict with, result in a breach of, constitute a default under, be prohibited by or require any additional approval under its certificate of incorporation, articles of incorporation, bylaws, or any material instrument or Agreement to which it is a party or by which it is bound, or which affects the Servicing, or any state or federal law rule or regulation or any judicial or administrative decree, order, ruling or regulation applicable to it or to the Servicing. 4.4 Compliance with Contracts and Regulations. Seller and, to the Best of Seller's Knowledge, Prior Servicers have complied with all material obligations under all contracts to which any of them was or is a party, and with all applicable federal, state and local laws and regulations, with respect to and which might affect any of the Servicing. The laws and regulations which Seller has complied with include but are not limited to all applicable FHLMC or FNMA requirements, as the case may be. 4.5 Filing of Reports. For each Loan, Seller and, to the Best of Seller's Knowledge, Prior Servicers have filed or Seller shall file through the Transfer Date(s), all required reports including but not limited to investor reports to FHLMC or FNMA reports to all governmental agencies having jurisdiction over the Servicing and all appropriate private mortgage insurance companies. 4.6 Title to the Servicing and Related Escrow Accounts. Seller is the lawful owner of the Servicing, is custodian of the Related Escrow Accounts and has the sole right and authority to transfer the Servicing and the Related Escrow Accounts as contemplated hereby. The transfer, assignment and delivery of the Servicing and of the Related Escrow Accounts in accordance with the terms and conditions of this Agreement shall vest in Purchaser all rights as a FHLMC/FNMA servicer free and clear of any and all claims, charges, defenses, offsets and encumbrances of any kind of nature whatsoever. 4.7 Related Escrow Accounts. All Related Escrow Accounts are being maintained in accordance with applicable law and in accordance with the Servicing Agreements and the terms of the Mortgages related thereto. Except as to payments which are past due under the Loans, all escrow balances required by the Loans and paid to Seller for the account of the Mortgagors are on deposit in the appropriate escrow/impound accounts. 4.8 Litigation; Compliance with Laws. There is no litigation, proceeding or governmental investigation pending, or any order, injunction or decree outstanding which might materially affect any of the Loans or the Servicing, except for Foreclosure Mortgages. Additionally, there is no litigation, proceeding or governmental investigation existing or pending or, to the knowledge of Seller, threatened, or any order, injunction or decree outstanding against, or relating to Seller, a Prior Servicer or the Servicing which could have a material adverse effect upon any of the Loans or the Servicing, except for Foreclosure Mortgages. Neither Seller nor, to the Best of Seller's Knowledge, any Prior Servicer has violated any applicable law, regulation, ordinance, order, injunction or decree, or any other requirement of any governmental body or court, which may materially affect any of the Loans or the Servicing. 4.9 Statements Made. No representation, warranty or written statement made by Seller in this Agreement, or in any exhibit, schedule, written statement or certificate delivered to Purchaser pursuant hereto or made in or pursuant to the Letter contains or will contain any untrue statement of material fact as of the date made or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading as of the date made. 4.10 No Accrued Liabilities. To the Best of Seller's Knowledge, there are no accrued liabilities of Seller with respect to breaching Seller's responsibility to the Loans or the Servicing or circumstances under which such accrued liabilities will arise against Purchaser as successor to the Servicing, with respect to occurrences prior to the Transfer Date(s). 4.11 FHLMC/FNMA Requirements. Seller and, to the Best of Seller's Knowledge, each Prior Servicer has performed under the respective FHLMC or FNMA requirements with respect to the Servicing, and no event has occurred and is continuing which, but for the passage of time or the giving of notice or both, would constitute an event of default thereunder. Seller and, to the Best of Seller's Knowledge, each Prior Servicer has serviced the Loans and has kept and maintained complete and accurate books and records in connection therewith, all in accordance with the respective FHLMC and FNMA requirements. 4.12 Compliance with Insurance Contracts. Seller has complied with all obligations under all applicable insurance contracts, including private mortgage insurance, with respect to, and which might affect, any of the Servicing. Seller has not taken any action or failed to take any action which might cause the cancellation of or otherwise adversely affect any of the insurance policies on a Loan. 4.13 Private Mortgage Insurance. (a) Each Mortgage which is represented by Seller to have private mortgage insurance ("PMI") is insured in the amounts represented. (b) As to each private mortgage insurance certificate, Seller further warrants that it has complied with applicable provisions of federal status and regulations and applicable PMI requirements, the insurance is in full force and effect with respect to each Mortgage, and, to the Best of Seller's Knowledge, no event or condition exists within the control of Seller which can result in a revocation of any such insurance. (c) If a Loan transferred and/or assigned to Purchaser hereunder which is represented by Seller as having PMI fails to have PMI, or subsequently loses its PMI by reason of any act or omission of Seller or any Prior Servicer occurring prior to the Transfer Date(s), then, upon receipt of written notice from Purchaser, Seller shall have sixty (60) days to remedy the problem causing loss on insurance. If Seller is unable within sixty (60) days after receipt of notice to remedy the problem, then Seller shall repurchase the loan, provided FHLMC or FNMA requires such repurchase, as well as the Servicing from Purchaser within ten (10) Business Days after the expiration of the sixty (60) day remedial period at the price computed according to Section 12.5(b), and against delivery of the purchase price thereof, Purchaser shall assign its rights in such Loan to Seller and transfer its related Servicing and all mortgage servicing records related to the Loan, all free and clear of all liens, charges or encumbrances whatsoever. 4.14 Title Insurance. A title policy currently in effect running to the benefit of the owner of the Loan has been issued for each Loan insuring that the Mortgage relating thereto is a valid first lien on the property therein described, which has not been modified, and that the mortgaged property is free and clear of all encumbrances and liens having priority over the first lien of the mortgage or deed of trust, except for liens for real estate taxes and special assessments not yet due and payable and except for easements and restrictions of record identified in the title policy. 4.15 Non-Recourse Servicing. All loans which were sold to the Investors were sold without recourse to the Servicer, except as may arise from any misrepresentation or breach of warranty or covenant made under the Servicing Agreements or otherwise in connection with the Servicing. 4.16 Payment of Taxes, Insurance Premiums, Etc. All applicable taxes, special assessments, ground rents, flood insurance premiums and mortgage insurance premiums have been paid, by the Mortgagor or Seller, as required by and in accordance with the terms of the Loans or the Servicing Agreements. 4.17 Effective Insurance. All required insurance policies, including hazard, flood, and PMI, remain in full force and effect, and such policies are with companies acceptable to FHLMC or FNMA in accordance with the Servicing Agreements. 4.18 Payoff Statements. All payoff and assumption statements with respect to each Loan provided by Seller to Mortgagors or their agents were complete and accurate. 4.19 Interest on Escrows. Seller has paid to the mortgagor all interest required to be paid on any escrow/impound account through the Transfer Date(s). Evidence of such payment shall be provided to Purchaser upon request. ARTICLE 5 REPRESENTATIONS AND WARRANTIES AS TO LOANS As further inducement to Purchaser to enter into this Agreement, Seller represents and warrants to Purchaser as of the Sale Date, that to the Best of Seller's Knowledge: 5.1 Mortgage Documents. The Mortgage documents are genuine, duly executed by a borrower of legal capacity, and all insertions in any loan document are correct. 5.2 No Defenses. There are no defenses, set-offs or counterclaims against the Loan. 5.3 Validity of Note. There is nothing which would impair the validity of the promissory note, the Mortgage, or any other material loan document. 5.4 Compliance with Law. The origination and closing of each Loan complied in all material respects with each of the federal or state laws or regulations which were in effect at the time of origination and pertain to the origination and closing of the Loan. ARTICLE 6 PURCHASER'S REPRESENTATIONS AND WARRANTIES As an inducement to Seller to enter into this Agreement, Purchaser represents and warrants as follows, it being acknowledged that each such representation and warranty relates to material matters upon which Seller relied, and it being understood that each such representation and warranty is made to Seller as of the Sale Date and shall be deemed remade as of the Transfer Date(s): 6.1 Due Incorporation and Good Standing. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the state of California, and is properly licensed and qualified to transact business in each jurisdiction in which such qualification is necessary to the conduct of its servicing activities with respect to the Loans following the respective transfer dates, except where the failure to be so licensed or qualified would not have a material adverse effect on the servicing of the Loans after the Transfer Date(s). 6.2 Authority and Capacity. Purchaser has all requisite corporate power, authority and capacity to enter into this Agreement and to perform the obligations required of it hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have each been duly and validly authorized by all necessary corporate action. This Agreement constitutes the valid and legally binding agreement of Purchaser enforceable in accordance with its terms, except to the extent enforceability may be limited by applicable bankruptcy, insolvency or other laws affecting the enforcement of creditors rights generally and by general principles of equity. 6.3 Effect of Agreement. The execution, delivery and performance of this Agreement by Purchaser, its compliance with the terms hereof and the consummation of the transactions contemplated hereby (assuming receipt of the various consents necessary to consummate this Agreement) will not violate, conflict with, result in a breach of, constitute a default under, be prohibited by or require any additional approval under its charter, articles of incorporation, bylaws, or any material instrument or agreement to which it is a party or by which it is bound, or any state or federal law, rule or regulation or any judicial or administrative decree, order, ruling or regulation applicable to it, except such violation, conflict, breach or default that would not have a material adverse effect on the servicing of the Loans following the respective Transfer Date(s). 6.4 Approvals and Compliance. Purchaser is an approved FHLMC and FNMA Seller/Servicer in good standing. Purchaser is not in material default under the terms of any agreement between Purchaser and FHLMC or FNMA. 6.5 Litigation. There is no litigation, proceeding or governmental investigation existing or pending, or to the knowledge of Purchaser, threatened, or any order, injunction or decree outstanding, against or relating to Purchaser that could have a material adverse effect upon the Servicing being purchased by Purchaser hereunder or the performance of Purchaser of its obligations under the Servicing Agreements, nor does Purchaser know of any basis for any such litigation, proceeding or governmental investigation. 6.6 Facts and Omissions. No representation or warranty of Purchaser contained in this Agreement or in any schedule or written statement delivered to Seller pursuant hereto contains or will contain any untrue statement of material fact, or omits or will omit to state a material fact necessary to make the statements contained herein and therein not misleading. ARTICLE 7 COVENANTS 7.1 Notice to Mortgagors. Seller shall, at Seller's expense, mail to the Mortgagor of each Loan a letter advising the Mortgagor of the transfer of Servicing to Purchaser no later than fifteen (15) days prior to the Transfer Date(s) or earlier if required by state or federal law or by FHLMC or FNMA; provided, however, the content and format of the letter shall be subject to the prior written approval of Purchaser, which approval shall not be unreasonably withheld. Purchaser shall mail to the Mortgagor of each Mortgage, no sooner than the date of Seller's notice pursuant to this Section 7.1 and no later than five (5) days after the date of Seller's notice, a letter (in form and substance reasonably satisfactory to Seller) confirming Seller's notice of the transfer of the Servicing. 7.2 Notice to Mortgage Insurers. Seller shall, at Seller's expense, notify all relevant private mortgage insurance companies no later than fifteen (15) Business Days prior to the Transfer Date(s) by certified mail, return receipt required, that all insurance premium billings for the Loans must thereafter be sent to Purchaser. Seller shall provide Purchaser with a copy of the certified receipt. Additionally, Seller shall, prior to the Transfer Date(s), obtain the written consent of any private mortgage insurance companies which have the contractual right to approve transfer of the Servicing. 7.3 Notice to Taxing Authorities and Insurance Companies. No later than fifteen days prior to the Transfer Date(s), unless otherwise agreed by the parties, Seller shall, at Seller's expense, notify applicable taxing authorities, tax service agencies and insurance companies and/or agents by certified mail, of the assignment of the Servicing and instructions to deliver all notices, tax bills and insurance statements, as the case may be, to Purchaser from and after the Transfer Date(s). 7.4 Delivery of Loan Documents/Files. Against delivery of final payment under Paragraph 3.2(b), Seller shall forward to Purchaser in a manner reasonably acceptable to Purchaser no later than three (3) Business Days after the FHLMC/FNMA Transfer Date(s) all loan documentation in Seller's possession relating to each Mortgage. 7.5 Delivery of Servicing Records. Against delivery of final payment under Paragraph 3.2(c), Seller shall deliver to Purchaser, in a manner acceptable to Purchaser, on the relevant Transfer Date(s), all servicing records necessary to effectuate a proper transfer of servicing. 7.6 Delivery of Data Base Record Definition. Against delivery of Transfer Date(s) payment under Paragraph 3.2(a), Seller shall forward to Purchaser no later than ten (10) Business Days after the Sale Date, or earlier if so requested by Purchaser, a full definition of user developed field uses of any and all data base fields ("Data Base"). 7.7 Delivery of Data Base Records. (a) Against delivery of final payment under Paragraph 3.2(b), Seller shall direct the computer service bureau to deliver to Purchaser on the close of business on the "trial conversion date" (to be established by Purchaser) the data base records which represent the Data Base for the Loans as of close of business on the "trial conversion date". (b) Against delivery of final payment under Paragraph 3.2(b), Seller shall direct their computer service bureau to deliver to Purchaser on close of business, within two (2) Business Days of September 16, 1994 (For FHLMC) and September 30, 1994 (For FNMA), the data base records which represent the Data Base for the Loans as of close of business on the applicable Transfer Date. 7.8 Escrow/Impound Balance . Within three (3) Business Days after the Transfer Date(s), Seller shall deliver to Purchaser, in immediately available funds, the net (net of any Advances) escrow and suspense balances and all loss draft and buydown balances associated with the Loans, together with an accounting statement of escrow and suspense balances and loss draft balances and buydown balances sufficient to enable Purchaser to reconcile the amount of such funds with the accounts of the Loans. 7.9 Payoffs and Assumptions. Seller shall provide to Purchaser on the Transfer Date(s) copies of all assumption and payoff statements generated by Seller on the Mortgages within the preceding thirty (30) days. Seller shall notify Purchaser prior to the Transfer Date(s) of all payoffs and assumptions in process or of which Seller has any notice or knowledge. 7.10 Mortgage Payments Received Prior to Transfer Date. Prior to the Transfer Date(s), all payments received by Seller on each Mortgage shall be properly applied by Seller to the account of the particular Mortgagor. 7.11 Mortgage Payments Received After Transfer Date. Any Mortgage payments received by Seller within sixty (60) days after the Transfer Date(s) shall be delivered to Purchaser in the form received within two (2) Business Days after receipt by Seller, properly endorsed by Seller to Purchaser. Seller shall notify Purchaser of the particulars of the payment, which notification shall be satisfied if Seller forwards with its payment sufficient information to permit appropriate processing of the payment by Purchaser. If certain Mortgagors persist in forwarding payments to Seller after the Transfer Date(s), Seller shall notify Purchaser and Purchaser shall take all steps reasonably necessary to assure that such Mortgagors remit payments directly to Purchaser. 7.12 Misapplied Payments. Misapplied payments shall be processed as follows: (a) Both parties shall cooperate in correcting misapplication errors. (b) The party receiving notice of a misapplied payment occurring prior to the Transfer Date(s) and discovered after the Transfer Date(s) shall immediately notify the other party. (c) If a misapplied payment that occurred prior to the Transfer Date(s) cannot be identified by either party and it has resulted in a shortage in a Mortgage account, Seller shall be liable for the amount of such shortage. Seller shall reimburse Purchaser for the amount of such shortage within thirty (30) days after receipt of written demand from Purchaser. (d) If a misapplied payment resulted in the incorrect calculation of the Purchase Price, a check in the amount of the shortage and payable to the party shorted shall be delivered by the other party within ten (10) Business Days after notice thereof. (e) Any check issued under the provisions of this Section 7.12 shall be accompanied by a statement indicating the purpose of the check, the Mortgagor and property address involved, and the corresponding Seller and/or Purchaser account number. 7.13 Payment of Taxes and Insurance. Before the Transfer Date(s) Seller will pay all taxes and insurance premiums (including hazard and PMI premiums) payable from escrow accounts which are (a) due on or before the Transfer Date(s) whether or not Seller has received bills for those payments, or (b) due within thirty (30) days after the Transfer Date(s). Seller shall provide a list to Purchaser on or before the Transfer Date(s) of tax and insurance bills coming due thirty (30) days after Transfer Date(s) for which Seller has not received bills on or before the Transfer Date(s). Seller shall send to Purchaser within two (2) Business Days of Seller's receipt, any tax or insurance (hazard or PMI) bills received by Seller after the Transfer Date(s) on the Loans. Purchaser and Seller agree to cooperate to make sure all bills relating to the Loans and due thirty (30) days after the Transfer Date(s) are paid by the respective due dates. 7.14 Missing Payments. Seller agrees to indemnify and remit to Purchaser any missing escrow funds or unremitted principal and interest which preceded the transfer of Servicing; provided that this obligation shall exist only to the extent Seller was responsible for such shortages under the terms of the Servicing Agreements and provided further that Purchaser shall reimburse Seller to the extent such missing payment represented an advance otherwise reimbursable to Seller under Section 3.3 hereof. 7.15 Tax Contracts. Seller, at its expense, shall assign to Purchaser on the Transfer Date(s), a fully paid, transferable, life-of-the- loan, tax service contract with Transamerica Realty Tax Service. The tax service contract so assigned shall cover each of the Loans for their respective remaining terms. 7.16 Annual Report to Mortgagors and IRS. Seller agrees to provide the IRS and each Mortgagor whose Loan Servicing is transferred under this Agreement with an annual year-end statement in accordance with IRS and state regulations and FHLMC and FNMA requirements. Such statement(s) shall reflect the status of the Loan up to the applicable Transfer Date. Purchaser shall have no responsibility for providing this information for the period of time the Loan was serviced by the Seller and Seller is likewise not responsible for providing this information for the period of time the Loan is serviced by Purchaser or its successors. Seller agrees to mail the applicable information to the mortgagor on or after January 15, 1995, along with a 1099 INT (Interest on Escrow), if applicable. 7.17 Further Solicitation. Seller agrees that it shall not solicit the Mortgagors for any mortgage-related services, including but not limited to, refinancing their mortgage loan, credit insurance and homeowner's insurance. General solicitation to the public and borrower initiated contacts shall not constitute solicitations hereunder. ARTICLE 8 INTERIM SERVICING 8.1 Servicing of Mortgages. In the event the Transfer Date(s) with respect to the Servicing or any portion thereof occurs later than the Sale Date, Seller shall service the Loans relating thereto on behalf of the Purchaser during that time period (the "Interim Period") as provided herein. Purchaser agrees and acknowledges that Seller shall perform all servicing responsibilities through a designated subservicer. Seller acknowledges that it shall be responsible for any errors and omissions committed by same subservicer. In the event the Transfer Date(s) with respect to the Servicing occurs simultaneously with the Sale Date, these provisions of this Article 8 shall be inapplicable to those Loans already transferred. 8.2 Assumption of Duties; Standard of Care. Seller agrees that, throughout the Interim Period, it shall observe and perform all warranties, representations, covenants and agreements with respect to the Loans and the Servicing required to be observed and performed by Seller as servicer under the Servicing Agreements. Seller shall at all times, service the Loans in accordance with all applicable statutes, regulations, contractual provisions, and in accordance with prudent mortgage banking practices. It is understood and agreed that Seller shall exercise the same standard of care that it exercises in the servicing of mortgages for its own account. Among the services to be provided by Seller during the Interim Period are: (a) Receive and process Mortgagor's payments; (b) Make all escrow disbursements in its own name; (c) Handle all collection efforts with Mortgagor in its own name; (d) Provide and handle insurer delinquency notices in its own name; (e) Prepare and forward all remittances due for the months during the Interim Period; (f) Prepare and submit all cut-off reports for the months of the Interim Period; (g) Resolve all items prior to Transfer Date(s) appearing on reports listed in Section 8.4 (e) and (f). 8.3 Servicing Fee. As consideration for servicing the Mortgages during the Interim Period, Seller shall receive for each Loan for each month the Loan is serviced by Seller a servicing fee of five dollars ($ 5.00) per Loan. The monthly servicing fee with respect to any Loan is payable from the principal and interest payment actually received during the month for that Loan. Seller shall promptly remit to Purchaser on the day accounting reports are due to FHLMC or FNMA for each month during the Interim Period, the Total Servicing Fee for each Loan less the servicing fee retained by Seller under this Section 8.3. 8.4 Reporting by Seller. Servicer shall provide to Purchaser within five (5) business days of each respective cutoff (FHLMC and FNMA), a Trial Balance report which shall set forth for the prior investor accounting period for each Mortgage, subtotaled by pool (as applicable): (a) collections of principal and interest; (b) the remaining principal balance; (c) the mortgage interest rate; (d) the servicing fee retained by Servicer; (the following (e) and (f) will be separate reports, not part of the Trial Balances); (e) a report with any real estate taxes still delinquent with anticipated resolution date by account number; (f) a report listing all hazard insurance expired with anticipated resolution dates by account number; and (g) such other information as may be reasonably requested in writing by Purchaser with reasonable notice. 8.5 Notifications. If required by FHLMC or FNMA, Servicer shall upon execution of this Agreement, notify FHLMC or FNMA, in writing that Servicer shall service the Loans during the Interim Period. Purchaser hereby authorizes FHLMC or FNMA to communicate with, issue instructions to, accept directives from and otherwise deal with Seller in the manner and to the extent permitted pursuant to applicable rules and regulations. 8.6 Fees and Advances. During the Interim Period, Servicer shall be responsible for payment of all guarantee fees to FHLMC or FNMA and for all advances required by FHLMC or FNMA. Servicer shall also be responsible for any advances required for the various Mortgage escrow/impound accounts, and shall be responsible for prompt payment of all mortgage insurance premiums, hazard insurance premiums and real estate taxes during the Interim Period. If adequate funds are not held in escrow to pay, when due, real estate taxes or insurance premiums on any property securing a Loan, Servicer shall advance sufficient funds to cover any such deficiency in a manner to ensure timely payment of such taxes or insurance premiums. Servicer shall be reimbursed for all advances made pursuant to this Section 8.6 in accordance with Section 7.8 of this agreement. 8.7 Escrows. Until the Transfer Date(s), Seller shall credit to the account of borrower all interest required to be credited, or otherwise accrued, to any escrow amount by applicable law or Investor requirement. Also, during the Interim Period, Servicer shall maintain all escrow/impound accounts at a financial institution or institutions of its choice, consistent with the Servicing Agreements and applicable laws, rules and regulations. 8.8 After Transfer Date. Following the Transfer Date(s), Servicer shall endorse and forward to Purchaser all funds received by Servicer related to the Loans as provided in Section 7.9. 8.9 Suspension. Should Seller at any time during the Interim Period have its right to service for FHLMC or FNMA temporarily or permanently suspended, then Purchaser shall, in its sole discretion and without liability of any kind to Seller, elect to: a) Immediately accelerate performance of the provisions of this Agreement to require immediate transfer of the Servicing and payment of the purchase Price, provided all necessary approvals can be obtained. If such approvals cannot be obtained then; (b) Immediately terminate this Agreement, at which time Seller shall be required to refund to Purchaser all portions of the Purchase Price which have been previously paid by Purchaser plus costs as provided for in Section 11.2(b) below and Purchaser shall assign its rights in the Loans and transfer and assign the related servicing and deliver any and all mortgage servicing records in its possession to Seller. 8.10 Termination. The provisions of Article 8 of this Agreement shall terminate with respect to the Servicing or portion thereof transferred on the Transfer Date(s). 8.11 Maintenance of Books and Records. Seller shall keep full and complete records pertaining to (i) each Mortgage and the collections made thereon, and (ii) each check paid as distribution of principal and interest collected, to appropriate parties. During the Interim Period, Purchaser or its representative, upon three (3) Business Days' written notice to Seller may examine any and all such records at such time or times as it may elect during the Seller's regular business hours, subject to the provisions of Section 12.8. 8.12 Insurance. In addition to insurance required to be maintained by Seller under the Servicing Agreements, Seller shall also at its own expense maintain at all times during the Interim Period policies of fidelity, theft, forgery and errors and omissions insurance. Such policies shall be in reasonable amounts with acceptable standard coverages in accordance with industry standards. 8.13 Relationship of Parties. Nothing herein contained shall be deemed or construed to create a partnership or joint venture between the parties. The duties and responsibilities of the Seller shall be rendered by the Seller as an independent contractor and not as an agent of Purchaser. The Seller shall have full control of all of its acts, doings, proceedings, relating to or requisite in connection with the discharge of its duties and responsibilities under this Agreement. ARTICLE 9 CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER All of the obligations of Purchaser under this Agreement are subject to the fulfillment prior to or on the Sale Date and/or the Transfer Date(s), as the case may be, of each of the following conditions, any one or more of which may be waived in writing by Purchaser: 9.1 Accuracy of Representatives and Warranties. The representations and warranties of Seller contained herein or in any certificate, schedule or other document delivered pursuant to the provisions hereof or in connection herewith shall be true and correct in all material respects as of the Sale Date and the Transfer Date(s), except to the extent such representations and warranties expressly relate only to an earlier date, in which case they shall be true and correct in all material respects only as of such earlier date and except for changes contemplated by this Agreement or approved by Purchaser. 9.2 Compliance with Conditions. Seller shall have performed and complied in all material respects with all conditions and agreements required by this Agreement to be complied with or performed by it prior to or on the Sale Date and the Transfer Date(s). 9.3 No Actions. There shall not have been commenced or, to the knowledge of any party hereto, threatened prior to or on the Sale Date or the Transfer Date(s) any action, suit or proceeding which may materially and adversely affect Seller's ability to consummate the transactions contemplated hereby. 9.4 Consents and Approvals. Seller shall have obtained prior to or on the Transfer Date(s), all consents and approvals required for consummation of the transaction contemplated hereby, including those contemplated by Section 2.5 hereof. Purchaser shall have obtained all consents and approvals required for the consummation of the transaction contemplated hereby. 9.5 Sale Date Documents. Seller shall have delivered to Purchaser on the Sale Date a copy of the resolution of the board of directors of Seller approving the execution, delivery and performance of this Agreement, certified as of the Sale Date by the Secretary or Assistant Secretary of Seller. CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER All of the obligations of Seller under this Agreement are subject to the fulfillment prior to or on the Sale Date and/or the Transfer Date(s), as the case may be, of each of the following conditions, any one or more of which may be waived in writing by Seller. 10.1 Accuracy of Representations and Warranties. The representations and warranties of Purchaser contained herein or in any certificate, schedule or other document delivered pursuant to the provisions hereof or in connection herewith shall be true and correct in all material respects as of the Sale Date and Transfer Date(s), except to the extent such representations and warranties expressly relate only to an earlier date, and except for changes contemplated by this Agreement or approved by Seller. 10.2 Compliance with Conditions. Purchaser shall have performed and complied in all material respects with all conditions and agreements required by this Agreement to be performed or complied by it prior to or on the Sale Date and Transfer Date(s). 10.3 No Actions. There shall not have been commenced or, to the knowledge of any party hereto, threatened prior to or on the Sale Date or Transfer Date(s) any action, suit or proceeding which may materially and adversely affect Purchaser's ability to consummate the transaction contemplated hereby. 10.4 Consents and Approvals. Seller shall have obtained prior to or on the Transfer Date(s) all consents and approvals required for consummation of the transaction contemplated hereby including those contemplated by Section 2.5 hereof. Purchaser shall have obtained all consents and approvals required for the consummation of the transaction contemplated hereby. 10.5 Sale Date Document. Purchaser shall have delivered to Seller on the Sale Date a copy of the resolutions of the board of directors of Purchaser approving the execution, delivery and performance of this Agreement, certified as of the Sale Date by the Secretary or an Assistant Secretary of Purchaser. ARTICLE 11 TERMINATION 11.1 Events of Termination. To the extent and under the circumstances set forth below, this Agreement may be terminated at any time by Purchaser or Seller prior to the Transfer Date(s) upon written notice to the other party as follows: (a) By Purchaser at any time in the event that the examination of the books and records of Seller relating to the Mortgages, the Related Escrow Accounts or the Servicing reveals that there has been on or before the Sale Date, any information provided to Purchaser in this Agreement or any Exhibit or Schedule hereto was materially inaccurate or incomplete (as of the date as of which the information spoke), which can not adequately be remedied by the payment by the Seller or Purchaser of damages; (b) By Purchaser or Seller, if FHLMC or FNMA disapproves or fails to timely approve the transfer of Servicing in accordance with Section 2.5 hereof; (c) By Purchaser or Seller if an action, suit or proceeding of the type the absence of which would be a condition precedent to either party's obligations described in Section 9.3 and 10.3, respectively, shall have been commenced, or, to the knowledge of either hereto, threatened; (d) By Purchaser or Seller, if the other shall materially breach any material term of this Agreement, which breach can not adequately be remedied by the payment by the Seller or Purchaser of damages; and such breach shall not have been cured within thirty (30) days following notice thereof by the other party, but in any event prior to the Transfer Date(s); and (e) By Purchaser or Seller, if the conditions precedent to its obligation to consummate on the Transfer Date(s) the transaction contemplated hereby have not been satisfied or waived on or prior to such Transfer Date(s), or such later date as may be mutually agreed upon in writing by the parties hereto, which can not adequately be remedied by the payment by the Seller or Purchaser of damages; provided, however, that neither Purchaser nor Seller shall have any obligation to waive a condition precedent to its obligation or to extend the date for satisfaction thereof. 11.2 Requirements and Effects of Termination. (a) Upon valid and proper termination of this Agreement pursuant to any provision of Section 11.1, all right, title and interest in or to the Servicing, the Related Escrow Accounts and the Mortgages shall revert to Seller and no party hereto shall have any liability or further obligation to the other party hereunder except as provided in Paragraphs 11.2(b), 12.1 and 12.10 hereof. (b) Except as specifically set forth or referred to in Paragraph 11.2(a) above, if this Agreement is terminated with cause or the transaction contemplated hereby is not consummated, any amounts paid by Purchaser pursuant to Paragraphs 3.2(a) or 3.2(b) shall be immediately refunded by Seller to Purchaser. If such termination occurs on or before May 31, 1994 Seller shall also reimburse Purchaser for all costs it has incurred to the date of termination. ARTICLE 12 MISCELLANEOUS 12.1 Costs and Expenses. Except as otherwise provided for in this Agreement, costs and expenses incurred in connection with the transactions contemplated hereby shall be paid as follows: (a) Seller shall pay all the standard and customary costs associated with the transfer of the Servicing to Purchaser, including without limitation, any recording or filing fees, FHLMC or FNMA transfer fees, any fees related to obtaining any required approvals, custodian charges, cost of shipping and delivery of mortgage files to Purchaser, Tax Service tax contract fees, Flood Service contract fees, and all other costs associated with the preparation and filing of Mortgage assignments or any other transfer documents; and (b) Except as provided in Section 12.1(a) above, Purchaser shall pay the expenses incurred by it or its affiliates in connection with the transactions contemplated hereby whether or not the transactions are consummated. 12.2 Indemnification by Seller. (a) Subject to the further terms and conditions of this Agreement, Seller shall indemnify and hold Purchaser harmless from and shall reimburse Purchaser for any losses, damages, deficiencies or expenses of any nature (including reasonable attorneys' fees) incurred by Purchaser before or after the Transfer Date(s) to the extent that such loss, damage, deficiency or expense results from: (1) Any knowing, intentional or negligent misrepresentation made by Seller in this Agreement, or any knowing, intentional or negligent inaccurate information or omission in any schedule, written statement or certificate furnished by Seller pursuant to this Agreement; (2) (x) any representation or warranty set forth in Article 4 or article 5 hereof being untrue in any material respect as the date made, (y) the failure of Seller to perform its material obligations under any covenant set forth in Article 7 or Article 8, or (z) any representation or warranty set forth in the certificate referenced in Section 9.5 being untrue in any material respect as of the date of such Exhibit or certificate. (3) Any material defect in any Loans existing as of the Transfer Date(s) (including those defects subsequently discovered), or as a result of any act or omission of Seller prior thereto: (4) Material errors in originating or servicing any of the Loans (e.g., failure to follow underwriting or appraisal guidelines, misquoted payoffs, misapplied payments, failure to file timely notice of default or failure to pay taxes or other charges including penalties and interest) prior to the Transfer Date(s) or as a result of Seller's act or omission prior thereto. Such errors may include, without limitation, improper action or failure to act when required to do so. Provided, however, that Purchaser has taken reasonable and appropriate actions to mitigate any such loss, damage, deficiency, claim or expense. For purposes of this Section 12.2(a) the word "material" means a misrepresentation, misstatement, breach, nonperformance, defect, error or omission resulting in a loss to Purchaser of $500 or more. 12.3 Indemnification of Seller. (a) Subject to the further terms and conditions of this Agreement, Purchaser shall indemnify and hold Seller harmless from, and shall reimburse Seller for any losses, damages, deficiencies or expenses of any nature (including reasonable attorneys' fees) incurred by Seller before or after the Transfer Date(s) to the extent that such loss, damage, deficiency or expense results from: (1) Any knowing, intentional or negligent misrepresentation made by Purchaser in this Agreement, or any knowing, intentional or negligent inaccurate information or omission in any schedule, written statement or certificate furnished by Purchaser pursuant to this Agreement, (2) Any breach of a representation or warranty by Purchaser or the failure to perform any covenant or condition of Purchaser contained in this Agreement, or in any schedule, written statement or certificate furnished by Purchaser pursuant to this Agreement. Provided, however, that Seller has taken reasonable and appropriate actions to mitigate any such loss, damage, deficiency, claim or expense. For purposes of this Section 12.2(a) the word "material" means a misrepresentation, misstatement, breach, nonperformance, defect, error or omission resulting in a loss to Seller of $500 or more. 12.4 Notice and Settlement of Claims. Each party to this Agreement shall promptly notify the other party in writing of the existence of any material fact known to it giving rise to any obligations of the other party under these Section 12.2 and 12.3 and, in the case of any claim or any litigation brought by a third party, which may give rise to any such obligations, each party shall promptly notify the other party of the making of such claim or the commencement of such action by a third party as and when same becomes known to it. 12.5 Cure by Seller. If Purchaser notifies Seller of any claim giving rise to Seller's obligations under Section 12.2, Seller, at its option, may: (a) cure or correct the underlying cause of such claim in a manner and within a time reasonably acceptable to Purchaser and FHLMC or FNMA (but not exceeding 60 days) as the case may be; (b) repurchase from Purchaser the Servicing with respect to those Loans which are affected by such claim within fifteen (15) Business Days following receipt by Purchaser of written notice from Seller of such election as follows; (i) Purchaser shall assign its rights in such Loan and transfer and assign the related Servicing and all mortgage servicing records in its possession to Seller, free and clear of all liens, charges and encumbrances whatsoever, and (ii) Seller shall (x) reimburse Purchaser for the cost of purchasing such Loan, if applicable, (y) pay to Purchaser a repurchase price for the Servicing equal to .8336% of the remaining principal balance of such Loan as of the date of repurchase, and (z) reimburse Purchaser for any advances made by Purchaser in connection with the Loan, including without limitation, any unrecovered advance reimbursements previously paid to Seller pursuant to Section 3.3; or (c) if such Loans are in foreclosure or foreclosed, purchase the property securing such Loans at a price equal to the then outstanding fair market value or no greater than the outstanding principal balance of such Loan and reimburse Purchaser for any advances and other losses made by Purchaser in connection with the Loans, including without limitation, any unrecovered advance receivable reimbursements previously paid to Seller pursuant to Section 3.3. 12.6 Cure by Purchaser. If Seller notifies Purchaser of any claim giving rise to Purchaser's obligations under Section 12.3, Purchaser shall have 60 days from the day it receives that notice to cure or correct the underlying cause of such claim. 12.7 Repurchase of Loan. If FHLMC or FNMA requests Purchaser to repurchase one or more Loans (including those from any pools, if applicable), Seller shall promptly repurchase that Loan(s) and the related servicing out of the appropriate pool(s) or promptly repurchase that Loan(s) from Purchaser and shall promptly reimburse Purchaser for any costs Purchaser incurred in handling that Loan(s); provided, however, that the requested repurchase by FHLMC or FNMA is not due primarily to an act or omission of Purchaser. Before Seller's obligation to repurchase Loans arises under this Section, Purchaser shall notify Seller in writing of the requested repurchase and Seller shall have sixty (60) days to cure the problem causing the request for repurchase or to other wise defend against the repurchase request made by FHLMC, or FNMA. The repurchase of Loans is in addition to the obligations of Seller and Purchaser to reassign and pay for the servicing on the repurchased Loan(s) under Section 12.5(b), and shall not otherwise limit Seller's indemnification of Purchaser under Section 12.2. Seller's repurchase of Loans shall not alter its rights to indemnification from Purchaser under Section 12.3. For example, if Seller is required to repurchase a Loan pursuant to this Section 12.7 and because of an act or omissions of Purchaser (such as the failure to maintain mortgage or hazard insurance or to pay applicable taxes or assessments on time), Seller suffers a loss on the Loan repurchased greater than would have occurred absent the act or omission of Purchaser, then Purchaser shall indemnify and hold Seller harmless for such excess loss. 12.8 Supplementary Information. From time to time prior to and after Transfer Date(s), Seller shall furnish Purchaser such incidental information, which is reasonably available to Seller, supplementary to the information contained in the documents and schedules delivered pursuant hereto as Purchaser may reasonably request. 12.9 Access to Information. Seller shall give to Purchaser and its counsel, accountants and other representatives, upon receipt of written notice not less than one (1) Business Day in advance, reasonable access during normal business hours throughout the period prior to the Transfer Date(s), to all of Seller's files, books and records relating to the Servicing and Related Escrow Accounts. 12.10 Confidentiality. Each party understands that certain information which has been furnished and will be furnished in connection with this transaction, including, but not limited to, information concerning customers or business procedures, servicing fees or prices, policies or plans of the other party or any of its affiliates, and also including specifically information in which Seller has a proprietary interest such as the identity of the mortgagors under the mortgages, the remaining principal balances of the Loans and purchase by such mortgagors of ordinary life, ordinary health, credit life, credit health, credit unemployment and any other forms of group or individual insurance coverage or of any other financial services of products of any nature, is confidential and proprietary, and each party agrees that it will maintain the confidentiality of such information and will not disclose it to others or use it except in connection with the proposed acquisition contemplated by this Agreement, without the consent of the party furnishing such information. Information which is generally known in the industry concerning a party or among such party's creditors generally or which has been disclosed to the other party by third parties who have a right to do so shall not be deemed confidential or proprietary information for these purposes. If the proposed acquisition is not consummated pursuant to Article 12 or otherwise, each party agrees to promptly return to the other all confidential materials, and all copies thereof, which have been furnished to it in connection with the transactions contemplated hereby. 12.11 No Broker's Fees. Except for Seller's broker, Hamilton, Carter, Smith & Co., Inc., each party hereto represents and warrants to the other that it has made no agreement to pay any agent, finder, or broker or any other representative, any fee or commission in the nature of a finders' fee or originators' fee arising out of or in connection with the subject matter of this Agreement. The Seller is responsible for all broker fees to Hamilton, Carter, Smith & Co., Inc.; provided this Agreement shall not create any rights, third party beneficiary or otherwise, in Hamilton, Carter, Smith & Co., Inc. 12.12 Survival of Representations and Warranties. Each party hereto covenants and agrees that the representations and warranties in this Agreement, and in any document delivered or to be delivered pursuant hereto, shall survive the Transfer Date(s). 12.13 Notices. All notices, requests, demands and other communications which are required or permitted to be given under this Agreement shall be in writing and shall be deemed served, given and received when personally delivered to an officer of such party, or in lieu of such personal service or delivery, when deposited in the U.S. mail, registered or certified mail, postage prepaid, return receipt requested, and received on three days from the date of such mailing, whichever first occurs addressed as follows: (a) HAMILTON FINANCIAL CORPORATION 525 Market Street, 9th Floor San Francisco, CA 94105 Attn: Terry W. Malone CMB, EVP (b) CALIFORNIA UNITED BANK, N.A. 16030 Ventura Boulevard Encino, CA 91436 Attn: Patrick Hartman, CFO or to such other address as Purchaser or Seller shall have specified in writing to the other. 12.14 Waivers. Either Purchaser or Seller may, by written notice to the other: (a) Extend the time for the performance of any of the obligations or other transactions of the other; (b) Waive compliance with any of the terms, conditions or covenants required to be complied with by the other hereunder; and (c) Waive or modify performance of any of the obligations of the other hereunder. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other subsequent breach. 12.15 Entire Agreement, Amendment. This Agreement and the documents, instruments and agreements to be executed and delivered herewith constitute the entire agreement between the parties with respect to the sale of the Servicing and supersede all prior with respect thereto, including without limitation, the Letter of Intent. This Agreement may be amended and any provision hereof waived, but only in writing signed by the party against whom such amendment or waiver is sought to be enforced. 12.16 Binding Effect. This Agreement shall inure to the benefit of and be binding upon parties hereto and their permitted successors and assigns. Seller may not assign this Agreement or delegate any of its duties hereunder without the express written consent of Purchaser. Purchaser may assign this Agreement at any time after the final payment to its parent corporation or any other subsidiary of its parent corporation but may not make any other assignment hereof without the express written consent of Seller. No permitted assignment or delegation of duties shall relieve the party making such assignment or delegation from its representations, warranties and the obligations undertaken pursuant to Section 12.2 or 12.3, or 12.7 hereof. 12.17 Headings. Section titles or captions to this Agreement are for convenience only and do not define, limit, augment, extend or describe the content or scope of intent of this Agreement and shall not be deemed to be a part hereof. 12.18 Choice of Law. This Agreement shall be interpreted and construed in accordance with the laws of the state of California, provided in applying the laws of California, its conflict of law rules shall not be employed to apply the substantive or procedural laws or equitable principals of any other state. The parties agree that if any action at law or suit in equity is commenced with respect to this Agreement or any parties' obligations hereunder, that venue shall be proper in San Francisco County, California. 12.19 Incorporation of Exhibits. Exhibits "A" and "B" attached hereto shall be incorporated herein and shall be understood to be a part hereof as though included in the body of this Agreement. 12.20 Counterparts. This Agreement may be executed simultaneously in several counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same contract. 12.21 Further Acts. Each of the parties to this Agreement shall execute and deliver all documents, provide all information which is not confidential, take or forbear from all such action as may be necessary, convenient, or appropriate to achieve the purposes of this Agreement. IN WITNESS WHEREOF, each of the undersigned parties to this Agreement has caused this to be duly executed in its corporate name by one of its duly authorized officers, all as of the date first above written. CALIFORNIA UNITED BANK, N.A. ATTEST: DOUG GODDARD By: PATRICK HARTMAN ------------ --------------------------- Patrick Hartman Its: Controller Its: Chief Financial Officer HAMILTON FINANCIAL CORPORATION By: TERRY W. MALONE ------------------- ATTEST: RUSTY LACKEY Terry W. Malone CMB Its: Executive Vice President Its: Vice President Loan Administration -----END PRIVACY-ENHANCED MESSAGE-----