-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PnpgufkeL3Z7JS1aLIEf1cVZcJqyHVMm9nDZlaO8IgsD3oJoQYwP/s9474hXkyVt aP0+LFqWmQgGwosBYm9sfA== 0000898430-98-001514.txt : 19980424 0000898430-98-001514.hdr.sgml : 19980424 ACCESSION NUMBER: 0000898430-98-001514 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980423 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED PANAM FINANCIAL CORP CENTRAL INDEX KEY: 0001049231 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 953211687 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-39941 FILM NUMBER: 98599228 BUSINESS ADDRESS: STREET 1: 1300 SOUTH EL CAMINO REAL CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503451800 MAIL ADDRESS: STREET 1: 1300 SOUTH EL CAMINO REAL CITY: SAN MATEO STATE: CA ZIP: 94402 S-1/A 1 AMENDMENT #4 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998 FILE NO.: 333-39941 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- UNITED PANAM FINANCIAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 6162 95-3211687 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
1300 SOUTH EL CAMINO REAL SAN MATEO, CALIFORNIA 94402 (650) 345-1800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- LAWRENCE J. GRILL PRESIDENT AND CHIEF EXECUTIVE OFFICER 1300 SOUTH EL CAMINO REAL SAN MATEO, CALIFORNIA 94402 (650) 345-1800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: PAUL H. IRVING, ESQ. TODD H. BAKER, ESQ. MANATT, PHELPS & PHILLIPS, LLP GREGORY J. CONKLIN, ESQ. 11355 WEST OLYMPIC BOULEVARD GIBSON, DUNN & CRUTCHER LLP LOS ANGELES, CALIFORNIA 90064 ONE MONTGOMERY STREET, SUITE 3100 (310) 312-4196 SAN FRANCISCO, CALIFORNIA 94104 (415) 393-8200 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement has become effective. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED APRIL 23, 1998 5,500,000 SHARES UNITED PANAM FINANCIAL CORP. LOGO COMMON STOCK All of the 5,500,000 shares of Common Stock offered hereby (the "Offering") are being sold by United PanAm Financial Corp., a California corporation (the "Company"). Prior to the Offering, there has been no public market for the Common Stock. It currently is anticipated that the initial public offering price will be between $9.50 and $11.50 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "UPFC." SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Price to Underwriting Proceeds to Public Discount(1) Company(2) - -------------------------------------------------------------------------------- Per Share..................................... $ $ $ - -------------------------------------------------------------------------------- Total(3)...................................... $ $ $ - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) See "Underwriting" for information relating to indemnification of the Underwriters and other matters. (2) Before deducting expenses payable by the Company estimated to be $950,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 825,000 additional shares of Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the offices of NationsBanc Montgomery Securities LLC on or about , 1998. ----------- NationsBanc Montgomery Securities LLC Piper Jaffray Inc. , 1998 [MAP OF THE UNITED STATES SHOWING THE LOCATION OF THE COMPANY'S OFFICES.] The Company intends to furnish its shareholders with annual reports containing financial statements audited by independent certified public accountants and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus (i) reflects a 1,875- for-1 stock split effected in November 1997, (ii) assumes no exercise of the Underwriters' over-allotment option and (iii) excludes 2,287,500 shares of Common Stock reserved for issuance under the Company's 1997 Employee Stock Incentive Plan (the "Stock Incentive Plan"). See "Management--Stock Incentive Plan" and "Underwriting." Unless the context indicates otherwise, all references herein to the "Company" refer to United PanAm Financial Corp. and its subsidiaries on a consolidated basis. This Prospectus contains forward-looking statements, including statements regarding the Company's strategies, plans, objectives, expectations and intentions, which are subject to a variety of risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. THE COMPANY The Company is a diversified specialty finance company engaged primarily in originating and acquiring for investment or sale residential mortgage loans, personal automobile insurance premium finance contracts and retail automobile installment sales contracts. The Company targets customers who generally cannot obtain financing from traditional lenders. These customers usually pay higher loan origination fees and interest rates than those charged by traditional lenders to gain access to consumer financing. The Company believes that management's experience in originating, assessing, pricing and managing credit risk enables the Company to earn attractive risk-adjusted returns. The Company has funded its operations to date principally through retail deposits, Federal Home Loan Bank ("FHLB") advances and whole loan sales at its federal savings bank subsidiary, Pan American Bank, FSB (the "Bank"). The Company completed its first securitization of mortgage loans in December 1997. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeds the carrying value of approximately $8.2 million at the date of sale. The Company's strategy is to undertake controlled geographic expansion of its existing businesses, with particular emphasis in the near term on the national expansion of its mortgage finance operations, and to evaluate possible entry into other specialty finance businesses which provide the opportunity for attractive risk-adjusted returns. The Company believes that the Bank currently is the largest Hispanic- controlled savings association in California. The Company commenced operations in 1994, as a Hispanic-controlled financial institution, by purchasing from the Resolution Trust Corporation (the "RTC") certain assets and assuming certain liabilities of the Bank's predecessor, Pan American Federal Savings Bank. The Company has used the Bank as a base for expansion into its current specialty finance businesses. In 1995, the Company commenced its insurance premium finance business through a joint venture with BPN Corporation ("BPN"), which the Company believes to be the second largest provider of financing for consumer automobile insurance premiums in California. In 1996, the Company commenced its current mortgage and automobile finance businesses. Mortgage Finance. The Company originates and sells subprime mortgage loans secured primarily by first mortgages on single family residences through its subsidiary, United PanAm Mortgage Corporation, and the Bank (such business, together with the Bank's mortgage finance activities, "UPAM"). UPAM's targeted mortgage customers are considered "subprime" because of factors such as impaired credit history or high debt-to-income ratios compared to customers targeted by traditional mortgage lenders. UPAM's customers use the proceeds of the mortgage loans primarily to finance home purchases and improvements, debt consolidation, education and other 3 consumer needs, and may benefit from consolidating existing consumer debt through mortgage loans with lower monthly payments. The Company believes that the subprime residential mortgage market is highly fragmented and that success in this market depends primarily on the ability to provide superior customer service and competitive pricing. UPAM seeks to (i) locate experienced loan officers in geographic proximity to large population centers, (ii) issue conditional loan approvals promptly, generally within 24 hours after receipt of an application, (iii) avoid imposing unnecessarily restrictive conditions on loan approvals, (iv) fund loans on a timely basis, generally within 15 to 20 days following conditional approval, and in accordance with approved terms, and (v) competitively price loans according to market conditions. UPAM's operating strategy is to maintain a balance between retail and wholesale origination of mortgage loans. Approximately 38% of the mortgage loans originated by UPAM during the twelve months ended December 31, 1997 were originated through the direct solicitation of borrowers by mail and telemarketing ("retail" loan originations), with the balance originated through independent loan brokers ("wholesale" loan originations). At March 31, 1998, UPAM had 23 retail loan branches and five wholesale loan centers originating mortgage loans in 29 states, and intends to balance its future growth between retail offices and wholesale loan centers. UPAM's mortgage loan originations have grown from $71.5 million for the twelve months ended December 31, 1996 to $578.6 million for the twelve months ended December 31, 1997. The average loan-to-value ratio ("LTV") on mortgage loans originated by UPAM during the twelve months ended December 31, 1997 was approximately 75%. Until December 1997, UPAM sold all of its loan originations to mortgage companies and investors through whole loan packages offered for bid several times each month. During the twelve months ended December 31, 1997, UPAM sold $360.2 million of mortgage loans at a weighted average sales price equal to 105.7% of the unpaid principal balance of the loans sold. The Company completed its first securitization of $114.9 million in mortgage loans in December 1997 at a net gain on sale of 5.2% of the principal amount of loans securitized, and expects to sell or securitize mortgage loans on a periodic basis in the future. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeds the carrying value of approximately $8.2 million at the date of sale. See "Risk Factors--General--Securitizations." Insurance Premium Finance. In May 1995, the Company entered into a joint venture with BPN under the name "ClassicPlan" (such business, "IPF"). BPN was founded in 1982. Under this joint venture, which commenced operations in September 1995, (i) the Bank underwrites and finances automobile insurance premiums in California and (ii) BPN markets this financing primarily to independent insurance agents that sell personal automobile insurance in California and, thereafter, services such loans for the Bank. The Bank lends to individuals for the purchase of single premium automobile insurance policies. The Bank's collateral is the unearned insurance premium, which is held by the insurance company and is refundable to IPF in the event the underlying insurance policy is canceled. The Company does not sell or have the risk of underwriting the underlying insurance policy. The Company's portfolio of insurance premium finance contracts has grown from 54,927 contracts in the aggregate gross amount of $32.1 million at December 31, 1996 to 132,623 contracts in the aggregate gross amount of $40.0 million at December 31, 1997, primarily as a result of changes in California's automobile insurance laws. During the twelve months ended December 31, 1997, IPF originated 125,315 insurance premium finance contracts in the aggregate gross amount of $145.2 million, as compared to 83,839 such contracts in the aggregate gross amount of $99.0 million during the twelve months ended December 31, 1996. The Company believes that success in the insurance premium finance business depends on developing relationships with independent insurance agents and efficient and accurate servicing and collection systems. The Company has an option to purchase BPN, which becomes exercisable on April 29, 1999 at an agreed price. See "Business--Insurance Premium Finance--Relationship with BPN." In January 1998, the Company and BPN purchased from Providian National Bank and others the right to solicit new and renewal insurance premium finance business from brokers who have previously provided contracts to Commonwealth Premium Finance ("CPF"). Primarily as a result of this acquisition, the Company's insurance premium finance contracts increased from $40.0 million at December 31, 1997 to $50.3 million at March 30, 1998. 4 Automobile Finance. The Company acquires, holds for investment and services subprime retail automobile installment sales contracts ("auto contracts") generated by franchised and independent dealers of used automobiles through the Bank and its subsidiary, United Auto Credit Corporation (such business, "UACC"). UACC's customers are considered "subprime" because they typically have limited credit histories or credit histories that preclude them from obtaining loans through traditional sources. The Company believes that success in the subprime automobile finance business depends upon controlled growth, disciplined underwriting, strong internal audit procedures and focused servicing and collection efforts at each of its local branches adjacent to dealers, customers and collateral. The Company's portfolio of auto contracts has grown from 1,134 contracts in the aggregate gross amount (including unearned financing charges) of $10.8 million at December 31, 1996 to 4,750 contracts in the aggregate gross amount of $40.9 million at December 31, 1997. During the twelve months ended December 31, 1997, the Company acquired 4,187 auto contracts in the aggregate gross amount of $44.1 million, as compared to 1,177 auto contracts in the aggregate gross amount of $12.2 million during the twelve months ended December 31, 1996. At March 31, 1998, the Company marketed its automobile finance program from seven branch offices in California and one each in Arizona, Colorado, Oregon and Utah. The Bank. The Bank has been the principal funding source to date for the Company's residential mortgage, insurance premium and automobile finance businesses, primarily through the Bank's deposits, FHLB advances and whole loan sales. In addition, the Bank holds a portfolio of primarily traditional residential mortgage loans acquired from the RTC in 1994 and 1995 at a discount from the unpaid principal balance of such loans, which loans aggregated $82.0 million (before unearned discounts and premiums) at December 31, 1997. The Bank maintains four branches in Northern California and one in Southern California, and has focused its branch marketing efforts on building a middle income customer base, including efforts targeted at local Hispanic communities. As of December 31, 1997, deposits totaled $233.2 million with a weighted average interest rate of 5.25%. In the future, the Company intends to operate its mortgage finance business principally through United PanAm Mortgage Corporation. The Company intends to continue funding its insurance premium and automobile finance businesses entirely through the Bank for the foreseeable future. BUSINESS STRATEGY Growth Strategy. The Company intends to capitalize on its competitive strengths by expanding its core businesses and entering other specialty finance businesses which provide the opportunity for attractive risk- adjusted returns. The Company's growth strategy includes the following key elements. . Geographic Expansion of Existing Businesses. The Company intends to expand its residential mortgage and automobile finance businesses into new geographic areas, principally by opening offices staffed by experienced local marketing and management personnel. The Company believes that an emphasis on management with local experience, coupled with comprehensive underwriting standards and financial controls, will permit growth in loan originations without compromising loan performance. The Company also may expand its insurance premium finance business as opportunities arise outside of California. See "Risk Factors--General--Management of Growth." . Entry into New Specialty Finance Businesses. The Company continually evaluates expansion into other specialty finance businesses which provide the opportunity for attractive risk-adjusted returns in markets (i) which it believes are underserved by traditional lenders or are undergoing change, (ii) which are highly fragmented with no participant having significant market share, or (iii) in which it can attract the required management experience to assess, price and manage the credit risk and, thereby, generate attractive risk-adjusted returns. The Company may enter such new businesses on a de novo basis or through acquisitions. See "Risk Factors--General--Management of Growth and "Use of Proceeds." 5 Operating Strategy. The Company's operating strategy includes the following key elements. . Centralized Risk Management Controls. For each of its businesses, the Company has implemented comprehensive risk management policies and portfolio parameters which are designed to identify the types and amount of risk that can prudently be taken in each business. The Company continually monitors the performance of each of its businesses against these policies and parameters. . Decentralized Management. The management of each of the Company's businesses is responsible for its day-to-day operations, subject to centralized risk management controls and individualized, goal oriented incentive compensation programs that support the achievement of credit quality, growth and profitability objectives. The Company believes that the delegation of responsibility to the management of each business has enabled the Company to attract, promote and retain experienced managers, to provide high levels of customer service and to respond promptly to changes in market conditions. . Diversified Funding Sources. The Company has funded its lending businesses to date primarily through the Bank's deposits, as well as FHLB advances and whole loan sales. The Company believes that bank deposits are a stable and cost-effective funding source which provide it with a competitive advantage. To further diversify its funding sources, in October 1997 the Company obtained a $100 million master repurchase facility to finance the anticipated growth in its mortgage lending operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources-- Warehouse Line of Credit." The Company completed its first securitization of mortgage loans in December 1997 and expects to sell or securitize mortgage loans on a periodic basis in the future. In connection with any mortgage loan securitizations, the Company will seek to maximize cash gains or arrange for the prompt sale of residual interests retained in the securitizations at or above their net book value. The Company will, in the future, consider the sale or securitization of other financial assets. See "Risk Factors--General-- Securitizations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--General--Mortgage Finance." RECENT DEVELOPMENTS Securitization. In December 1997, the Company completed its first securitization of mortgage loans in the principal amount of $114.9 million. As part of this securitization, the Company recorded a net gain on sale of $5.9 million or 5.2% of the principal amount of loans securitized and recorded residual interests in securitizations of $8.2 million. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeds the carrying value of approximately $8.2 million at the date of sale. Acquisition of Commonwealth Portfolio. In January 1998, the Company and BPN purchased from Providian National Bank and others for $450,000 the right to solicit new and renewal personal and commercial insurance premium finance business from brokers who previously have provided contracts to CPF. The purchase price for the agreement was provided 60% by the Company and 40% by BPN. The relationship between the Company and BPN continues to be governed by the joint venture arrangement already in effect. See "Business--Insurance Premium Finance--Relationship with BPN." The Company also acquired the Commonwealth name and certain equipment and software. The agreement also provides that Providian National Bank and the servicers of its insurance premium finance business may not solicit or engage in the insurance premium finance business in California for a period of three years. Primarily as a result of this acquisition, the Company's insurance premium finance contracts increased from $40.0 million at December 31, 1997 to $50.3 million at March 30, 1998. First Quarter Developments. Net income increased from $233,000, or $0.02 per share, for the three months ended March 31, 1997 to $1.5 million, or $0.13 per share, for the three months ended March 31, 1998. This increase was due primarily to an increase of $7.5 million in gain on sale of loans from the Company's mortgage finance operations and an increase in net interest income of $2.5 million, offset in part by an increase in non-interest expense of $8.0 million. The Company's results reflected the expansion of its mortgage finance, insurance premium finance and automobile finance businesses during the last twelve months. 6 Net income for the first quarter of 1998 declined $1.2 million, or $0.11 per share, from $2.7 million in the fourth quarter of 1997. This decrease was due to a $1.4 million decline in gain on sale of loans and an increase of $2.0 million in operating expenses related to the expansion of the Company's mortgage finance business. The Company's mortgage loan originations increased to $263.8 million in the first quarter of 1998 from $241.7 million in the fourth quarter of 1997. The Company's revenue from gain on sale of loans is dependent, in part, on the timing and extent of its mortgage loan sales and securitizations. During the fourth quarter of 1997, the Company sold or securitized $202.0 million in mortgage loans, or 84% of its total mortgage loan originations during such period, compared to $193.8 million, or 73% of its total mortgage loan originations, in the first quarter of 1998. Because the Company elected to defer some loan sales from the first quarter of 1998 to the second quarter of 1998, the gain on sale for the first quarter of 1998 was less than the gain on sale for the prior quarter. The weighted average sales price of mortgage loans sold during the first quarter of 1998 was 105.5% of the principal amount of the loans sold compared to 105.6% of the principal amount of loans sold or securitized in the fourth quarter of 1997. There can be no assurance that future sales prices will be similar to the prices received in the first quarter of 1998. The increase of $2.0 million in operating expenses resulted from growth in the Company's mortgage and automobile finance businesses. As part of its growth strategy, the Company opened 11 retail mortgage loan branches during the fourth quarter of 1997 and the first quarter of 1998, and established retail telemarketing and wholesale correspondent lending groups in the first quarter of 1998. The expenses associated with this growth strategy, as well as expenses related to the 9% increase in mortgage loan originations during the first quarter of 1998, resulted in this increase in operating expenses. At March 31, 1998, the Company had $185.1 million in mortgage loans held for sale compared to $120.0 million at December 31, 1997. The Company was incorporated in California on April 9, 1998 for the purpose of reincorporating its business in that state, through the merger of United PanAm Financial Corp., a Delaware corporation (the "Predecessor") into the Company. Unless the context indicates otherwise, all references herein to the "Company" include the Predecessor. The Company's principal executive offices are located at 1300 South El Camino Real, San Mateo, California 94402, and its telephone number is (650) 345-1800. THE OFFERING Common Stock offered by the Company... 5,500,000 shares Common Stock to be outstanding after 16,450,000 shares(1) the Offering.......................... Use of proceeds....................... For general corporate purposes, including financing the growth of the Company's existing businesses, with particular emphasis on the expansion of UPAM and the development or acquisition of other specialty finance businesses, and to repay certain indebtedness to existing shareholders. See "Use of Proceeds." Proposed Nasdaq National Market UPFC symbol................................ - -------- (1) Excludes 2,287,500 shares reserved for issuance under the Stock Incentive Plan, of which (i) 1,580,000 shares were subject to options outstanding as of March 31, 1998, at a weighted average exercise price of $4.55 per share, and (ii) 170,000 shares are subject to options to be granted to certain directors and officers concurrently with the completion of the Offering, at an exercise price equal to either the initial public offering price or 110% of the initial public offering price. See "Management--Stock Incentive Plan." 7 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APRIL 29, 1994 (INCEPTION) AT OR FOR THE THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------------------- 1994 1995 1996 1997 -------------- -------- -------- -------- STATEMENT OF OPERATIONS DATA Interest income................... $ 6,882 $ 13,533 $ 16,561 $ 26,511 Interest expense.................. 3,573 7,727 7,853 12,411 -------- -------- -------- -------- Net interest income............. 3,309 5,806 8,708 14,100 Provision for loan losses......... 50 120 194 507 -------- -------- -------- -------- Net interest income after provision for loan losses...... 3,259 5,686 8,514 13,593 -------- -------- -------- -------- Non-interest income Gain on sale of loans........... 3 90 2,333 26,526 Other non-interest income....... 95 228 443 702 -------- -------- -------- -------- Total non-interest income..... 98 318 2,776 27,228 -------- -------- -------- -------- Non-interest expense Compensation and benefits....... 1,564 2,750 5,248 19,043 Savings Association Insurance Fund special assessment........ -- -- 820 -- Other expense................... 1,579 2,412 3,581 11,039 -------- -------- -------- -------- Total non-interest expense.... 3,143 5,162 9,649 30,082 -------- -------- -------- -------- Income before income taxes........ 214 842 1,641 10,739 Income taxes...................... 98 384 691 4,491 -------- -------- -------- -------- Net income........................ $ 116 $ 458 $ 950 $ 6,248 ======== ======== ======== ======== Net income per share--basic(1).... $ 0.01 $ 0.04 $ 0.09 $ 0.58 ======== ======== ======== ======== Net income per share--diluted(1) ................................. $ 0.01 $ 0.04 $ 0.09 $ 0.53 ======== ======== ======== ======== Weighted average shares outstanding--basic(1)............ 10,669 10,669 10,669 10,739 ======== ======== ======== ======== Weighted average shares outstanding--diluted(1).......... 10,669 10,669 10,669 11,875 ======== ======== ======== ======== BALANCE SHEET DATA Total assets...................... $180,024 $159,581 $188,743 $310,842 Loans............................. 53,176 131,794 134,821 148,535 Loans held for sale............... -- -- 20,766 120,002 Allowance for loan losses......... (378) (5,250) (5,356) (6,487) Deposits.......................... 163,114 141,924 159,061 233,194 Notes payable..................... 10,930 10,930 10,930 12,930 FHLB advances..................... -- -- 4,000 28,000 Warehouse line of credit.......... -- -- -- 6,237 Stockholders' equity.............. 5,270 5,811 6,761 13,009 OPERATING DATA Return on average assets(2)....... 0.11% 0.27% 0.56% 2.48% Return on average stockholders' equity(2)........................ 3.44% 8.51% 16.10% 71.84% Net interest margin............... 3.24% 3.61% 5.44% 6.07%
8
APRIL 29, 1994 (INCEPTION) AT OR FOR THE THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------- 1994 1995 1996 1997 -------------- ------- ------- -------- Stockholders' equity to assets..... 2.93% 3.64% 3.58% 4.19% Tangible capital ratio of Bank..... 8.50% 9.89% 8.85% 7.27% Core capital ratio of Bank......... 8.50% 9.89% 8.85% 7.27% Risk-based capital ratio of Bank... 27.53% 17.19% 16.36% 12.34% ASSET QUALITY DATA Nonaccrual loans, net(3)........... $1,439 $ 5,240 $ 5,835 $ 6,633 Real estate owned.................. -- 298 988 562 Total non-performing assets........ 1,439 5,538 6,823 7,195 Non-performing assets to total assets............................ 0.80% 3.47% 3.61% 2.31% Allowance for credit losses to loans held for investment......... 0.71% 3.98% 3.97% 4.37% SUBPRIME MORTGAGE FINANCE DATA Loan origination activities(4) Wholesale originations........... -- -- $58,456 $359,236 Retail originations.............. -- -- 13,055 219,386 ------ ------- ------- -------- Total loan originations........ -- -- $71,511 $578,622 Percent of loans secured by first mortgages....................... -- -- 95% 96% Weighted average initial loan-to- value ratio..................... -- -- 72% 75% Originations by product type Adjustable-rate mortgages...... -- -- 85% 82% Fixed-rate mortgages........... -- -- 15% 18% Weighted average interest rate Adjustable-rate mortgages...... -- -- 9.55% 9.48% Fixed-rate mortgages........... -- -- 10.76% 10.67% Average balance per loan......... -- -- $ 100 $ 104 Loans sold through whole loan transactions(5)................... -- -- $50,142 $360,210 Loan securitizations............... -- -- -- $114,904 Number of retail branches and wholesale loan centers............ -- -- 5 22 INSURANCE PREMIUM FINANCE DATA Loans originated................... -- $21,676 $99,012 $145,167 Number of loans originated......... -- 21,137 83,839 125,315 Average net yield on loans originated........................ -- 15.77% 13.62% 14.01% Average loan size at origination... -- $ 1.03 $ 1.18 $ 1.16 Net charge-offs to average loans(2)(6)....................... -- -- 0.39% 0.35% AUTOMOBILE FINANCE DATA Gross contracts purchased.......... -- -- $12,216 $ 44,056 Number of contracts purchased...... -- -- 1,177 4,187 Average discount on contracts purchased......................... -- -- 10.00% 9.79% Gross amount financed per contract.......................... -- -- $ 10.38 $ 10.52 Net charge-offs to average contracts(7)...................... -- -- 1.50% 4.94% Number of branches................. -- -- 4 10
(Footnotes on next page) 9 - -------- (1) Net income per share-diluted is based on the weighted average shares of Common Stock and Common Stock equivalents outstanding during the period adjusted for a 1,875-for-1 stock split effected in November 1997. Net income per share-basic is based on the weighted average shares of Common Stock outstanding during the period adjusted for the 1,875-for-1 stock split. (2) Information for the period from April 29, 1994 (Inception) through December 31, 1994 is annualized for comparability with full year information. (3) Nonaccrual loans are net of specific loss allowances. (4) Does not include conforming loans purchased from the RTC in the aggregate principal amount of $75.9 million and $57.2 million in the year ended December 31, 1995 and from April 29, 1994 (Inception) through December 31, 1994, respectively, and conforming loan originations of $4.5 million in the year ended December 31, 1995. (5) Does not include $3.5 million in conforming loan sales in the year ended December 31, 1995. (6) See "Business--Insurance Premium Finance--Servicing and Collection." (7) See "Business--Automobile Finance--Servicing and Collection." 10 ORGANIZATIONAL STRUCTURE The following chart illustrates the relationship between the Company and its principal operating subsidiaries and divisions prior to the Offering and certain sources of financing.
- ------------------- --------------------------- $2.0 million ---- United PanAm Capital Loan(1) Financial Corp. - ------------------- --------------------------- 100% Owned 100% Owned ----------------- ------------------ ------------------- United PanAm PanAmerican ------- $10.9 million Mortgage Corp. Financial, Inc. RTC Interim ----------------- ------------------ Capital Assistance Notes Payable(2) 100% Owned ------------------- ------------------- ------------------- $100 million Master Repurchase Pan American Bank, FSB Agreement(3) ------------------- ------------------- ------------------- Deposits and 100% Owned(4) FHLB Advances ------------------- -------------------- -------------------- United Auto Credit Insurance Premium Corporation Finance Division ------------------- --------------------
- -------- (1) See "Use of Proceeds" and Note 10 of Notes to Consolidated Financial Statements. (2) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--RTC Notes Payable" and "Use of Proceeds." (3) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Warehouse Line of Credit." (4) United Auto Credit Corporation has granted to certain key employees the right to purchase up to a 13.5% ownership interest in that corporation, subject to certain performance standards, and may, in the future, grant options to purchase an additional 1.5% interest. See "Management--Executive Compensation--Employment Agreements" and "--Certain Transactions." 11 RISK FACTORS This Prospectus contains forward-looking statements, including statements regarding the Company's strategies, plans, objectives, expectations and intentions, which are subject to a variety of risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward- looking statements as a result of certain factors, including those set forth in these "Risk Factors" and elsewhere in this Prospectus. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. Prospective investors should consider carefully the following factors, together with the other information contained in this Prospectus, in evaluating an investment in the Common Stock offered hereby. GENERAL LIMITED OPERATING HISTORY The Company purchased certain assets and assumed certain liabilities of Pan American Federal Savings Bank from the RTC in 1994. In 1995, the Company commenced its insurance premium finance business through a joint venture with BPN, and in 1996 the Company commenced its subprime mortgage and automobile finance businesses. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CREDIT-IMPAIRED BORROWERS Loans made to borrowers who cannot obtain financing from traditional lenders generally entail a higher risk of delinquency and default and higher losses than loans made to borrowers with better credit. Such loans also have a more limited secondary market than traditional loans. The actual rate of delinquencies, defaults and losses on such loans could be more dramatically affected by an economic slowdown or recession than those experienced in the financial services industry generally. Substantially all of the Company's mortgage and auto loans are made to individuals with impaired or limited credit histories, limited documentation of income or higher debt-to-income ratios than are permitted by traditional lenders. Although delinquencies, defaults and losses to date have not had a material adverse effect on the Company's financial condition, results of operations or business prospects, no assurance can be given that the Company's underwriting criteria and collection methods will continue to afford adequate protection against the higher risks associated with loans to such borrowers. If the Company experiences higher losses than anticipated, the Company's financial condition, results of operations and business prospects would be materially and adversely affected. NEED FOR ADDITIONAL FINANCING The Company's ability to maintain or expand its current level of lending activity will depend on the availability and terms of its sources of financing. The Company has funded its operations to date principally through deposits, FHLB advances and whole loan sales at the Bank. The Company completed its first securitization of mortgage loans in December 1997. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeds the carrying value of approximately $8.2 million at the date of sale. The Bank competes for deposits primarily on the basis of interest rates and, accordingly, the Bank could experience difficulty in attracting deposits if it does not continue to offer rates that are competitive with other financial institutions. Certificate of deposit accounts ("CDs") constituted $197.1 million or 84.5% of the Bank's total deposits at December 31, 1997, of which amount $181.9 million matures in one year or less. Increases in short-term CDs, which tend to be more sensitive to interest rate movements than core deposits, may cause the Bank's deposit base to be less stable than if it had a large amount of core deposits. Federal regulations restrict the Bank's ability to lend to affiliated companies and limit the amount of non-mortgage consumer loans that may be held by the Bank. Accordingly, the growth of the 12 Company's mortgage, insurance premium and automobile finance businesses will depend to a significant extent on the availability of additional sources of financing. There can be no assurance that the Company will be able to develop additional financing sources on acceptable terms or at all. To the extent the Bank is unable to maintain its deposits and the Company is unable to develop additional sources of financing, the Company will have to restrict its lending activities which would materially and adversely affect the Company's financial condition, results of operations and business prospects. In addition, the Company's ability to raise additional equity financing may be limited by the requirement that the Company repay the $10.9 million RTC interim capital assistance loan (the "RTC Notes Payable") if the Bank ceases to be a "minority-owned" business, as defined by the OTS, or Pan American Financial, Inc. ("PAFI") obtains a material portion of its permanent financing. Pursuant to the Company's loan agreement with the RTC, the Bank would cease to be a "minority-owned business" if 50% or more of its capital stock were owned or controlled by one or more non-minorities. Upon completion of the Offering (whether or not the underwriters' over-allotment option is exercised), 50% or more of the outstanding Common Stock is expected to be owned by minorities, assuming that no shares in the Offering are purchased by minorities. Therefore, the Company believes that, upon completion of the Offering, it will be a minority-owned business. Because all of the shares offered hereby will be sold by the Company, and no portion of the net proceeds is anticipated to be used to finance PAFI or the Bank, the Company believes that the Offering will not constitute permanent financing of PAFI. In addition, the Company has pledged the shares of the Bank as collateral for the RTC interim capital assistance loan. However, there can be no assurances that the RTC will not view the Offering as changing the "minority-owned" status of the Bank or constituting permanent financing of PAFI and require repayment of the RTC Notes Payable. In the event the Offering is deemed to change the "minority- owned" status of the Bank or constitute the permanent financing of PAFI, the Company will use $10.9 million of the net proceeds to repay the RTC Notes Payable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--RTC Notes Payable." CONCENTRATION OF BUSINESS IN CALIFORNIA The Company's lending activities are concentrated primarily in California and are likely to remain so for the foreseeable future. At December 31, 1997, 82.0% of the dollar amount of the Company's loans was related to collateral or borrowers located in California. The performance of these loans may be affected by changes in California's economic and business conditions, including its residential real estate market. In the recent past, the California economy has experienced a significant recession with a resulting decline in employment and the value of residential property. A decline in the value of residential real estate may adversely affect the value of the Company's collateral. In addition, California real estate is subject to certain natural disasters, such as earthquakes and erosion-caused mudslides, which are typically not covered by the standard hazard insurance policies maintained by borrowers. Uninsured disasters may render borrowers unable to repay loans made by the Company. The occurrence of adverse economic conditions or natural disasters in California could have a material adverse effect on the Company's financial condition, results of operations and business prospects. RELIANCE ON SYSTEMS AND CONTROLS The Company depends heavily upon its systems and controls, some of which have been designed specifically for a particular business, to support the evaluation, acquisition, monitoring, collection and administration of that business. There can be no assurance that these systems and controls, including those specially designed and built for the Company, are adequate or will continue to be adequate to support the Company's growth. A failure of the Company's automated systems, including a failure of data integrity or accuracy, could have a material adverse effect upon the Company's financial condition, results of operations and business prospects. RELIANCE ON KEY EMPLOYEES AND OTHERS The Company is dependent upon the continued services of its key employees, including Guillermo Bron, the Chairman of the Board, Lawrence J. Grill, President and Chief Executive Officer, John T. French, President and Chief Executive Officer of United PanAm Mortgage Corporation, and Ray C. Thousand, President and Chief Executive Officer of United Auto Credit Corporation, as well as the key employees of BPN. The loss of the services of any such employee, or the failure of the Company to attract and retain other qualified personnel, could 13 have a material adverse effect on the Company's financial condition, results of operations and business prospects. Although the Company has entered into employment agreements with certain key employees, including Messrs. Bron, Grill, French and Thousand, there can be no assurance that these agreements will be effective in retaining their services. See "Management." Mr. Bron, the Chairman of the Board of the Company, is an officer, director and principal stockholder of a general partner of Bastion Capital Fund, L.P., a private equity investment fund, and in such capacity, may have the power to direct the investments of such fund. Mr. Bron may have conflicts of interest in determining whether a potential acquisition or other business opportunity should be presented to the Company or to Bastion Capital Fund, L.P. or another affiliate of Mr. Bron. No assurance can be given that any such conflict will be resolved in favor of the Company. COMPETITION Each of the Company's businesses is highly competitive. Competition in the Company's markets can take many forms, including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and terms of the loan, loan origination fees and interest rates. Many of the Company's competitors are substantially larger and have considerably greater financial, technical and marketing resources than the Company. The Company's competitors in subprime mortgage finance include other consumer finance companies, mortgage banking companies, commercial banks, credit unions, savings associations and insurance companies. The Company competes in the insurance premium finance business with other specialty finance companies, independent insurance agents who offer premium finance services, captive premium finance affiliates of insurance companies and direct bill plans established by insurance companies. The Company competes in the subprime automobile finance industry with commercial banks, the captive finance affiliates of automobile manufacturers, savings associations and companies specializing in subprime automobile finance, many of which have established relationships with automobile dealerships and may offer dealerships or their customers other forms of financing, including dealer floor plan financing and lending, which are not offered by the Company. In attracting deposits, the Bank competes primarily with other savings institutions, commercial banks, brokerage firms, mutual funds, credit unions and other types of investment companies. The profitability of the Company's lending activities and the low barriers to entry could attract additional competitors. Certain large, national finance companies and mortgage originators have announced their intention to adapt their mortgage loan origination programs and allocate resources to the origination of subprime loans. The Company and its competitors may also face increasing competition from government-sponsored entities, such as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FHLMC currently purchases what it terms "Alternative-A" mortgage loans and has announced its intention to establish a program to purchase what it terms "A-" mortgage loans in the near future. In addition, FHLMC has expressed its intention to purchase so-called "B" and "C" mortgage loans in the future. FHLMC also has purchased securities backed by subprime mortgage loans and has re-securitized them for resale. Additional competition may lower the rates the Company can charge borrowers, reduce the volume of the Company's loan originations and increase demand for the Company's key employees and the potential that such employees will leave the Company for its competitors. Fluctuations in interest rates and general and localized economic conditions also may affect the competition the Company faces. Competitors with lower costs of capital have a competitive advantage over the Company. During periods of declining interest rates, competitors may solicit the Company's customers to refinance their loans. In addition, during periods of economic slowdown or recession, the Company's borrowers may face financial difficulties and be more receptive to offers of the Company's competitors to refinance their loans. As the Company expands into new geographic markets, it will face additional competition from lenders already established in these markets. There can be no assurance that the Company will be able to compete successfully with these lenders. 14 CHANGES IN INTEREST RATES The Company's results of operations depend to a large extent upon its net interest income, which is the difference between interest income on interest- earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. When interest-bearing liabilities mature or reprice more quickly than interest- earning assets in a given period, a significant increase in market rates of interest could have a material adverse effect on the Company's net interest income. Further, a significant increase in market rates of interest could adversely affect demand for the Company's financial products and services. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions, which are beyond the Company's control. The Company's liabilities generally have shorter terms and are more interest rate sensitive than its assets. Accordingly, changes in interest rates could have a material adverse effect on the profitability of the Company's lending activities. Adjustable-rate mortgage loans ("ARMs") totaled $472.4 million of the $578.6 million of mortgage loans originated by the Company during the twelve months ended December 31, 1997. The market values of ARMs are less sensitive to changes in market interest rates than are the market values of fixed-rate loans. The Company's ARMs generally are offered at an initial interest rate below the fully indexed interest rate at origination. There can be no assurance that the interest rate on these loans will reach the fully indexed rate if the loans are pre-paid or in the case of foreclosure. Further, although these loans are underwritten at the fully indexed rate at origination, borrowers may encounter financial difficulties as a result of increases in the interest rate over the life of the loan. Certain ARMs also may be subject to periodic or lifetime payment caps that result in a portion of the accrued interest being deferred and added to the outstanding principal. This could result in receipt by the Company of less cash income on its ARMs than it is required to pay on its related borrowings which do not have such payment caps. Because the Company does not believe that hedging against interest rate risks is cost-effective and because the Company sells a substantial portion of its loans on a regular basis, the Company currently does not use hedging strategies to mitigate interest rate risk. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Management of Interest Rate Risk." MANAGEMENT OF GROWTH The Company has experienced rapid growth in each of its businesses and intends to pursue growth for the foreseeable future, particularly in its mortgage and automobile finance businesses. In addition, the Company intends to broaden its product offerings to include additional types of consumer or, in the case of IPF, commercial loans. Further, the Company may enter other specialty finance businesses. This growth strategy will require additional capital, systems development and human resources. There can be no assurance that the Company will continue to (i) manage effectively its funding sources, information and operating systems and human resources, (ii) expand successfully and operate such businesses profitably, (iii) identify and hire qualified employees to support its expansion plans, or (iv) accomplish such expansion in a timely and cost-effective manner or, if achieved, that such expansion will result in profitable operations. The failure of the Company to implement its planned growth strategy would have a material adverse effect on the Company's financial condition, results of operations and business prospects. SECURITIZATIONS The Company completed its first securitization of mortgage loans in December 1997 and expects to sell or securitize mortgage loans on a periodic basis in the future. The Company will, in the future, consider the securitization of other financial assets. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeds the carrying value of approximately $8.2 million at the date of sale. The Company believes that the gain on sale from such securitizations could represent a significant portion of the Company's future revenues and net income. The Company's ability to complete securitizations will depend on a number of factors, including conditions in the securities markets generally, conditions in the asset-backed securities market specifically, the performance of the Company's portfolio of securitized loans and the Company's ability to obtain credit enhancement for its securitized loans. If the Company were unable to securitize profitably a sufficient number of its loans in a particular quarter, then the 15 Company's revenues for the quarter could decline, which could result in lower earnings or a loss reported for the quarter. In addition, delays in closing a securitization could require the Company to seek additional and alternative funding under current and future credit facilities in order to finance additional loan originations and purchases and could increase the Company's interest rate risk by increasing the period during which newly originated loans are held prior to sale and could increase the Company's interest expense. In a securitization, the Company sells loans that it has originated or purchased to a trust for a cash purchase price and an interest in the loans securitized, called "residual interests," which thereafter can be retained or sold. The cash portion of the purchase price in many cases will be less than the carrying value of the related loan. The Company will estimate the present value of the residual interests on its balance sheet, and will project the expected cash flows over the life of the residual interests, using prepayment and default assumptions that the Company believes that market participants would use for similar financial instruments that are subject to prepayment, credit and interest rate risks. The Company then will determine the present value of these cash flows using an interest rate believed by it to be commensurate with the risks involved. If the Company's actual experience differs materially from the assumptions used in the determination of the present value of the residual interests, future cash flows and earnings could be adversely affected. Furthermore, because the Company does not have meaningful loan performance data, the Company's assumptions will not be based on the actual performance of its loans but on available historical loss data for comparable portfolios of loans and the specific characteristics of the loans included in the Company's securitizations. No assurance can be given that the residual interests could be sold at their stated value, if at all. The assumptions used by the Company for valuing the residual interests in securitizations arising from its December 1997 securitization included a prepayment assumption of 5% for the first year increasing to 25% thereafter, an annual credit loss assumption of 0.75% and a discount rate of 15%. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeds the carrying value of approximately $8.2 million at the date of sale. No assurance can be given that the assumptions used by the Company for valuing the residual interests in its first securitization will be appropriate in connection with any subsequent securitization. The Company may rely on credit enhancements to guarantee or otherwise support senior certificates issued in securitizations. If the Company is unable to obtain credit enhancement in connection with the senior certificates, the Company might be unable to securitize its loans, which could have a material adverse effect on the Company's results of operations, financial condition and business prospects. Although alternative structures to securitizations may be available, there can be no assurance that the Company will be able to use these structures or that these structures will be economically viable for the Company. The Company's ability to obtain credit enhancement for its securitizations also may be adversely affected by poor performance of the Company's securitizations or the securitizations of others. The inability of the Company to complete securitizations for any reason could have a material adverse effect on the Company's results of operations, financial condition and business prospects. CHANGES IN GENERAL ECONOMIC CONDITIONS Each of the Company's businesses is affected directly by changes in general economic conditions, including changes in employment rates, prevailing interest rates and real wages. During periods of economic slowdown or recession, the Company may experience a decrease in demand for its financial products and services, an increase in its servicing costs, a decline in collateral values and an increase in delinquencies and defaults. A decline in collateral values and an increase in delinquencies and defaults increase the possibility and severity of losses. Because substantially all of the Company's loans are made to borrowers who generally cannot obtain financing from traditional lenders, its actual rates of delinquency, default and loss could be more dramatically affected by an economic slowdown or recession than those experienced in the financial services industry generally. Although the Company believes that its underwriting criteria and collection methods enable it to manage the higher risks inherent in loans made to such borrowers, no assurance can be given that such criteria or methods will afford adequate protection against such risks. Any sustained period of increased delinquencies, defaults or losses would materially and adversely affect the Company's financial condition, results of operations and business prospects. 16 YEAR 2000 COMPLIANCE Like most financial institutions, the Company's computer systems identify dates using only the last two digits of the year. These systems may recognize a date using "00" as the year 1900, rather than 2000. The Company is using both internal and external resources to identify, correct and test systems that may be affected by year 2000 dates. System identification is scheduled for completion by the end of the second quarter of 1998, with testing and implementation scheduled for completion during the last half of 1998 and in 1999. The Company believes that year 2000 compliance will not pose significant operational issues for the Company. However, the failure to implement timely year 2000 compliant systems could have a material adverse effect on the operations of the Company. Dependence on third party vendors could adversely affect the Company's efforts to successfully complete year 2000 compliance for all systems in a timely manner. The Company is requiring third party vendors to represent that their products are year 2000 compliant and will implement a program to test for compliance. Contingency plans are being developed in the event that a vendor is not able to provide timely year 2000 compliance. The Company has initiated formal communications with its significant customers and vendors to determine the extent to which the Company may be affected by the failure of these parties to correct their own year 2000 issues. No assurance can be given that the systems of third parties on which the Company relies will be corrected in a timely manner, or that a failure to correct the year 2000 issue by another party, or a correction that is incompatible with the Company's systems, will not have a material adverse effect on the Company. The Company is assessing the expense of year 2000 compliance and the potential effect on the Company's earnings. The Company does not believe that the costs of year 2000 compliance will be material. RISKS ASSOCIATED WITH MORTGAGE FINANCE DEPENDENCE ON WHOLE LOAN SALES FOR FUTURE EARNINGS The gain on sale generated by whole loan sales has represented and will continue to represent a significant source of the Company's earnings. During the twelve months ended December 31, 1997, UPAM sold approximately 62% of its loan originations in the whole loan secondary market to a limited number of institutional purchasers. The Company plans to sell a significant number of loans it originates through whole loan sales in the future. There can be no assurance that such purchasers will continue to purchase UPAM's loans, and UPAM's failure to replace successfully such loan purchasers, would have a material adverse effect on the Company's financial condition, results of operations and business prospects. Further, adverse conditions in the asset- backed securitization market could adversely affect the Company's ability to complete whole loan sales, as many of UPAM's whole loan purchasers securitize loans purchased from UPAM, as well as UPAM's ability to complete the securitization of its mortgage loans. During the twelve months ended December 31, 1997, UPAM sold loans to 16 institutional purchasers, four of which purchased approximately 78% of the total loans sold by UPAM in that period. CONTINGENT RISKS During the period that mortgage loans are held for sale, UPAM is subject to various risks associated with its lending business, including borrower default, foreclosure and the risk that a rapid increase in interest rates would result in a decline in the value of loans held for sale, thus reducing or eliminating any gain on sale on such loans. RISK OF DECLINING VALUE OF COLLATERAL The Company's mortgage finance business may be materially and adversely affected by declining real estate values. Any material decline in real estate values reduces the ability of borrowers to use home equity to support borrowings and increases the LTV of loans previously made by the Company, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a default. Further, delinquencies, foreclosures 17 and losses generally increase during an economic slowdown or recession. Because UPAM targets borrowers who generally are unable to obtain mortgage financing from traditional lenders, the actual rates of delinquency, foreclosure and loss on such loans could be higher under adverse economic conditions than those experienced in the mortgage finance industry in general. Any sustained period of increased delinquencies, foreclosures or losses could materially and adversely affect the Company's financial condition, results of operations and business prospects. DEPENDENCE ON INDEPENDENT MORTGAGE BROKERS UPAM depends primarily on independent mortgage brokers for the origination and purchase of its wholesale mortgage loans, which constitute the largest portion of its total loan production. These independent mortgage brokers deal with multiple lenders for each prospective borrower. UPAM competes with these lenders for the independent brokers' business on price, service, loan fees, costs and other factors. UPAM's competitors also seek to establish relationships with such brokers who are not obligated by contract or otherwise to do business with it. The Company's financial condition, results of operations and business prospects could be adversely affected by changes in the volume and profitability of UPAM's wholesale loans resulting from, among other things, competition with other lenders and purchasers of such loans. ELIMINATION OF LENDER PAYMENTS TO BROKERS Class-action lawsuits have been filed against a number of mortgage lenders alleging that such lenders have violated the federal Real Estate Settlement Procedures Act of 1974 ("RESPA") and engaged in unfair practices by making certain payments to independent mortgage brokers. These lawsuits generally have been filed on behalf of a purported nationwide class of borrowers and allege that payments made by a lender to a broker in addition to payments made by the borrower to a broker are prohibited by RESPA and, therefore, illegal. If these cases are resolved against the lenders, it may cause an industry-wide change in the way independent mortgage brokers are compensated. UPAM's broker compensation arrangements permit such payments. Future regulatory interpretations or judicial decisions may require UPAM to change its broker compensation programs or subject it to material monetary judgments or other penalties. Any such changes or penalties may have a material adverse effect on the Company's financial condition, results of operations and business prospects. Although UPAM has not been named in any such class-action lawsuit, there can be no assurance that UPAM will not subsequently be named in these or similar lawsuits. ENVIRONMENTAL LIABILITIES The Company may acquire real property securing mortgage loans that are in default, and there is a risk that hazardous substances or waste, contaminants or pollutants could be discovered on such properties after the Company acquires them. The Company may be required to remove such substances from the affected properties at its expense, and the cost of such removal may substantially exceed the value of the affected properties or the loans secured by such properties. Furthermore, the Company may not have adequate remedies against the prior owners or other responsible parties to recover its costs. Finally, the Company may find it difficult or impossible to sell the affected properties either prior to or following any such removal. GOVERNMENT REGULATION The subprime mortgage industry is highly regulated. UPAM is subject to extensive and complex rules and regulations of, and examinations by, various federal, state and local government authorities. These rules and regulations impose obligations and restrictions on UPAM's loan originations, credit activities and secured transactions. In addition, these rules may limit the interest rates, finance charges and other fees UPAM may assess, mandate extensive disclosure to its customers, prohibit discrimination and impose multiple qualification and licensing obligations on UPAM. Certain of UPAM's loan origination activities may be subject to the laws and regulations of the states in which those activities are conducted. UPAM's lending activities are also subject to various federal laws, including the Truth in Lending Act ("TILA"), the Homeownership and Equity 18 Protection Act of 1994 ("High Cost Mortgage Act"), the Equal Credit Opportunity Act ("ECOA"), the Fair Credit Reporting Act ("FCRA"), RESPA and the Home Mortgage Disclosure Act ("HMDA"). Failure to comply with any of these laws may result in, among other things, demands for indemnification or mortgage loan repurchases, certain rights of rescission for mortgage loans, class action lawsuits, administrative enforcement actions and civil and criminal liability. The laws, rules and regulations applicable to the Company's mortgage finance business are subject to change. In addition, various laws, rules and regulations currently are proposed, which, if adopted, could affect UPAM. There can be no assurance that these proposed laws, rules and regulations, or other such laws, rules or regulations, will not be adopted in the future. Such adoption could make compliance more difficult or expensive, restrict UPAM's ability to originate, broker, purchase or sell loans, further limit or restrict the amount of commissions, interest and other charges earned on loans originated, brokered, purchased or sold by UPAM, or otherwise materially and adversely affect the Company's financial condition, results of operations and business prospects. See "Business--Supervision and Regulation--Regulation of Mortgage Finance Operation." UPAM's loans currently are originated and funded by the Bank. Current federal regulations generally provide that the Bank is not subject to state law limits on its lending operations, other than certain California limits on charges that are deemed to be "interest" under federal regulations. It is contemplated that the Company's mortgage lending operations in the future will be conducted by United PanAm Mortgage Corporation. At such time, the Company's mortgage lending operations will become subject to state law limits in each state in which it originates mortgage loans. EFFECT OF ELIMINATION OF MORTGAGE INTEREST DEDUCTION Government officials, including members of Congress, have from time to time suggested the elimination of the mortgage interest deduction for federal income tax purposes or other action, such as a flat tax or a national sales tax in substitution for the existing income tax system. Because many of UPAM's loans are made to borrowers for the purpose of consolidating consumer debt or financing other consumer needs, the competitive advantages of tax deductible interest, when compared with alternative sources of consumer financing, could be eliminated or seriously impaired by such government action. Accordingly, the reduction or elimination of these tax benefits could have a material adverse effect on the demand for loans of the kind offered by UPAM. RISKS ASSOCIATED WITH INSURANCE PREMIUM FINANCE DEPENDENCE ON INDEPENDENT INSURANCE AGENTS IPF depends primarily on independent insurance agents for the origination of insurance premium finance contracts. These independent insurance agents deal with multiple lenders for each prospective borrower. IPF competes with these lenders for the independent agents' business on price, service, loan fees, costs and other factors. IPF's competitors also seek to establish relationships with such agents, who are not obligated by contract or otherwise to do business with IPF. For the twelve months ended December 31, 1997, two insurance agents located in Southern California accounted for approximately 12.2% and 20.8%, respectively, of the aggregate number of insurance premium finance contracts entered into by IPF. The loss of a substantial portion of the business of either of these agents would have a material adverse effect on the Company's financial condition, results of operations and business prospects. In addition, the Company's financial condition, results of operations and business prospects could be adversely affected by changes in the volume and profitability of IPF resulting from, among other things, competition from other lenders for business from independent insurance agents. RISK OF CONTRACT LOSSES Each insurance premium finance contract is designed to ensure that at any point during the term of the underlying insurance policy, the unearned premium under the policy exceeds the unpaid principal under the contract. However, in the event of a default, the unearned premium may not provide IPF full reimbursement of interest, fees and other charges. In addition, the insurance company may default and fail to remit the unearned 19 premium, and a delay in processing a claim for the return of the unearned premium may cause IPF to incur a loss. Moreover, any delay in IPF's cancellation of a policy would result in declining collateral protection and an increase in IPF's risk of loss. Although contract losses to date have not had a material adverse effect on the Company's financial condition, results of operations or business prospects, no assurance can be given that IPF will not suffer material losses in the future as a result of defaults under insurance premium finance contracts. See "Business--Insurance Premium Finance--Operating Summary." GOVERNMENT REGULATION IPF is subject to California regulation. This regulatory structure requires certain disclosures, notices and collection procedures with respect to loans made to finance insurance premiums. Such state regulations also require that certain disclosures be delivered by the insurance agent or broker or other person arranging for such credit. IPF's activities also are subject to certain federal statutes, including TILA. Any failure of the Company or BPN to comply with any of the laws and regulations to which they are subject, or any change in the regulatory structure or the applicable statutes, regulations or interpretations of such laws and regulations, could have a material adverse effect on the Company's and BPN's respective financial condition, results of operations and business prospects. See "Business--Supervision and Regulation-- Regulation of Insurance Premium Finance Companies." RELIANCE ON BPN IPF is dependent upon the continued services of BPN and its key employees. The loss by IPF of the services of BPN or of the services of any such employee, or the failure of BPN to attract and retain other qualified personnel, could have a material adverse effect on the Company's financial condition, results of operations and business prospects. See "Business-- Insurance Premium Finance--Relationship with BPN." RISKS ASSOCIATED WITH AUTOMOBILE FINANCE RISK OF DECLINING VALUE OF COLLATERAL The value of the collateral securing UACC's auto contracts is subject to various risks, including uninsured damage, change in location or decline in value caused by use or age. Any material decline in the value of the collateral could result in a loss to UACC in the event of a default on the auto contract. DEPENDENCE ON DEALER RELATIONSHIPS The ability of UACC to expand into new geographic markets and to maintain or increase its volume of auto contracts is dependent upon maintaining and expanding the network of automobile dealers from which it purchases contracts. UACC's loss of any of its branch managers could materially and adversely affect its relationships with dealers doing business with that branch and, thereby, result in fewer opportunities to purchase contracts. Increased competition, including competition from captive finance affiliates of automobile manufacturers, could have a material adverse effect on UACC's ability to maintain or expand its dealer network. See "Business--Automobile Finance--Subprime Automobile Finance Industry," "--Sales and Marketing" and "Business--Competition." GOVERNMENT REGULATION AND LITIGATION UACC is subject to numerous federal and state consumer protection laws and regulations which are subject to change. An adverse change in or interpretation of existing laws or regulations, the promulgation of any new laws or regulations, or the failure to comply with any of such laws and regulations could have a material adverse effect on the Company's financial condition, results of operations and business prospects. See "Business-- Supervision and Regulation--Regulation of Subprime Automobile Lending." Given the consumer-oriented nature of the subprime automobile finance industry, industry participants from time to time are named as defendants in litigation involving alleged violations of federal and state consumer 20 protection or other similar laws and regulations. A judgment against the Company in connection with any such litigation could have a material adverse effect on the Company's financial condition, results of operations and business prospects. In addition, the determination that an automobile dealer failed to comply with applicable laws or that any auto contracts purchased by UACC involved violations of applicable law could have a material adverse effect on the Company's financial condition, results of operations and business prospects. See "Business--Supervision and Regulation--Regulation of Subprime Automobile Lending." RISKS ASSOCIATED WITH THE BANK FINANCIAL INSTITUTION REGULATION Both the Company, as a savings and loan holding company, and the Bank, as a federal savings bank, are subject to significant regulation by the federal government. Statutes and regulations now affecting the Company or the Bank may be changed at any time, and the interpretation of these statutes and regulations by federal regulatory authorities also is subject to change. Changes in federal statutes and regulations affecting federal savings banks and their holding companies could, among other matters, materially alter the powers of and opportunities available to the Bank, the Company and its subsidiaries. There can be no assurance that future changes in such statutes and regulations or in their interpretation will not adversely affect the Company's financial condition, results of operations and business prospects. As a savings and loan holding company, the Company is subject to supervision and examination from time to time by the Office of Thrift Supervision ("OTS"). As a federal savings bank, the Bank is subject to supervision and examination from time to time by the OTS, its primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), as administrator of the Savings Association Insurance Fund ("SAIF"), of which the Bank is a member. Any failure by the Company or the Bank to comply with any of the laws and regulations to which it is subject, or any change in the regulatory structure or the applicable statutes, regulations or interpretations of such laws and regulations, by the OTS, the FDIC or the Congress, could have a material adverse effect on the Company or the Bank, and on the Company's financial condition, results of operations and business prospects. See "Business-- Supervision and Regulation--Holding Company Regulation" and "--Federal Savings Bank Regulation." RISKS ASSOCIATED WITH THE COMPANY AND THE OFFERING CONTROL BY EXISTING SHAREHOLDERS Upon completion of the Offering, Pan American Financial, L.P. ("PAFLP") will own an aggregate of approximately 52.8% of the outstanding shares of Common Stock (approximately 50.3% assuming the exercise of the Underwriters' over- allotment option in full). Accordingly, PAFLP will have the ability to approve any matter submitted to a vote of the Company's shareholders (including mergers, consolidations and sales of assets) and to elect all members of the Board of Directors. See "Principal Shareholders" and "Management." ANTI-TAKEOVER PROVISIONS The Company's Articles of Incorporation (the "Articles") and Bylaws (the "Bylaws") include provisions that could delay, defer or prevent a takeover attempt that may be in the best interests of shareholders. These provisions include the ability of the Board of Directors to issue up to 2,000,000 shares of Preferred Stock without any further shareholder approval and requirements that (i) any action required to be taken or that may be taken at any meeting of the Company's shareholders may only be taken at a meeting of shareholders or by the written consent of the holders of two-thirds of the outstanding voting shares, (ii) shareholders give advance notice with respect to nomination of candidates for election as directors and certain proposals they may wish to present for a shareholder vote and (iii) special meetings of shareholders may only be called by the Company's Board of Directors, Chairman of the Board, Chief Executive Officer, or at the written request of holders of not less than 10% of the Company's voting shares. In addition, certain provisions of the Articles and the Bylaws, including provisions governing the required vote for shareholder action without a meeting, the classification of the Board of Directors, the elimination of cumulative voting and indemnification of directors, officers and others, can only be amended by the affirmative vote of the holders of at least two-thirds of the outstanding voting shares. The 21 issuance of Preferred Stock in certain circumstances may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the current market price of the Common Stock and may adversely affect the market price, and the voting and other rights of the holders, of Common Stock. See "Description of Capital Stock." ABSENCE OF PUBLIC MARKET There currently is no trading market for the Common Stock. Although the Company has applied for quotation of the Common Stock on the Nasdaq National Market ("Nasdaq"), there can be no assurance that an active public trading market for the Common Stock will develop after the Offering or that, if developed, will be sustained. The initial public offering price of the Common Stock offered hereby will be determined by negotiations among the Company and representatives of the Underwriters and may not be indicative of the price at which the Common Stock will trade after the Offering. See "Underwriting." Accordingly, there can be no assurance that the market price for the Common Stock will not fall below the initial public offering price. POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Common Stock may experience fluctuations that are unrelated to the operating performance of the Company. In particular, the price of the Common Stock may be affected by general market price movements as well as developments specifically related to the consumer finance industry and the financial services sector, including interest rate movements, quarterly variations or changes in financial estimates by securities analysts and a significant reduction in the price of the stock of another participant in the consumer finance industry. In addition, the Company's quarterly operating income depends significantly upon the successful completion of sales by UPAM of its loans, and the Company's inability to complete these transactions in a particular quarter may have a material adverse effect on the Company's results of operations for that quarter and, accordingly, could materially and adversely affect the price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 16,450,000 shares of Common Stock. The 5,500,000 shares of Common Stock offered hereby (6,325,000 shares if the Underwriters' over-allotment option is exercised in full) will be immediately eligible for sale in the public market without restriction beginning on the date of this Prospectus. Future sales of substantial amounts of Common Stock after the Offering, or the perception that such sales could occur, could have a material adverse effect on the market price of the Common Stock. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for further sale, will have on the market price of the Common Stock. Additionally, 2,287,500 shares of Common Stock are reserved for issuance under the Stock Incentive Plan of which 1,580,000 were subject to options outstanding as of March 31, 1998 and 170,000 shares are subject to options to be granted concurrently with the completion of the Offering. The Company intends to file a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), to register such shares of Common Stock reserved for issuance under the Stock Incentive Plan, thus permitting the resales of such shares by non-affiliates in the public market without restriction under the Securities Act. The remaining 10,950,000 shares of Common Stock held by existing shareholders are "restricted securities," as that term is defined in Rule 144 promulgated under the Securities Act, and are eligible for sale subject to the holding period, volume and other limitations imposed thereby. See "Description of Capital Stock--Shares Eligible for Future Sale." The Company, certain existing shareholders of the Company and the executive officers and directors of the Company have agreed with the Underwriters that, subject to certain exceptions, for a period of 180 days following the commencement of the Offering, they will not sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to acquire such shares (other than pursuant to employee plans) without the prior written consent of NationsBanc Montgomery Securities LLC on behalf of the Underwriters. See "Underwriting." 22 SUBSTANTIAL AND IMMEDIATE DILUTION The initial public offering price will be substantially higher than the net tangible book value per share of the Common Stock. Investors purchasing shares of Common Stock in the Offering will be subject to immediate dilution of $6.53 per share in net tangible book value assuming an initial public offering price of $10.50 per share (the mid-point of the filing range set forth on the cover of this Prospectus). See "Dilution." ABSENCE OF DIVIDENDS The Company has never paid a cash dividend on the Common Stock. The Company currently intends to retain any future earnings to provide funds for the operation and expansion of its businesses and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions on the payment of dividends and general business conditions. See "Dividend Policy." Federal regulations restrict the Bank's ability to declare or pay any dividends to the Company. See "Business--Supervision and Regulation--Federal Savings Bank Regulation--Limitation on Capital Distributions." In addition, certain interim capital assistance loan agreements among the Bank, PAFI and the RTC prohibit the Bank from declaring or paying any dividends, except under limited circumstances, until all of the obligations of the Bank and PAFI to the RTC have been discharged. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--RTC Notes Payable." USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 5,500,000 shares of Common Stock offered hereby (after deducting the estimated underwriting discount and Offering expenses) are estimated to be $52.8 million ($60.8 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $10.50 per share (the mid- point of the filing range set forth on the cover of this Prospectus). The net proceeds of the Offering will be used primarily for general corporate purposes, including financing the growth of the Company's existing businesses, with particular emphasis on the expansion of UPAM and the development or acquisition of other specialty finance businesses. See "Business--Business Strategy." In addition, the Company intends to use $2.0 million of the net proceeds of the Offering to repay the Company's indebtedness to certain of its existing shareholders, which indebtedness was incurred subsequent to July 1, 1997 to finance the establishment and operations of United PanAm Mortgage Corporation. Such indebtedness bears interest at 8% per year (which interest is payable on July 15, 1998 and June 30, 1999) and the entire unpaid principal is payable on June 30, 1999. See "Management--Certain Transactions." In the event the Offering is deemed by the RTC to change the "minority-owned" status of the Bank or constitute the permanent financing of PAFI for purposes of the RTC loan agreements, the Company will use $10.9 million of the net proceeds to repay the RTC Notes Payable. All of the shares offered hereby will be sold by the Company, and no portion of the net proceeds is anticipated to be used to finance PAFI or the Bank. Therefore, the Company believes that the Offering will not constitute permanent financing of PAFI. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--RTC Notes Payable." 23 DIVIDEND POLICY The Company has never paid a cash dividend on the Common Stock. The Company currently intends to retain any future earnings to provide funds for the operation and expansion of its businesses and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions on the payment of dividends and general business conditions. Federal regulations restrict the Bank's ability to declare or pay any dividends to the Company. See "Business--Supervision and Regulation--Federal Savings Bank Regulation--Limitation on Capital Distributions." In addition, certain interim capital assistance loan agreements among the Bank, PAFI and the RTC prohibit the Bank from declaring or paying any dividends, except under limited circumstances, until all of the obligations of the Bank and PAFI to the RTC have been discharged. See "Risk Factors--Risks Associated With the Company and the Offering--Absence of Dividends" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--RTC Notes Payable." DILUTION At December 31, 1997, the net tangible book value of the Company was approximately $12.6 million, or $1.15 per share of Common Stock. Net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities divided by the number of shares of Common Stock outstanding. Net tangible book value dilution represents the difference between the amount per share paid by purchasers in the Offering and the net tangible book value per share after the Offering. Without taking into account any changes in net tangible book value after December 31, 1997, other than to give effect to the sale by the Company of the 5,500,000 shares of Common Stock offered hereby, assuming an initial public offering price of $10.50 per share (the mid-point of the filing range set forth on the cover of this Prospectus) and after deducting the estimated underwriting discount and Offering expenses, the net tangible book value of the Company at December 31, 1997 would have been approximately $65.3 million, or $3.97 per share. This represents an immediate increase in net tangible book value of $2.82 per share to the existing shareholders and an immediate net tangible book value dilution of $6.53 per share to purchasers in the Offering, as illustrated by the following table. Assumed initial public offering price............................. $10.50 Net tangible book value per share at December 31, 1997........... $1.15 Increase in net tangible book value per share attributable to new investors....................................................... 2.82 ----- Net tangible book value per share after the Offering.............. 3.97 ------ Dilution to new investors......................................... $ 6.53 ======
The following table summarizes as of December 31, 1997 the differences between the number of shares of Common Stock purchased from the Company, the total cash consideration paid and the average price per share paid by the existing shareholders and to be paid by the investors purchasing shares of Common Stock in the Offering assuming the sale of 5,500,000 shares by the Company at an assumed initial public offering price of $10.50 per share (the mid-point of the filing range set forth on the cover of this Prospectus) and before deducting the estimated underwriting discount and Offering expenses.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing shareholders.......... 10,950,000 66.6% $ 5,237,000 8.3% $ 0.48 New investors.................. 5,500,000 33.4% 57,750,000 91.7% $10.50 ---------- ----- ----------- ----- Total...................... 16,450,000 100.0% $62,987,000 100.0% ========== ===== =========== =====
24 CAPITALIZATION The following table sets forth the consolidated capitalization and certain ratios of the Company and the Bank's regulatory capital ratios at December 31, 1997, and as adjusted to give effect to the sale of Common Stock offered hereby.
AS OF DECEMBER 31, 1997 ------------------------- AS ACTUAL ADJUSTED ----------- ------------ (DOLLARS IN THOUSANDS) Long-term borrowings Shareholder notes payable due 1999................. $ 2,000 $ -- RTC notes payable due 1999......................... 10,930 10,930 ----------- ----------- Total long-term borrowings........................... 12,930 10,930 ----------- ----------- Shareholders' equity Preferred Stock: 2,000,000 shares authorized; no shares outstanding................................ -- -- Common Stock : 20,000,000 shares authorized; 10,950,000 shares outstanding; 16,450,000 shares as adjusted....................................... 110 165 Additional paid-in capital......................... 5,127 57,830 Retained earnings.................................. 7,772 7,772 ----------- ----------- Total shareholders' equity........................... 13,009 65,767 ----------- ----------- Total capitalization................................. $ 25,939 $ 76,697 =========== =========== Ratio of equity to assets............................ 4.19% 18.19% Regulatory capital ratios of the Bank(1) Leverage........................................... 7.27% 7.27% Tier 1 risk-based.................................. 11.07% 11.07% Total risk-based................................... 12.34% 12.34%
- -------- (1) For regulatory capital purposes, the Bank includes the $10.9 million of RTC Notes Payable as equity capital. As adjusted numbers assume no capital contribution of net Offering proceeds to the Bank. 25 SELECTED CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated financial and other data of the Company at the dates and for the periods indicated. The selected consolidated financial and other data should be read in conjunction with, and is qualified in its entirety by reference to, the information in the consolidated financial statements and related notes set forth elsewhere herein. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APRIL 29, 1994 (INCEPTION) AT OR FOR THE THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------------------- 1994 1995 1996 1997 -------------- -------- -------- -------- STATEMENT OF OPERATIONS DATA Interest income................... $ 6,882 $ 13,533 $ 16,561 $ 26,511 Interest expense.................. 3,573 7,727 7,853 12,411 -------- -------- -------- -------- Net interest income............. 3,309 5,806 8,708 14,100 Provision for loan losses......... 50 120 194 507 -------- -------- -------- -------- Net interest income after provision for loan losses...... 3,259 5,686 8,514 13,593 -------- -------- -------- -------- Non-interest income Gain on sale of loans........... 3 90 2,333 26,526 Other non-interest income....... 95 228 443 702 -------- -------- -------- -------- Total non-interest income..... 98 318 2,776 27,228 -------- -------- -------- -------- Non-interest expense Compensation and benefits....... 1,564 2,750 5,248 19,043 SAIF special assessment......... -- -- 820 -- Other expense................... 1,579 2,412 3,581 11,039 -------- -------- -------- -------- Total non-interest expense.... 3,143 5,162 9,649 30,082 -------- -------- -------- -------- Income before income taxes........ 214 842 1,641 10,739 Income taxes...................... 98 384 691 4,491 -------- -------- -------- -------- Net income........................ $ 116 $ 458 $ 950 $ 6,248 ======== ======== ======== ======== Net income per share--basic (1)... $ 0.01 $ 0.04 $ 0.09 $ 0.58 ======== ======== ======== ======== Net income per share--diluted (1).............................. $ 0.01 $ 0.04 $ 0.09 $ 0.53 ======== ======== ======== ======== Weighted average shares outstanding--basic (1)........... 10,669 10,669 10,669 10,739 ======== ======== ======== ======== Weighted average shares outstanding--diluted (1)......... 10,669 10,669 10,669 11,875 ======== ======== ======== ======== BALANCE SHEET DATA Total assets...................... $180,024 $159,581 $188,743 $310,842 Loans............................. 53,176 131,794 134,821 148,535 Loans held for sale............... -- -- 20,766 120,002 Allowance for loan losses......... (378) (5,250) (5,356) (6,487) Deposits.......................... 163,114 141,924 159,061 233,194 Notes payable..................... 10,930 10,930 10,930 12,930 FHLB advances..................... -- -- 4,000 28,000 Warehouse line of credit.......... -- -- -- 6,237 Stockholders' equity.............. 5,270 5,811 6,761 13,009
26
APRIL 29, 1994 (INCEPTION) AT OR FOR THE YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, -------------------------- 1994 1995 1996 1997 -------------- ------- ------- -------- OPERATING DATA Return on average assets(2)........ 0.11% 0.27% 0.56% 2.48% Return on average stockholders' equity(2)......................... 3.44% 8.51% 16.10% 71.84% Net interest margin................ 3.24% 3.61% 5.44% 6.07% Stockholders' equity to assets..... 2.93% 3.64% 3.58% 4.19% Tangible capital ratio of Bank..... 8.50% 9.89% 8.85% 7.27% Core capital ratio of Bank......... 8.50% 9.89% 8.85% 7.27% Risk-based capital ratio of Bank... 27.53% 17.19% 16.36% 12.34% ASSET QUALITY DATA Nonaccrual loans, net(3)........... $1,439 $ 5,240 $ 5,835 $ 6,633 Real estate owned.................. -- 298 988 562 Total non-performing assets........ 1,439 5,538 6,823 7,195 Non-performing assets to total assets............................ 0.80% 3.47% 3.61% 2.31% Allowance for credit losses to loans held for investment......... 0.71% 3.98% 3.97% 4.37% SUBPRIME MORTGAGE FINANCE DATA Loan origination activities(4) Wholesale originations........... -- -- $58,456 $359,236 Retail originations.............. -- -- 13,055 219,386 ------ ------- ------- -------- Total loan originations........ -- -- $71,511 $578,622 Percent of loans secured by first mortgages....................... -- -- 95% 96% Weighted average initial loan-to- value ratio..................... -- -- 72% 75% Originations by product type Adjustable-rate mortgages...... -- -- 85% 82% Fixed-rate mortgages........... -- -- 15% 18% Weighted average interest rate Adjustable-rate mortgages...... -- -- 9.55% 9.48% Fixed-rate mortgages........... -- -- 10.76% 10.67% Average balance per loan......... -- -- $ 100 $ 104 Loans sold through whole loan transactions(5)................... -- -- $50,142 $360,210 Loan securitizations............... -- -- -- $114,904 Number of retail branches and wholesale loan centers............ -- -- 5 22 INSURANCE PREMIUM FINANCE DATA Loans originated................... -- $21,676 $99,012 $145,167 Number of loans originated......... -- 21,137 83,839 125,315 Average net yield on loans originated........................ -- 15.77% 13.62% 14.01% Average loan size at origination... -- $ 1.03 $ 1.18 $ 1.16 Net charge-offs to average loans(2)(6)....................... -- -- 0.39% 0.35% AUTOMOBILE FINANCE DATA Gross contracts purchased.......... -- -- $12,216 $ 44,056 Number of contracts purchased...... -- -- 1,177 4,187 Average discount on contracts purchased......................... -- -- 10.00% 9.79% Gross amount financed per contract.......................... -- -- $ 10.38 $ 10.52 Net charge-offs to average contracts(7) ..................... -- -- 1.50% 4.94% Number of branches................. -- -- 4 10
(Footnotes on next page) 27 - -------- (1) Net income per share - basic is based on the weighted average shares of Common Stock outstanding during the period adjusted for the 1,875-for-1 stock split effective in November 1997. Net income per share - diluted is based on the weighted average shares of Common Stock and Common Stock equivalents outstanding during the period adjusted for a 1,875-for-1 stock split effective in November 1997. (2) Information for the period from April 29, 1994 (Inception) to December 31, 1994 is annualized for comparability with full year information. (3) Nonaccrual loans are net of specific loss allowances. (4) Does not include conforming loans purchased from the RTC in the aggregate principal amount of $75.9 million and $57.2 million in the year ended December 31, 1995 and from April 29, 1994 (Inception) through December 31, 1994, respectively, and conforming loan originations of $4.5 million in the year ended December 31, 1995. (5) Does not include $3.5 million in conforming loan sales in the year ended December 31, 1995. (6) See "Business--Insurance Premium Finance--Servicing and Collection." (7) See "Business--Automobile Finance--Servicing and Collection." The following table presents summary consolidated financial and other data of the Company for the quarters indicated.
FOR THE QUARTER ENDED ---------------------------------------------------------- DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1997 1997 1997 1997 ------------ --------- -------- ------------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA Net interest income.... $ 2,344 $ 2,766 $ 3,511 $ 3,844 $ 3,979 Provision for loan losses................ 96 94 285 66 62 ------- ------- -------- -------- -------- Net interest income after provision for loan losses........... 2,248 2,672 3,226 3,778 3,917 ------- ------- -------- -------- -------- Non-interest income Gain on sale of loans................ 1,479 2,380 4,697 8,183 11,266 Other non-interest income............... 129 143 179 201 179 ------- ------- -------- -------- -------- Total non-interest income.............. 1,608 2,523 4,876 8,384 11,445 ------- ------- -------- -------- -------- Non-interest expense... 3,843 4,800 6,496 7,989 10,797 ------- ------- -------- -------- -------- Income before income taxes................. 13 395 1,606 4,173 4,565 Income taxes........... (7) 162 666 1,752 1,911 ------- ------- -------- -------- -------- Net income............. $ 20 $ 233 $ 940 $ 2,421 $ 2,654 ======= ======= ======== ======== ======== Net income per share - basic (1)............. $ -- $ 0.02 $ 0.09 $ 0.23 $ 0.24 ======= ======= ======== ======== ======== Net income per share - diluted (1)........... $ -- $ 0.02 $ 0.08 $ 0.21 $ 0.22 ======= ======= ======== ======== ======== Weighted average shares outstanding - basic (1)............. 10,669 10,669 10,669 10,669 10,950 ======= ======= ======== ======== ======== Weighted average shares outstanding - diluted (1)................... 10,669 11,099 11,126 11,126 12,103 ======= ======= ======== ======== ======== OTHER DATA Mortgage loan originations.......... $34,796 $67,337 $108,481 $161,061 $241,743 Mortgage loans sold or securitized........... $28,162 $40,254 $ 92,463 $140,363 $202,034 Insurance premium finance loan originations.......... $25,563 $43,304 $ 41,951 $ 31,864 $ 28,048 Automobile installment contracts purchased... $ 5,351 $ 7,686 $ 9,520 $ 12,236 $ 14,813
- -------- (1) Net income per share - basic is based on the weighted average shares of Common Stock outstanding during the period adjusted for the 1,875-for-1 stock split effective in November 1997. Net income per common share is based on the weighted average shares of Common Stock and Common Stock equivalents outstanding during the period adjusted for a 1,875-for-1 stock split effective in November 1997. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains forward-looking statements, including statements regarding the Company's strategies, plans, objectives, expectations and intentions, which are subject to a variety of risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. GENERAL The Company is a diversified specialty finance company engaged primarily in originating and acquiring for investment or sale residential mortgage loans, personal automobile insurance premium finance contracts and retail automobile installment sales contracts. The Company targets customers who generally cannot obtain financing from traditional lenders. These customers usually pay higher loan origination fees and interest rates than those charged by traditional lenders to gain access to consumer financing. The Company believes that management's experience in originating, assessing, pricing and managing credit risk enables the Company to earn attractive risk-adjusted returns. Finance companies generate income from a combination of (i) "spread" or "net interest" income (i.e., the difference between the yield on loans, net of loan losses, and the cost of funding) and (ii) "non-interest" income (i.e., the fees paid for various services and gain on the sale of loans). Income is used to cover operating expenses incurred (i.e., compensation and benefits, occupancy and other expenses) in generating that income. Each of the Company's businesses, as described below, reflects a combination of spread and non- interest income. MORTGAGE FINANCE From its inception in January 1996 to July 1997, the Company's residential mortgage finance business was conducted solely through the Bank. As a federally chartered savings bank, the Bank's residential mortgage finance business is generally exempt from state licensing requirements. In January 1997, the Company organized United PanAm Mortgage Corporation. Pending receipt of its requisite state licenses, this subsidiary, as agent of the Bank, markets loans made by the Bank under the Company's mortgage finance program pursuant to an operating agreement between the subsidiary and the Bank. However, the Company does not anticipate that the failure to obtain such licensing would have a material effect on the conduct of its mortgage finance business because in such event the Bank will continue to conduct the Company's mortgage lending operations. After obtaining all required licensing, the mortgage operations will be operated entirely by United PanAm Mortgage Corporation. The Company has funded its mortgage finance business to date primarily through the Bank's deposits, FHLB advances, the sale of its mortgage loan originations to mortgage companies and investors through whole loan packages offered for bid several times per month and to a lesser extent, from a loan securitization. In October 1997, the Bank obtained a $100 million master repurchase agreement to supplement the Bank's existing financing sources and fund the anticipated growth of its mortgage lending business. The Company completed its first securitization of mortgage loans in December 1997 and expects to sell or securitize mortgage loans on a periodic basis in the future. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeds the carrying value of approximately $8.2 million at the date of sale. The Company will continue to evaluate both whole loan sales and securitizations as a means to finance its loan originations. The Company has sold or securitized a substantial majority of its mortgage loan originations to date. Therefore, its mortgage lending income has been generated almost entirely from gain on sale of loans, with only a small spread component resulting from loans held prior to sale. Income generated from this mortgage finance business covers operating costs including compensation, occupancy, loan origination and administrative expenses. In October 1997, the Bank entered into a $100 million master repurchase agreement under which it may sell and repurchase at a set price mortgage loans pending the sale or securitization of such loans. 29 INSURANCE PREMIUM FINANCE In May 1995, the Bank entered into a joint venture with BPN. Under this joint venture, which commenced operations in September 1995, the Bank underwrites and finances automobile insurance premiums in California and BPN markets the financing program and services the loans for the Bank. The Company has an option to purchase BPN exercisable commencing on April 29, 1999 at an agreed price. For a description of the fees paid by the Bank to BPN and the allocation of interest, fees, losses and recoveries experienced on the loan portfolio and the purchase option, see "Business--Insurance Premium Finance-- Relationship with BPN." As a result of BPN performing substantially all marketing and servicing activities, the Company's role is primarily that of an underwriter and funder of loans. Therefore, IPF's income is generated primarily on a spread basis, supplemented by non-interest income generated from late payment and returned check fees. The Bank uses this income to cover the costs of underwriting and loan administration, including compensation, occupancy and data processing expenses. AUTOMOBILE FINANCE In 1996, the Bank commenced its automobile finance business through its subsidiary, United Auto Credit Corporation. Unlike UPAM and IPF, UACC provides all marketing, origination, underwriting and servicing activities for its loans. Therefore, income is generated from a combination of spread and non- interest income and is used to cover all operating costs, including compensation, occupancy and systems expense. THE BANK The Company has funded its operations to date primarily through the Bank's deposits, FHLB advances and loan sales. As of December 31, 1997, the Bank was a five-branch federal savings bank with $233.2 million in deposits. The loans generated by the Company's mortgage, insurance premium and automobile finance businesses currently are funded and held by the Bank. In addition, the Bank holds a portfolio of primarily traditional residential mortgage loans acquired from the RTC in 1994 and 1995 at a discount from the unpaid principal balance of such loans, which loans aggregated $82.0 million in principal amount (before unearned discounts and premiums) at December 31, 1997. The Bank generates spread income not only from loans originated or purchased by each of the Company's principal businesses, but also from (i) loans purchased from the RTC, (ii) its securities portfolio and (iii) consumer loans originated by its branches. This income is supplemented by non-interest income from its branch banking activities (e.g., deposit service charges, safe deposit box fees), and is used to cover operating costs and other expenses. YEAR 2000 COMPLIANCE Like most financial institutions, the Company's computer systems identify dates using only the last two digits of the year. These systems may recognize a date using "00" as the year 1900, rather than 2000. The Company is using both internal and external resources to identify, correct and test systems that may be affected by year 2000 dates. System identification is scheduled for completion by the end of the second quarter of 1998, with testing and implementation scheduled for completion during the last half of 1998 and in 1999. The Company believes that year 2000 compliance will not pose significant operational issues for the Company. However, the failure to implement timely year 2000 compliant systems could have a material adverse effect on the operations of the Company. Dependence on third party vendors could adversely affect the Company's efforts to successfully complete year 2000 compliance for all systems in a timely manner. The Company is requiring third party vendors to represent that their products are year 2000 compliant and will implement a program to test for compliance. Contingency plans are being developed in the event that a vendor is not able to provide timely year 2000 compliance. 30 The Company has initiated formal communications with its significant customers and vendors to determine the extent to which the Company may be affected by the failure of these parties to correct their own year 2000 issues. No assurance can be given that the systems of third parties on which the Company relies will be corrected in a timely manner, or that a failure to correct the year 2000 issue by another party, or a correction that is incompatible with the Company's systems, will not have a material adverse effect on the Company. The Company is assessing the expense of year 2000 compliance and the potential effect on the Company's earnings. The Company does not believe that the costs of year 2000 compliance will be material. AVERAGE BALANCE SHEETS The following tables set forth information relating to the Company for the years ended December 31, 1995, 1996 and 1997. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. The yields and costs include fees which are considered adjustments to yields.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------- 1995 1996 1997 --------------------------- --------------------------- --------------------------- AVERAGE AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE(1) INTEREST COST BALANCE(1) INTEREST COSTS BALANCE(1) INTEREST COST ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS Interest earning assets Investment Securities.. $ 52,363 $3,205 6.12% $ 11,050 $ 706 6.39% $ 9,763 $ 639 6.55% Mortgage loans, net(2)................ 105,833 10,028 9.48% 117,877 11,150 9.46% 161,667 15,240 9.43% IPF loans, net(3)...... 2,591 300 11.58% 28,795 4,026 13.98% 43,923 6,179 14.07% Automobile installment contracts, net(4)..... -- -- -- 2,488 679 27.29% 16,980 4,453 26.22% -------- ------ -------- ------ -------- ------- Total interest earning assets................ 160,787 13,533 8.42% 160,210 16,561 10.34% 232,333 26,511 11.41% ------ ------ ------- ----- Non-interest earning assets(4).............. 6,106 8,124 19,778 -------- -------- -------- Total assets........... $166,893 $168,334 $252,111 ======== ======== ======== LIABILITIES AND EQUITY Interest bearing liabilities Customer deposits...... 148,582 7,240 4.87% 146,160 7,225 4.94% 198,405 10,095 5.09% Notes payable.......... 10,930 487 4.46% 10,930 556 5.09% 11,541 669 5.80% FHLB advances.......... -- -- -- 1,170 72 6.15% 18,526 1,103 5.95% Warehouse line of credit................ -- -- -- -- -- -- 8,914 544 6.10% -------- ------ ----- -------- ------ ----- -------- ------- Total interest bearing liabilities........... 159,512 7,727 4.85% 158,260 7,853 4.96% 237,386 12,411 5.23% ------ ----- ------ ----- ------- ----- Non-interest bearing liabilities............ 1,998 4,173 6,028 -------- -------- -------- Total liabilities...... 161,510 162,433 243,414 Equity.................. 5,383 5,901 8,697 -------- -------- -------- Total liabilities and equity................ $166,893 $168,334 $252,111 ======== ======== ======== Net interest income before provision for loan losses............ $5,806 $8,708 $14,100 ====== ====== ======= Net interest rate spread(5).............. 3.57% 5.38% 6.18% Net interest margin(6).. 3.61% 5.44% 6.07% Ratio of interest earning assets to interest bearing liabilities............ 100.8% 101.2% 97.9%
- -------- (1) Average balances are measured on a month-end basis. (2) Net of deferred loan origination fees, unamortized discounts, premiums and allowance for estimated loan losses; includes loans held for sale and non- performing loans. (3) Net of allowance for estimated losses; includes non-performing loans. (4) Net of unearned finance charges, allowance for estimated losses; includes non-performing loans. (5) Net interest rate spread represents the difference between the yield on interest earning assets and the cost of interest bearing liabilities. (6) Net interest margin represents net interest income divided by average interest earning assets. 31 RATE AND VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest earning assets and interest bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
YEAR ENDED YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1996 COMPARED TO COMPARED TO YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1997 ---------------------- ---------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO ---------------------- ---------------------- VOLUME RATE NET VOLUME RATE NET ------- ---- ------- ------ ------ ------ (IN THOUSANDS) Interest earning assets Investment securities......... $(2,639) $140 $(2,499) $(85) $ 19 $ (66) Mortgage loans, net(1)........ 1,138 (16) 1,122 4,128 (40) 4,088 IPF loans, net................ 3,652 74 3,726 2,128 25 2,153 Automobile installment contracts, net............... 679 -- 679 3,799 (26) 3,773 ------- ---- ------- ------ ------ ------ Total interest earning assets..................... 2,830 198 3,028 9,970 (22) 9,948 Interest bearing liabilities Customer deposits............. (133) 118 (15) 2,653 217 2,870 Notes payable................. -- 69 69 32 81 113 FHLB advances................. 72 -- 72 1,033 (2) 1,031 Warehouse line of credit...... -- -- -- 272 272 544 ------- ---- ------- ------ ------ ------ Total interest bearing liabilities................ (61) 187 126 3,990 568 4,558 ------- ---- ------- ------ ------ ------ Change in net interest income.. $ 2,891 $ 11 $ 2,902 $5,980 $(588) $5,392 ======= ==== ======= ====== ====== ======
- -------- (1) Includes interest on loans held for sale. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1997 GENERAL Net income increased from $950,000 for the twelve months ended December 31, 1996 to $6.2 million for the twelve months ended December 31, 1997. This increase was due primarily to the expansion of the Company's mortgage, insurance premium and auto finance businesses, all of which showed improved operating results in 1997. Also contributing to the favorable operating results was an increase of $24.2 million in gain on sales of loans from the Company's mortgage finance operations offset by an increase in non-interest expense of $20.4 million which also resulted primarily from the expansion of mortgage finance and other lending operations. As a result of the expansion of the Company's lending operations, mortgage loan originations increased from $71.5 million for the twelve months ended December 31, 1996 to $578.6 million for the twelve months ended December 31, 1997, while insurance premium financing originations increased from $99.0 million to $145.2 million, respectively, and auto contracts purchased increased from $12.2 million to $44.1 million, respectively. Sales of mortgage loans were $50.1 million for the twelve months ended December 31, 1996 and $475.1 million for the comparable period in 1997. 32 INTEREST INCOME Interest income increased from $16.6 million for the twelve months ended December 31, 1996 to $26.5 million for the twelve months ended December 31, 1997 due primarily to a $72.1 million increase in average earning assets and a 1.07% increase in the average yield on earning assets. The largest components of growth in average earning assets were mortgage loans, insurance premium finance loans and auto contracts, which increased $43.8 million, $15.1 million and $14.5 million, respectively. The increase in the average yield on earning assets was attributable to an increase in the origination or purchase of higher yielding loans during 1997 principally related to the expansion and growth of the mortgage, insurance premium and automobile finance businesses. The increase in mortgage loan receivables was a result of an increase in loans held for sale, which increased from $20.8 million at December 31, 1996 to $120.0 million at December 31, 1997. Generally, these loans are originated for sale in the secondary mortgage market. The growth in IPF loans was primarily a result of new loan originations associated with changes in California's automobile insurance laws effective January 1, 1997, while the increase in auto contracts principally resulted from the opening of new branch offices and the purchasing of additional dealer contracts in these new markets. INTEREST EXPENSE Interest expense increased from $7.9 million for the twelve months ended December 31, 1996 to $12.4 million for the twelve months ended December 31, 1997, due to a $79.1 million increase in average interest bearing liabilities and a 0.27% increase in the weighted average interest rate on interest bearing liabilities. The largest component of growth in interest bearing liabilities was deposits with the Bank, which increased from an average balance of $146.2 million for the twelve months ended December 31, 1996 to $198.4 million for the twelve months ended December 31, 1997. The average cost of deposits increased from 4.94% for the twelve months ended December 31, 1996 to 5.09% for the twelve months ended December 31, 1997. The increase in deposits resulted from the use of retail and wholesale CDs to finance the Company's lending operations, and the increase in the average yield on the Bank's deposits reflects the repricing of accounts to higher rates. The second largest component of growth in interest bearing liabilities was FHLB advances to the Bank, which increased from an average balance of $1.2 million for the twelve months ended December 31, 1996 to $18.5 million for the comparable period in 1997. This increase reflects the use of short-term borrowings to support the growth of the Company's lending businesses. PROVISION FOR LOAN LOSSES Provision for loan losses increased from $194,000 for the twelve months ended December 31, 1996 to $507,000 for the twelve months ended December 31, 1997. The increase in the provision reflects management's decision to increase general valuation allowances as a result of the increase in loans made by the Company. The total allowance for loan losses was $5.4 million at December 31, 1996 compared to $6.5 million at December 31, 1997. The increase is attributable to the additional provision for losses recorded during the twelve months ended December 31, 1997 and $2.0 million in acquisition discounts related to the Company's purchase of auto contracts. The Company allocates the estimated amount of discounts attributable to credit risk to the allowance for loan losses. Net loan charge-offs were $444,000 in the twelve months ended December 31, 1996 compared to $1.3 million in the twelve months ended December 31, 1997. A provision for loan losses is charged to operations based on the Company's regular evaluation of its loan portfolio and the adequacy of its allowance for loan losses. While management believes it has adequately provided for losses and does not expect any material loss on its loans in excess of allowances already recorded, no assurance can be given that economic or real estate market conditions or other circumstances will not result in increased losses in the loan portfolio. 33 NON-INTEREST INCOME Non-interest income increased $24.4 million, from $2.8 million for the twelve months ended December 31, 1996 to $27.2 million for the twelve months ended December 31, 1997. This increase resulted from gain on sale of mortgage loans and is due primarily to a substantial increase in the volume of loans sold by UPAM. During the twelve months ended December 31, 1996, the Company sold $50.1 million in mortgage loans compared to $475.1 million in mortgage loans sold or securitized during the comparable period in 1997. Net gains on sales of loans, as a percentage of loans sold, were 4.65% for the twelve months ended December 31, 1996 compared to 5.58% for the twelve months ended December 31, 1997. During the twelve months ended December 31, 1997, the Company sold $360.2 million as whole loan sales and completed its first securitization of $114.9 million in mortgage loans in December 1997. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeds the carrying value of approximately $8.2 million at the date of sale. The Company expects to sell or securitize mortgage loans on a periodic basis in the future. As part of its securitization, the Company recorded a net gain on sale of $5.9 million and recorded residual interests in securitizations of $8.2 million consisting of beneficial interests in the form of an interest-only strip representing the subordinated right to receive cash flows from the pool of securitized loans after payment of required amounts to the holders of the securities and certain costs associated with the securitization. The Company classifies its residual interests in securitizations as trading securities and records them at fair market value with any unrealized gains or losses recorded in the results of operations. Valuations of the residual interests in securitizations at each reporting period are based on discounted cash flow analyses. Cash flows are estimated as the amount of the excess of the weighted-average coupon on the loans sold over the sum of the pass-through on the senior certificates, a servicing fee, an estimate of annual future credit losses and prepayment assumptions and other expenses associated with the securitization, discounted at an interest rate which the Company believes is commensurate with the risks involved. The Company uses prepayment and default assumptions that market participants would use for similar instruments subject to prepayment, credit and interest rate risks. The assumptions used by the Company for valuing the residual interests in securitizations arising from its December securitization included a prepayment assumption of 5% for the first year increasing to 25% thereafter, an annual credit loss assumption of 0.75% and a discount rate of 15%. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeds the carrying value of approximately $8.2 million at the date of sale. In connection with its securitization transaction, an overcollateralization amount is required to be maintained which serves as credit enhancement to the senior certificate holders. The overcollateralization amount initially consists of the excess of the principal balance of the mortgage loans sold, less the principal balance of the certificates sold to investors. The overcollateralization is required to be maintained at a specified target level of the principal balance of the certificates and can be increased as specified in the related securitization documents. Cash flows received in excess of the obligations to the senior certificate holders and certain costs of the securitization are deposited into a trust account until the overcollateralization target is reached. Once this target is reached, distributions of excess cash from the trust account are remitted to the Company. Other components of non-interest income include fees and charges for Bank services and miscellaneous other income. The total of all of these items increased $259,000, from $443,000 for the twelve months ended December 31, 1996 to $702,000 for the twelve months ended December 31, 1997. NON-INTEREST EXPENSE Non-interest expense increased $20.5 million, from $9.6 million for the twelve months ended December 31, 1996 to $30.1 million for the twelve months ended December 31, 1997. This increase primarily reflects an increase in salaries, loan commissions, employee benefits and other personnel costs of $13.8 million associated with the expansion of the Company's mortgage and automobile finance operations. In addition, occupancy expense increased $2.1 million, reflecting an increase in the number of mortgage and automobile lending offices. Marketing expense was $1.7 million for the twelve months ended December 31, 1997, compared to $171,000 34 for the twelve months ended December 31, 1996. This increase is attributable to the Company's retail mortgage lending operations which use extensive direct mail and telemarketing campaigns to target prospective borrowers. Also, as a result of growth in the Company's mortgage finance and automobile lending operations, other operating expense, including stationery and supplies, data processing, insurance, telephone and postage, increased $3.8 million during the twelve months ended December 31, 1997 compared to the same period in 1996. The Company significantly expanded its mortgage and automobile finance operations, resulting in an increase from 54 employees in five offices and 25 employees in four offices, respectively, as of December 31, 1996 to 359 employees in 22 offices and 60 employees in ten offices, respectively, as of December 31, 1997. INCOME TAXES Income taxes increased $3.8 million, from $691,000 for the twelve months ended December 31, 1996 to $4.5 million for the twelve months ended December 31, 1997. This increase occurred as a result of a $9.1 million increase in income before income taxes between the two periods offset by a decrease in the effective tax rate from 42.1% for 1996 to 41.8% for 1997. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1997 Total assets increased $122.1 million, from $188.7 million at December 31, 1996 to $310.8 million at December 31, 1997. This increase occurred primarily as a result of a $112.9 million increase in loans receivable, from $155.6 million at December 31, 1996 to $268.5 million as of December 31, 1997. The increase in loans was comprised of a $99.2 million increase in mortgage loans held for sale, a $22.7 million increase (net of unearned finance charges) in auto contracts and a $7.9 million increase in insurance premium finance loans, offset by a $20.7 million decrease in loans purchased from the RTC as a result of scheduled principal amortizations and prepayments. Cash and cash equivalents decreased $7.1 million, from $26.1 million at December 31, 1996 to $19.0 million at December 31, 1997, primarily as a result of funding for the Company's origination of loans. Residual interests in securitizations were $8.2 million at December 31, 1997 which were entirely attributable to the Company's first securitization in December 1997. There were no residual interests in securitizations at December 31, 1996. Premises and equipment increased from $822,000 at December 31, 1996 to $3.1 million at December 31, 1997 as a result of purchases of furniture and equipment for the Company's new branch offices and the overall growth in lending operations. Deposit accounts at the Bank increased $74.1 million, from $159.1 million at December 31, 1996 to $233.2 million at December 31, 1997, due primarily to an increase in CDs of $65.7 million, from $131.4 million at December 31, 1996 to $197.1 million at December 31, 1997. Included in deposits at December 31, 1997 are $17.5 million in brokered CDs. There were no brokered CDs outstanding at December 31, 1996. Other interest bearing liabilities include the RTC notes payable which remained unchanged at $10.9 million between period ends, FHLB advances which increased from $4.0 million as of December 31, 1996 at a weighted average interest rate of 5.70% to $28.0 million at December 31, 1997 at a weighted average interest rate of 7.07%, notes payable from shareholders which increased $2.0 million between period ends and a warehouse line of credit of $6.2 million at December 31, 1997. Net deferred tax assets were $3.2 million at December 31, 1997 due principally to temporary differences in the recognition of gain on sale of loans for federal and state income tax reporting and financial statement reporting purposes. For income tax purposes, loans held for sale are marked- to-market. Shareholders' equity increased from $6.8 million at December 31, 1996 to $13.0 million at December 31, 1997, solely as a result of the Company's net income. 35 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1996 GENERAL Net income increased from $458,000 for the year ended December 31, 1995 to $950,000 for the year ended December 31, 1996. This increase was due primarily to the expansion of the Company's insurance premium and mortgage finance businesses which commenced in the later part of 1995 and early 1996, respectively. Partially offsetting this increase in net income was an increase in operating costs incurred by UPAM as well as those incurred as a result of the commencement in early 1996 of UACC's operations. INTEREST INCOME Interest income increased from $13.5 million for the year ended December 31, 1995 to $16.6 million for the year ended December 31, 1996 due primarily to a 1.9% increase in the average yield on earning assets. While average earning assets decreased $577,000, the components of this balance changed significantly with the average balance of insurance premium finance loans increasing from $2.6 million for the year ended December 31, 1995 to $28.8 million for the comparable period in 1996, and mortgage loans increasing from $105.8 million to $117.9 million, respectively. These increases in average earning assets were offset by a decline in average investments from $52.4 million for the year ended December 31, 1995 to $11.1 million for the year ended December 31, 1996. The changes in average earning assets resulted from the Company's strategy of reinvesting in higher yielding loans, such as subprime mortgage and insurance premium finance loans, rather than investment securities and traditional mortgage loans which dominated the Company's balance sheet in the early years of its operations. INTEREST EXPENSE Interest expense increased from $7.7 million for the year ended December 31, 1995 to $7.9 million for the year ended December 31, 1996 due primarily to a $1.3 million decrease in average interest bearing liabilities, offset by a 0.11% increase in the weighted average interest rate on interest bearing liabilities. The largest component of change in interest bearing liabilities was deposits, which decreased from an average balance of $148.6 million for the year ended December 31, 1995 to $146.2 million for the year ended December 31, 1996. The average cost of deposits increased from 4.87% for the year ended December 31, 1995 to 4.94% for the year ended December 31, 1996. Other interest bearing liabilities include the RTC Notes Payable, which remained unchanged at $10.9 million at both December 31, 1995 and 1996, and FHLB advances which increased to $4.0 million at December 31, 1996 with a weighted average interest rate of 5.70%. The Bank had no FHLB advances at December 31, 1995. PROVISION FOR LOAN LOSSES Provision for loan losses increased from $120,000 for the year ended December 31, 1995 to $194,000 for the year ended December 31, 1996. This increase was due primarily to the growth in 1996 of the Company's insurance premium finance business. The total allowance for loan losses was $5.3 million at December 31, 1995 compared to $5.4 million at December 31, 1996. The increase is attributable to the additional provision for losses recorded during the year ended December 31, 1996 and $356,000 in acquisition discounts related to the Company's purchase of auto contracts. The Company allocated the estimated amount of discounts attributable to credit risk to the allowance for loan losses. Net loan charge-offs were $108,000 in the year ended December 31, 1995 compared to $444,000 in the year ended December 31, 1996. A provision for loan losses is charged to operations based on the Company's regular evaluation of its loan portfolio and the adequacy of its allowance for loan losses. While management believes it has adequately provided for losses and does not expect any material loss on its loans in excess of allowances already recorded, no assurance can be given that economic or real estate market conditions or other circumstances will not result in increased losses in the loan portfolio. 36 NON-INTEREST INCOME Non-interest income increased $2.5 million, from $318,000 for the year ended December 31, 1995 to $2.8 million for the year ended December 31, 1996. This increase resulted from gain on sale of loans and is due primarily to a substantial increase in the volume of mortgage loans sold by the Company. During the year ended December 31, 1995, the Company sold $3.5 million in mortgage loans compared to $50.1 million during the comparable period in 1996. Net gains on sales of loans, as a percentage of loans sold, were 2.57% for the year ended December 31, 1995 compared to 4.65% for the year ended December 31, 1996. All loans sold during the year ended December 31, 1995 and 1996 were sold as whole loans with servicing released to the investor. Other components of non-interest income include fees and charges for Bank services and miscellaneous other income. The total of all of these items increased $215,000 from $228,000 for the year ended December 31, 1995 to $443,000 for the year ended December 31, 1996. NON-INTEREST EXPENSE Non-interest expense increased $4.4 million, from $5.2 million for the year ended December 31, 1995 to $9.6 million for the year ended December 31, 1996. This increase primarily reflects an increase in salaries, loan commissions, employee benefits and other personnel costs of $2.5 million associated with the Company's mortgage and automobile finance operations which commenced in early 1996. In addition, occupancy expense increased $402,000 also reflecting an increase in the number of mortgage and automobile finance offices. As a result of growth in mortgage and automobile finance operations, other operating expenses, including stationery and supplies, data processing, insurance, telephone and postage increased $800,000 during the year ended December 31, 1996 compared to the same period in 1995. As stated above, the Company commenced its subprime mortgage finance and automobile finance businesses in early 1996, and by December 31, 1996 these operations grew to 64 employees in five offices and 25 employees in four offices, respectively. Also included in 1996 non-interest expense is a one-time special assessment in the amount of $820,000 to recapitalize the SAIF. This assessment of 0.657% of the Bank's assessment base as of March 31, 1995 was enacted through federal legislation and paid by SAIF insured institutions. As a result of this recapitalization, the Bank's future deposit insurance assessments will decrease significantly. INCOME TAXES Income taxes increased $307,000 from $384,000 for the year ended December 31, 1995 to $691,000 for the year ended December 31, 1996. This increase occurred as a result of a $799,000 increase in income before income taxes between the two years offset by a decrease in the effective tax rate from 45.6% in 1995 to 42.1% in 1996. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND DECEMBER 31, 1996 Total assets increased $29.1 million, from $159.6 million as of December 31, 1995 to $188.7 million as of December 31, 1996. This increase occurred primarily as a result of a $23.8 million increase in loans, from $131.8 million for the year ended December 31, 1995 to $155.6 million for the year ended December 31, 1996. The increase in loans was comprised of a $20.8 million increase in mortgage loans held for sale, a $7.6 million increase (net of unearned finance charges) in auto contracts and a $15.1 million increase in insurance premium finance loans, offset by a $21.8 million decrease in loans purchased from the RTC, resulting from scheduled principal amortization and prepayments. Cash and cash equivalents increased $2.5 million, from $23.6 million as of December 31, 1995 to $26.1 million as of December 31, 1996, as a result of increased liquidity from the Company's sale of mortgage loans. 37 Deposit accounts increased $17.2 million, from $141.9 million as of December 31, 1995 to $159.1 million as of December 31, 1996 due primarily to an increase in CDs of $15.6 million, from $115.8 million as of December 31, 1995 to $131.4 million as of December 31, 1996. The Company uses CDs, in part, to finance the growth of its lending operations. Other interest-bearing liabilities include the RTC Notes Payable which remained unchanged at $10.9 million at December 31, 1995 and 1996, and FHLB advances which increased to $4.0 million at December 31, 1996 with a weighted average interest rate of 5.70%. There were no FHLB advances at December 31, 1995. Stockholders' equity increased $950,000, from $5.8 million as of December 31, 1995 to $6.8 million as of December 31, 1996, solely as a result of the Company's net income for the year. COMPARISON OF OPERATING RESULTS FOR THE PERIOD FROM APRIL 29, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994 AND THE YEAR ENDED DECEMBER 31, 1995 GENERAL Net income increased from $116,000 for the period from April 29, 1994 (Inception) to December 31, 1994 to $458,000 for the year ended December 31, 1995. This increase was due primarily to (i) completion of the Bank's purchases of loans from the RTC thereby converting assets from lower yielding investment securities into higher yielding loans, and (ii) the inclusion of twelve months of operations in 1995 as opposed to eight months in 1994. The Bank acquired certain assets and assumed certain liabilities from the RTC on April 29, 1994. INTEREST INCOME Interest income increased from $6.9 million for the period from April 29, 1994 (Inception) to December 31, 1994 to $13.5 million for the year ended December 31, 1995 due primarily to (i) the inclusion of twelve months of operations in 1995 as opposed to eight months in 1994, and (ii) a $7.6 million increase in average earning assets and a 1.68% increase in the average yield on earning assets. The largest component of growth in average earning assets was mortgage loans, which increased $50.2 million. Loans totaling $133.1 million were purchased from the RTC from April 1994 through December 1995, and these higher yielding loans resulted in a significant increase in interest income. INTEREST EXPENSE Interest expense increased from $3.6 million for the period from April 29, 1994 (Inception) to December 31, 1994 to $7.7 million for the year ended December 31, 1995 due primarily to (i) the inclusion of twelve months of operations in 1995 as opposed to eight months in 1994, (ii) a $10.3 million increase in average interest bearing liabilities and (iii) a 1.30% increase in the weighted average interest rate on interest bearing liabilities. The largest component of growth in interest bearing liabilities was deposits, which increased from an average balance of $140.3 million for the period from April 29, 1994 (Inception) to December 31, 1994 to $148.6 million for the year ended December 31, 1995. This growth resulted from the Bank's purchase of deposits from the RTC offset by the sale of deposits by the Bank in the same period and deposit outflows. The average cost of deposits increased from 3.58% for the period from April 29, 1994 (Inception) to December 31, 1994 to 4.87% for the year ended December 31, 1995 primarily as a result of deposits repricing to higher interest rate accounts. Other interest-bearing liabilities include the RTC Notes Payable, the average balance of which increased $1.9 million between years as a result of an additional loan provided to the Bank as part of its purchase of deposits from the RTC. 38 PROVISION FOR LOAN LOSSES Provision for loan losses increased from $50,000 for the period from April 29, 1994 (Inception) to $120,000 for the year ended December 31, 1995. The total allowance for loan losses was $378,000 at December 31, 1994 compared to $5.3 million at December 31, 1995. This increase was attributable to the additional provision for losses recorded during the year ended December 31, 1995 and $4.9 million in acquisition discounts related to the Company's purchase of loans from the RTC. The Company allocated the estimated amount of discounts attributable to credit risk to the allowance for loan losses. Loan charge-offs were $108,000 in the year ended December 31, 1995. There were no charge-offs in the period from April 29, 1994 (Inception) to December 31, 1994. NON-INTEREST INCOME Non-interest income increased $220,000, from $98,000 for the period from April 29, 1994 (Inception) through December 31, 1994 to $318,000 for the year ended December 31, 1995. This increase was due primarily to (i) the inclusion of twelve months of operations in 1995 as opposed to eight months in 1994, and (ii) an increase in gain on sale of loans from $3,000 for the period from April 29, 1994 (Inception) through December 31, 1994 to $90,000 for the year ended December 31, 1995. Other components of non-interest income include fees and charges for Bank services and miscellaneous other income. The total of all of these items increased $133,000 from $95,000 for the period from April 29, 1994 (Inception) through December 31, 1994 to $228,000 for the year ended December 31, 1995. NON-INTEREST EXPENSE Non-interest expense increased $2.1 million, from $3.1 million for the period from April 29, 1994 (Inception) through December 31, 1994 to $5.2 million for the year ended December 31, 1995. This increase was due primarily to (i) the inclusion of twelve months of operations in 1995 as opposed to eight months in 1994, and (ii) increases in compensation and benefits occurring from increased staffing in the Bank. INCOME TAXES Income taxes increased $286,000 from $98,000 for the period from April 29, 1994 (Inception) through December 31, 1994 to $384,000 for the year ended December 31, 1995. This increase occurred as a result of a $628,000 increase in income before income taxes between the two years, offset by a decrease in the average tax rate from 45.8% in 1994 to 45.6% in 1995. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1994 AND DECEMBER 31, 1995 Total assets decreased $20.5 million, from $180.0 million at December 31, 1994 to $159.6 million at December 31, 1995. This decrease occurred primarily as a result of a $95.8 million decrease in short-term investments offset by a $79.0 million increase in loans. The increase in loans was comprised primarily of a $75.9 million increase in mortgage loans purchased from the RTC under the Minority Preference Resolution Program in 1994 and 1995. Cash and cash equivalents decreased $96.0 million, from $119.6 million at December 31, 1994 to $23.6 million at December 31, 1995, resulting from the purchase of loans from the RTC in 1995. Deposits at the Bank decreased $21.2 million, from $163.1 million at December 31, 1994 to $141.9 million at December 31, 1995 due primarily to outflows in the Bank's deposits resulting from the acquisition by the Bank of certain assets and liabilities from the RTC and the resultant lowering of deposit rates to reflect market conditions and reduce excess liquidity held by the Bank. Other interest-bearing liabilities include the RTC Notes Payable, which remained unchanged at $10.9 million between December 31, 1994 and 1995. 39 Stockholders' equity increased $500,000, from $5.3 million at December 31, 1994 to $5.8 million at December 31, 1995, solely as a result of the Company's net income for the year. MANAGEMENT OF INTEREST RATE RISK The principal objective of the Company's interest rate risk management activities is to evaluate the interest rate risk inherent in the Company's business activities, determine the level of appropriate risk given the Company's operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with guidelines approved by the Board of Directors. Through such management, the Company seeks to reduce the exposure of its operations to changes in interest rates. The Board of Directors reviews on a quarterly basis the asset/liability position of the Company, including simulation of the effect on capital of various interest rate scenarios. The Company's profits depend, in part, on the difference, or "spread," between the effective rate of interest received on the loans it originates and the interest rates paid on deposits and other financing facilities which can be adversely affected by movements in interest rates. In addition, between the time the Company originates loans and investors' sales commitments are received, the Company may be exposed to interest rate risk to the extent that interest rates move upward or downward during the time the loans are held for sale. The Company mitigates these risks somewhat by purchasing or originating ARMs that reprice frequently in an increasing or declining interest rate environment. Also, the Company sells substantially all of its loans held for sale on a regular basis, thereby reducing significantly the amount of time these loans are held by the Company. The Bank's interest rate sensitivity is monitored by the Board of Directors and management through the use of a model which estimates the change in the Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet instruments, and NPV Ratio is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The Company reviews a market value model prepared quarterly by the OTS (the "OTS NPV model"), based on the Bank's quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model measures the Bank's interest rate risk by approximating the Bank's NPV under various scenarios which range from a 400 basis point increase to a 400 basis point decrease in market interest rates. The interest rate risk policy of the Company provides that the maximum permissible change at a 400 basis point increase or decrease in market interest rates is a 30% change in NPV. The OTS has incorporated an interest rate risk component into its regulatory capital rule for thrifts. Under the rule, an institution whose sensitivity measure, as defined by the OTS, in the event of a 200 basis point increase or decrease in interest rates exceeds 20% would be required to deduct an interest rate risk component in calculating its total capital for purpose of the risk-based capital requirement. At September 30, 1997, the most recent date for which the relevant OTS NPV model is available, the Bank's sensitivity measure resulting from (i) a 200 basis point decrease in interest rates was 40 basis points and would result in a $1.4 million increase in the NPV of the Bank and (ii) a 200 basis point increase in interest rates was 50 basis points and would result in a $1.8 million decrease in the NPV of the Bank. At September 30, 1997, the Bank's sensitivity measure was below the threshold at which the Bank could be required to hold additional risk-based capital under OTS regulations. Although the NPV measurement provides an indication of the Bank's interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income and will differ from actual results. Management monitors the results of this modeling, which are presented to the Board of Directors on a quarterly basis. 40 The following table shows the NPV and projected change in the NPV of the Bank at September 30, 1997 assuming an instantaneous and sustained change in market interest rates of 100, 200, 300 and 400 basis points ("bp"). This table is based on data prepared by the OTS. The Company makes no representation as to the accuracy of this data. INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
NPV AS % OF PORTFOLIO NET PORTFOLIO VALUE VALUE OF ASSETS --------------------------- ------------------------ CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE --------------- -------- -------- -------- ----------- ----------- (DOLLARS IN THOUSANDS) +400 bp.................... $33,034 $(8,495) -20% 11.46% -258 bp +300 bp.................... $36,982 $(4,547) -11% 12.69% -135 bp +200 bp.................... $39,766 $(1,763) -4% 13.54% -50 bp +100 bp.................... $41,198 $ (331) -1% 13.96% -8 bp 0 bp....................... $41,529 -- -- 14.04% -- - -100 bp.................... $41,794 $ 265 +1% 14.11% +7 bp - -200 bp.................... $42,967 $ 1,438 +3% 14.44% +40 bp - -300 bp.................... $44,724 $ 3,195 +8% 14.95% +91 bp - -400 bp.................... $47,183 $ 5,654 +14% 15.66% +162 bp
LIQUIDITY AND CAPITAL RESOURCES GENERAL The Company's primary sources of funds are deposits with the Bank, FHLB advances, principal and interest payments on loans, cash proceeds from the sale of loans and, to a lesser extent, interest payments on securities and proceeds from the maturation of securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. However, the Company has continued to maintain the required minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio is currently 4%, and the Company has always met or exceeded this requirement. Management, through its Asset and Liability Committee, which meets monthly or more frequently if necessary, monitors rates and terms of competing sources of funds to use the most cost- effective source of funds wherever possible. Sales and securitizations of loans have been a primary source of funds for the Company. During the twelve months ended December 31, 1996 and 1997, cash flows from sales and securitizations of loans were $52.2 million and $493.5 million, respectively. Another source of funds consists of deposits obtained through the Bank's five retail branches in California. The Bank offers checking accounts, various money market accounts, regular passbook accounts, fixed interest rate certificates with varying maturities and retirement accounts. Deposit account terms vary by interest rate, minimum balance requirement and the duration of the account. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank periodically based on liquidity and financing requirements, rates paid by competitors, growth goals and federal regulations. At December 31, 1997, such retail deposits were $182.2 million or 78.1% of total deposits. The Bank uses wholesale and broker-originated deposits to supplement its retail deposits and, at December 31, 1997, wholesale deposits were $33.6 million or 14.4% of total deposits while broker-originated deposits were $17.5 million or 7.5% of total deposits. The Bank solicits wholesale deposits by posting its interest rates on a national on-line service which advertises the Bank's wholesale products to investors. Generally, most of the wholesale deposit account holders are institutional investors, commercial businesses or public sector entities. The weighted average maturity of wholesale and broker- originated deposits at December 31, 1997 was five months. 41 The Company believes that wholesale and broker-originated deposits provide a supplemental short-term source of funding which can be more flexible than retail sources of funds for matching asset maturities, especially the Company's loans held for sale. While the Company believes its primary source of deposits will continue to be originated from the Bank's retail branches, wholesale and broker-originated deposits will be used to provide additional sources of funds to finance lending growth. Although the Bank has a significant amount of deposits maturing in less than one year, the Company believes that the Bank's current pricing strategy will enable it to retain a significant portion of these accounts at maturity and that it will continue to have access to sufficient amounts of CDs which, together with other funding sources, will provide the necessary level of liquidity to finance its lending businesses. However, as a result of these shorter-term deposits, the rates on these accounts may be more sensitive to movements in market interest rates which may result in a higher cost of funds. The following table sets forth the average balances and rates paid on each category of deposits for the years ended December 31, 1995, 1996 and 1997.
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1995 1996 1997 ---------------- ---------------- ---------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Passbook accounts............ $ 16,612 2.12% $ 14,665 2.39% $ 21,452 3.44% Checking accounts............ 12,091 1.48% 10,060 1.33% 9,910 1.32% Certificates of deposit Under $100,000.............. 112,877 5.67% 117,055 5.55% 134,961 5.53% $100,000 and over........... 7,537 6.36% 4,372 5.88% 31,984 5.90% -------- -------- -------- Total...................... $149,117 4.97% $146,152 4.95% $198,307 5.15% ======== ======== ========
The following table sets forth the time remaining until maturity for all CDs at December 31, 1995, 1996 and 1997.
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ (IN THOUSANDS) Maturity within one year................. $ 76,879 $103,369 $181,858 Maturity within two years................ 36,316 26,819 14,984 Maturity within three years.............. 1,681 1,177 298 Maturity within four years............... 957 -- -- -------- -------- -------- Total certificates of deposit............ $115,833 $131,365 $197,140 ======== ======== ========
At December 31, 1997, the Bank exceeded all of its regulatory capital requirements (and was deemed to be "well capitalized") with (i) tangible capital of $22.4 million, or 7.27% of total adjusted assets, which is above the required level of $4.6 million, or 1.50%; (ii) core capital of $22.4 million, or 7.27% of total adjusted assets, which is above the required level of $9.2 million, or 3.00%; and (iii) risk-based capital of $24.9 million, or 12.34% of risk-weighted assets, which is above the required level of $16.0 million, or 8.00%. The Company has other sources of liquidity, including FHLB advances, warehouse lines of credit and securities maturing within one year. Through the Bank, the Company obtains advances from the FHLB, collateralized by its portfolio of mortgage loans purchased from the RTC and the Bank's FHLB stock. The FHLB functions as a central reserve bank providing credit for thrifts and certain other member financial institutions. Advances are made pursuant to several programs, each of which has its own interest rate and range of maturities. Limitations on the amount of advances are based generally on a fixed percentage of net worth or on the FHLB's assessment of an institution's credit-worthiness. The Bank's available borrowing capacity under this credit facility was $40.9 million at December 31, 1997. 42 Other borrowings of the Company consist of the RTC Notes Payable which mature in 1999, notes payable from shareholders which mature in 1999 and a warehouse line of credit. See "--Liquidity and Capital Resources--Warehouse Line of Credit" and "--RTC Notes Payable" for a discussion of the Company's warehouse line of credit and RTC Notes Payable, respectively, and "Management--Certain Transactions" for discussion of the notes payable from shareholders. The following table sets forth certain information regarding the Company's short-term borrowed funds (consisting of FHLB advances and its warehouse line of credit) at or for the periods ended on the dates indicated.
AT OR FOR YEARS ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ------- ------- -------- (DOLLARS IN THOUSANDS) FHLB advances Maximum month-end balance.......................... $ -- $ 4,000 $ 40,900 Balance at end of period........................... -- 4,000 28,000 Average balance for period......................... -- 1,166 18,526 Weighted average interest rate on Balance at end of period........................... -- % 5.70% 7.07% Average balance for period......................... -- % 6.18% 5.95% Warehouse line of credit Maximum month-end balance.......................... $ -- $ -- $ 64,359 Balance at end of period........................... -- -- 6,237 Average balance for period......................... -- -- 8,914 Weighted average interest rate on Balance at end of period........................... -- % -- % 6.70% Average balance for period......................... -- % -- % 6.10%
The Company had no material contractual obligations or commitments for capital expenditures at December 31, 1997. However, the Company is in the process of expanding its mortgage and auto finance operations, which will entail lease commitments and expenditures for leasehold improvements and furniture, fixtures and equipment. At December 31, 1997, the Company had outstanding commitments to originate loans of $117.4 million, compared to $19.1 million at December 31, 1996. The Company anticipates that it will have sufficient funds available to meet its current loan origination commitments. WAREHOUSE LINE OF CREDIT In October 1997, the Bank entered into a $100 million master repurchase agreement under which it may sell and repurchase at a set price mortgage loans pending the sale or securitization of such loans. The arrangement provides for an advance rate approximating 100% of the outstanding principal balance of qualifying mortgage loans and a rate of interest to be determined by the parties upon each such sale of mortgage loans, but which shall not exceed LIBOR plus 0.70%. Qualifying mortgage loans consist of first and second mortgage loans with an LTV that does not exceed 90%, subject to certain restrictions. This agreement may be terminated at any time at the option of either party. RTC NOTES PAYABLE In connection with its acquisition of certain assets from the RTC, the Bank obtained loans from the RTC in the aggregate amount of $10.9 million under the RTC's Minority Interim Capital Assistance Program provided for in Section 21A(u) of the Federal Home Loan Bank Act, as amended (the "FHLBA"). The FHLBA gives the RTC authority to provide interim capital assistance to minority- owned institutions, defined in the FHLBA as more than fifty percent (50%) owned or controlled by one or more minorities. The Bank, PAFI and the RTC entered into an Interim Capital Assistance Agreement on April 29, 1994 with respect to a loan of $6,930,000 and a second Interim Capital Assistance Agreement on September 9, 1994 with respect to a loan of $4,000,000 (together, the "RTC Agreements"). The RTC Agreements provide for repayment of the entire principal amount, 43 plus any accrued, previously unpaid interest thereon, in a single lump sum installment on April 28, 1999 and September 8, 1999, respectively. The RTC Notes Payable may be prepaid at the option of the Bank and must be prepaid in the event that PAFI obtains all or any material portion of its permanent financing prior to maturity of the RTC Notes Payable. The RTC is entitled to declare the entire unpaid principal amount of the RTC Notes Payable, plus all interest accrued and unpaid thereon, immediately due and payable upon the occurrence of certain events of default. The rate at which interest accrues on the RTC Notes Payable is based on the RTC's "Cost of Funds," defined in the RTC Agreements as the end of the calendar quarter Monday auction yield price for 13 week United States Treasury Bills plus 12.5 basis points, and adjusts annually, in the case of the $6.9 million loan due April 1999, and quarterly, in the case of the $4 million loan due September 1999. Interest accrues on any amount of principal or interest not paid when due at the rate of the RTC's Cost of Funds (5.375% at December 31, 1997) plus 300 basis points, beginning on the date such unpaid amount became due. Until all of the obligations of PAFI and the Bank have been discharged, the Bank has agreed, pursuant to the RTC Agreements, among other things, not to: (i) declare or pay any dividends, except under certain limited circumstances, and not to issue any capital stock or any options or other rights in respect thereto, or repurchase, redeem, retire or otherwise acquire for value any of its capital stock; (ii) make any loan or advance to PAFI or any other affiliate, except to United PanAm Mortgage Corporation and United Auto Credit Corporation, as long as such transactions do not require the Bank to repurchase any loans which would result in a loss to the Bank; (iii) increase the compensation of, or pay any bonuses to, any of its officers, directors or key employees unless such increases are approved by the RTC; or (iv) sell or otherwise dispose of all or substantially all of its assets, enter into any merger or consolidation or enter into any agreement providing for a change of control of the Bank, unless such transaction is conditioned upon the prior or simultaneous repayment in full of all amounts due under the RTC Agreements. In connection with the RTC Agreements, PAFI and the RTC have entered into Stock Pledge Agreements pursuant to which PAFI has pledged to the RTC all of the issued and outstanding shares of the capital stock of the Bank as security for the repayment of the RTC Notes Payable. LENDING ACTIVITIES To date, the Company has sold most of its loan originations to mortgage companies and other investors through whole loan packages on a non-recourse, servicing released basis. As a result, upon sale, all risks and rewards of ownership, including those associated with loan payments, transfer to the buyer. In December 1997, the Company completed its first securitization of mortgage loans and in March 1998 sold its residual interests in this securitization to a third party. Accordingly, to date, prepayments have not had a significant effect on the Company's operations. Summary of Loan Portfolio. At December 31, 1997, the Company's loan portfolio constituted $268.5 million or 86.4% of the Company's total assets, of which $148.5 million or 55.3% were held for investment and $120.0 million or 44.7% were held for sale. Loans held for investment are reported at cost, net of unamortized discounts or premiums and allowance for losses. Loans held for sale are reported at the lower of cost or market value. 44 The following table sets forth the composition of the Company's loan portfolio at the dates indicated.
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 1997 ------------ ------------ ------------ ------------ (IN THOUSANDS) MORTGAGE LOANS Mortgage loans (purchased primarily from RTC)...... $57,274 $124,483 $102,733 $ 81,995 ------- -------- -------- -------- Subprime mortgage loans Held for sale........... -- -- 20,766 120,002 Held for investment..... -- -- 1,294 5,375 ------- -------- -------- -------- Total subprime mortgage loans.................. -- -- 22,060 125,377 ------- -------- -------- -------- Total mortgage loans.... 57,274 124,483 124,793 207,372 ------- -------- -------- -------- CONSUMER LOANS Automobile installment contracts................ -- -- 10,830 40,877 Insurance premium financing................ -- 16,975 32,058 39,990 Other consumer loans...... 235 31 230 267 ------- -------- -------- -------- Total consumer loans.... 235 17,006 43,118 81,134 ------- -------- -------- -------- Total loans............. 57,509 141,489 167,911 288,506 Unearned discounts and premiums................. (4,333) (4,445) (3,697) (2,901) Unearned finance charges.. -- -- (3,271) (10,581) Allowance for loan losses................... (378) (5,250) (5,356) (6,487) ------- -------- -------- -------- Total loans, net........ $52,798 $131,794 $155,587 $268,537 ======= ======== ======== ========
Loan Maturities. The following table sets forth the dollar amount of loans maturing in the Company's loan portfolio at December 31, 1997 based on scheduled contractual amortization. Loan balances are reflected before unearned discounts and premiums, unearned finance charges and allowance for losses.
AT DECEMBER 31, 1997 -------------------------------------------------------------------------- MORE THAN MORE THAN MORE THAN MORE THAN ONE YEAR 1 YEAR TO 3 YEARS TO 5 YEARS TO 10 YEARS TO MORE THAN OR LESS 3 YEARS 5 YEARS 10 YEARS 20 YEARS 20 YEARS TOTAL LOANS -------- --------- ---------- ---------- ----------- --------- ----------- (IN THOUSANDS) Mortgage loans held for investment............. $ 78 $ 484 $ 2,090 $7,185 $27,083 $ 50,450 $ 87,370 Mortgage loans held for sale................... -- -- -- -- 4,983 115,019 120,002 Consumer loans.......... 40,527 19,933 20,674 -- -- -- 81,134 ------- ------- ------- ------ ------- -------- -------- Total................. $40,605 $20,417 $22,764 $7,185 $32,066 $165,469 $288,506 ======= ======= ======= ====== ======= ======== ========
The following table sets forth, at December 31, 1997, the dollar amount of loans receivable that were contractually due after one year and indicates whether such loans have fixed or adjustable interest rates.
DUE AFTER DECEMBER 31, 1998 --------------------------- FIXED ADJUSTABLE TOTAL ------- ---------- -------- (IN THOUSANDS) Mortgage loans held for investment.............. $16,106 $ 71,186 $ 87,292 Mortgage loans held for sale.................... 24,898 95,104 120,002 Consumer loans.................................. 40,340 267 40,607 ------- -------- -------- Total......................................... $81,344 $166,557 $247,901 ======= ======== ========
45 CLASSIFIED ASSETS AND ALLOWANCE FOR LOAN LOSSES The Company maintains an asset review and classification process for purposes of assessing loan portfolio quality and the adequacy of its loan loss allowances. The Company's Asset Review Committee reviews for classification all problem and potential problem assets and reports the results of its review to the Board of Directors quarterly. The Company has incorporated the OTS internal asset classifications as a part of its credit monitoring systems and in order of increasing weakness, these designations are "substandard," "doubtful" and "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, condition and values, questionable and there is a high possibility of loss. Loss assets are considered uncollectible and of such little value that continuance as an asset is not warranted. Assets which do have weaknesses but do not currently have sufficient risk to warrant classification in one of the categories described above are designated as "special mention." At December 31, 1997, the Company had $2.7 million in assets classified as special mention, $6.9 million of assets classified as substandard, $70,000 in assets classified as doubtful and no assets classified as loss. The following table sets forth the remaining balances of all loans in the Bank's held for investment portfolio (before specific reserves for losses) that were more than 30 days delinquent at December 31, 1995, 1996 and 1997.
LOAN DECEMBER 31, % OF TOTAL DECEMBER 31, % OF TOTAL DECEMBER 31, % OF TOTAL DELINQUENCIES 1995 LOANS 1996 LOANS 1997 LOANS - ------------- ------------ ---------- ------------ ---------- ------------ ---------- (DOLLARS IN THOUSANDS) 30 to 59 days........... $1,753 1.5% $1,866 1.4% $ 416 0.3% 60 to 89 days........... 842 0.7% 109 0.1% 641 0.4% 90+ days................ 6,507 5.6% 6,422 4.7% 7,130 4.8% ------ --- ------ --- ------ --- Total................... $9,102 7.8% $8,397 6.2% $8,187 5.5% ====== === ====== === ====== ===
46 Nonaccrual and Past Due Loans. The Company's general policy is to discontinue accrual of interest on a mortgage loan when it is delinquent 90 days or more, and on a non-mortgage loan when it is delinquent for 120 days or more. When a loan is reclassified from accrual to nonaccrual status, all previously accrued interest is reversed. Interest income on nonaccrual loans is subsequently recognized only to the extent that cash payments are received or the borrower's ability to make periodic interest and principal payments is in accordance with the loan terms, at which time the loan is returned to accrual status. Accounts which are deemed fully or partially uncollectible by management are generally fully reserved or charged off for the amount that exceeds the estimated fair value (net of selling costs) of the underlying collateral. The Company does not generally modify, extend or rewrite loans and at December 31, 1997 had no troubled debt restructured loans. The following table sets forth the aggregate amount of nonaccrual loans (net of unearned discounts and premiums, unearned finance charges and specific allowances) at December 31, 1994, 1995, 1996 and 1997.
DECEMBER 31, ------------------------------ 1994 1995 1996 1997 ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Nonaccrual loans Single-family residential................ $1,439 $5,086 $5,044 $5,219 Multi-family residential................. -- 154 81 81 Consumer and other loans................. -- -- 710 1,333 ------ ------ ------ ------ Total.................................. $1,439 $5,240 $5,835 $6,633 ====== ====== ====== ====== Nonaccrual loans as a percentage of Total loans held for investment.......... 2.73% 3.85% 4.19% 4.31% Total assets............................. 0.80% 3.28% 3.09% 2.13% General allowance for loan losses as a percentage of Total loans held for investment.......... 0.71% 3.19% 3.14% 3.54% Nonaccrual loans......................... 26.27% 82.80% 74.90% 82.33%
For the years ended December 31, 1995, 1996 and 1997, the amount of interest income that would have been recognized on nonaccrual loans if such loans had continued to perform in accordance with their contractual terms was $296,000, $370,000 and $337,000, respectively. The total amount of interest income recognized on nonaccrual loans was $327,000, $364,000 and $212,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Accruing loans over 90 days past due were $66,000 at December 31, 1997. There were no accruing loans over 90 days past due at December 31, 1995 and 1996. Real Estate Owned. Real estate acquired through foreclosure or by deed in lieu of foreclosure ("REO") is recorded at the lower of cost or fair value at the time of foreclosure. Subsequently, an allowance for estimated losses is established when the recorded value exceeds fair value less estimated selling costs. Holding and maintenance costs related to real estate owned are recorded as expenses in the period incurred. At December 31, 1995, 1996 and 1997, real estate owned was $298,000, $988,000 and $562,000, respectively, and consisted entirely of one to four family residential properties. For the twelve months ended December 31, 1997, real estate owned expenses were $158,000 and gains of $239,000 were reported on the sale of real estate owned. 47 Allowance for Loan Losses. The following is a summary of the changes in the consolidated allowance for loan losses of the Company for each of the years ended December 31, 1995, 1996 and 1997 and for the period from April 29, 1994 (Inception) to December 31, 1994.
AT OR FOR THE YEAR ENDED APRIL 29, 1994 DECEMBER 31, (INCEPTION) TO ----------------------- DECEMBER 31, 1994 1995 1996 1997 ----------------- ------ ------ ------- (DOLLARS IN THOUSANDS) ALLOWANCE FOR LOAN LOSSES Balance at beginning of period...... $ -- $ 378 $5,250 $ 5,356 Provision for loan losses......... 50 120 194 507 Charge-offs Mortgage loans held for investment..................... -- (108) (285) (373) Mortgage loans held for sale.... -- -- -- -- Consumer loans.................. -- -- (433) (2,101) ----- ------ ------ ------- -- (108) (718) (2,474) Recoveries Mortgage loans held for investment..................... -- -- -- 77 Mortgage loans held for sale.... -- -- -- -- Consumer loans.................. -- -- 274 1,068 ----- ------ ------ ------- -- -- 274 1,145 ----- ------ ------ ------- Net charge-offs................... -- (108) (444) (1,329) Acquisition discounts allocated to loss allowance................... 328 4,860 356 1,953 ----- ------ ------ ------- Balance at end of period............ $ 378 $5,250 $5,356 $ 6,487 ===== ====== ====== ======= Allowance as a percent of net principal balance Mortgage loans held for investment....................... 0.71% 4.23% 4.28% 4.32% Consumer loans.................... -- 1.00% 2.66% 3.18% Net charge-offs to average loans.. -- 0.10% 0.30% 0.60% Ending allowance to period end loans, net....................... 0.71% 3.98% 3.97% 4.37%
AT DECEMBER 31, ----------------------------------------------------------------------------------------------- 1994 1995 1996 1997 ----------------------- ----------------------- ----------------------- ----------------------- PERCENT OF LOANS PERCENT OF LOANS PERCENT OF LOANS PERCENT OF LOANS IN EACH CATEGORY IN EACH CATEGORY IN EACH CATEGORY IN EACH CATEGORY AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS ------ ---------------- ------ ---------------- ------ ---------------- ------ ---------------- (DOLLARS IN THOUSANDS) Distribution of end of period allowance by loan type Mortgage loans held for investment....... $378 99.6% $5,080 87.9% $4,295 70.7% $3,653 51.9% Consumer loans........ -- 0.4% 170 12.1% 1,061 29.3% 2,246 48.1% Unallocated........... -- -- -- -- -- -- 588 -- ---- ----- ------ ----- ------ ----- ------ ----- $378 100.0% $5,250 100.0% $5,356 100.0% $6,487 100.0% ==== ===== ====== ===== ====== ===== ====== =====
The Company's policy is to maintain an allowance for loan losses to absorb future losses which may be realized on its loan portfolio. These allowances include specific reserves for identifiable impairments of individual loans and general valuation allowances for estimates of probable losses not specifically identified. The determination of the adequacy of the allowance for loan losses is based on a variety of factors, including an assessment of the credit risk inherent in the portfolio, prior loss experience, the levels and trends of non- performing loans, the concentration of credit, current and prospective economic conditions and other factors. 48 The Company's management uses its best judgment in providing for possible loan losses and establishing allowances for loan losses. However, the allowance is an estimate which is inherently uncertain and depends on the outcome of future events. In addition, regulatory agencies, as an integral part of their examinations process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to increase the allowance based upon their judgment of the information available to them at the time of their examination. CASH EQUIVALENTS AND SECURITIES PORTFOLIO The Company's cash equivalents and securities portfolios are used primarily for liquidity purposes and secondarily for investment income. Cash equivalents and securities, which generally have maturities of less than 90 days, satisfy regulatory requirements for liquidity. The following is a summary of the Company's cash equivalents and securities portfolios as of December 31, 1995, 1996 and 1997.
AS OF DECEMBER 31, --------------------------- 1995 1996 1997 ------- ------- --------- (DOLLARS IN THOUSANDS) Balance at end of period Fed funds........................................ $ 8,500 $ -- $ -- Overnight deposits............................... 1,507 21,000 4,000 U.S. agency securities........................... -- -- 1,002 Commercial paper................................. 2,986 -- -- FHLB certificates of deposit..................... 9,000 -- -- ------- ------- --------- Total............................................ $21,993 $21,000 $ 5,002 ======= ======= ========= Weighted average yield at end of period Fed funds........................................ 5.29% -- -- Overnight deposits............................... 5.67% 5.02% 3.50% U.S. agency securities........................... -- -- 6.54% Commercial paper................................. 5.62% -- -- FHLB certificates of deposit..................... 5.61% -- -- Weighted average maturity at end of period Fed funds........................................ 1 day -- -- Overnight deposits............................... 1 day 1 day 1 day U.S. agency securities........................... -- -- 24 months Commercial paper................................. 26 days -- -- FHLB certificates of deposit..................... 3 days -- --
IMPACT OF INFLATION AND CHANGING PRICES The financial statements and notes thereto presented herein have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. 49 ACCOUNTING CONSIDERATIONS FASB No. 129, "Disclosure on Information about Capital Structure" ("FASB 129") is effective for financial statements for periods ending after December 15, 1997. It is not expected that FASB 129 will require significant revision of prior disclosures since FASB 129 lists required disclosures that had been included in a number of previously existing separate statements and opinions. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. SFAS 130 does not, however, require a specific format for presenting such information, but requires the Company to display an amount representing total comprehensive income for the period in that financial statement. The Company is in the process of determining its preferred format. SFAS 130 is effective for fiscal years beginning after December 15, 1997. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way that public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for financial statements for periods beginning after December 31, 1997. 50 BUSINESS GENERAL The Company is a diversified specialty finance company engaged primarily in originating and acquiring for investment or sale residential mortgage loans, personal automobile insurance premium finance contracts and retail automobile installment sales contracts. The Company targets customers who generally cannot obtain financing from traditional lenders. These customers usually pay higher loan origination fees and interest rates than those charged by traditional lenders to gain access to consumer financing. The Company believes that management's experience in originating, assessing, pricing and managing credit risk enables the Company to earn attractive risk-adjusted returns. The Company has funded its operations to date principally through retail deposits, FHLB advances and whole loan sales at the Bank, and its first securitization of mortgage loans completed in December 1997. The Company's strategy is to undertake controlled geographic expansion of its existing businesses, with particular emphasis in the near term on the national expansion of its mortgage finance operations, and to evaluate possible entry into additional specialty finance businesses which provide the opportunity for attractive risk-adjusted returns. The Company believes that the Bank currently is the largest Hispanic- controlled savings association in California. The Company commenced operations in 1994, as a Hispanic-controlled financial institution, by purchasing from the RTC certain assets and assuming certain liabilities of the Bank's predecessor, Pan American Federal Savings Bank. The Company has used the Bank as a base for expansion into its current specialty finance businesses. In 1995, the Company commenced its insurance premium finance business through a joint venture with BPN, which the Company believes to be the second largest provider of financing for consumer automobile insurance premiums in California. In 1996, the Company commenced its current mortgage and automobile finance businesses. BUSINESS STRATEGY GROWTH STRATEGY The Company intends to capitalize on its competitive strengths by expanding its core businesses and entering other specialty finance businesses which provide the opportunity for attractive risk-adjusted returns. The Company's growth strategy includes the following key elements. . Geographic Expansion of Existing Businesses. The Company intends to expand its residential mortgage and automobile finance businesses into new geographic areas, principally by opening offices staffed by experienced local marketing and management personnel. The Company believes that an emphasis on management with local experience, coupled with comprehensive underwriting standards and financial controls, will permit growth in loan originations without compromising loan performance. The Company also may expand its insurance premium finance business as opportunities arise outside of California. See "Risk Factors--General--Management of Growth." . Entry into New Specialty Finance Businesses. The Company continually evaluates expansion into other specialty finance businesses which provide the opportunity for attractive risk-adjusted returns in markets (i) which it believes are underserved by traditional lenders or are undergoing change, (ii) which are highly fragmented with no participant having significant market share, or (iii) in which it can attract the required management experience to assess, price and manage the credit risk and, thereby, generate attractive risk-adjusted returns. The Company may enter such new businesses on a de novo basis or through acquisitions. See "Risk Factors--General--Management of Growth" and "Use of Proceeds." 51 OPERATING STRATEGY The Company's operating strategy includes the following key elements. . Centralized Risk Management Controls. For each of its businesses, the Company has implemented comprehensive risk management policies and portfolio parameters which are designed to identify the types and amount of risk that can prudently be taken in each business. The Company continually monitors the performance of each of its businesses against these policies and parameters. . Decentralized Management. The management of each of the Company's businesses is responsible for its day-to-day operations, subject to centralized risk management controls and individualized, goal oriented incentive compensation programs that support the achievement of credit quality, growth and profitability objectives. The Company believes that the delegation of responsibility to the management of each business has enabled the Company to attract, promote and retain experienced managers, to provide high levels of customer service and to respond promptly to changes in market conditions. . Diversified Funding Sources. The Company has funded its lending businesses to date primarily through the Bank's deposits, as well as FHLB advances and whole loan sales. The Company believes that bank deposits are a stable and cost-effective funding source which provide it with a competitive advantage. To further diversify its funding sources, in October 1997 the Company obtained a $100 million master repurchase facility to finance the anticipated growth in its mortgage lending operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources-- Warehouse Line of Credit." The Company completed its first securitization of mortgage loans in December 1997 and expects to sell or securitize mortgage loans on a periodic basis in the future. In connection with any mortgage loan securitizations, the Company will seek to maximize cash gains or arrange for the prompt sale of residual interests retained in the securitizations at or above their net book value. The Company will, in the future, consider the sale or securitization of other financial assets. See "Risk Factors--General-- Securitizations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- General--Mortgage Finance." MORTGAGE FINANCE BUSINESS OVERVIEW UPAM's loan production generally consists of subprime residential mortgage loans which are made to borrowers whose borrowing needs may not be met by traditional financial institutions due to credit history or other factors. UPAM's customers use the proceeds of the mortgage loans primarily to finance home purchases and improvements, debt consolidation, education and other consumer needs, and may benefit from consolidating existing consumer debt through mortgage loans with lower monthly payments. UPAM generally targets borrowers who have substantial equity in the property securing the loan, but may have (i) impaired or limited credit profiles, (ii) higher debt-to-income ratios than traditional mortgage lenders allow or (iii) difficulty verifying their income due to self-employment or other circumstances. These borrowers are generally willing to pay higher loan origination fees and interest rates than those charged by traditional lenders. The Company believes that the amount of equity present in the real estate securing UPAM's loans, together with the fact that approximately 88% of UPAM's loans are secured by borrowers' primary residences and approximately 96% are secured by first mortgages, mitigates certain risks inherent in subprime lending. The average LTV ratio on loans originated by UPAM during the twelve months ended December 31, 1997 was approximately 75%. UPAM's strategy emphasizes a more balanced retail and wholesale origination approach than many of its competitors. The retail division originates loans through the direct solicitation of borrowers by mail and telemarketing and accounted for $219.4 million, or 38%, of UPAM's total loan production during the twelve months ended December 31, 1997. The wholesale division originates loans through independent loan brokers and accounted for $359.2 million, or 62%, of UPAM's total loan production during the same period. 52 Until December 1997, UPAM sold substantially all of its loan originations with servicing released to other mortgage companies and investors through whole loan packages offered for bid several times per month. During the twelve months ended December 31, 1997, UPAM sold $360.2 million of loans through whole loan sales at a weighted average sales price equal to 105.7% of the original principal balance of the loans sold. UPAM completed its first securitization of $114.9 million in mortgage loans in December 1997 at a net gain on sale of 5.2% of the principal amount of loans securitized and expects to sell or securitize its loans on a periodic basis in the future. No assurances can be given that UPAM will be able to continue to securitize its mortgage loans in the future or that any such securitizations will prove to be profitable if commenced. See "Risk Factors--General--Securitizations." SUBPRIME MORTGAGE INDUSTRY The residential mortgage market can be separated into two major segments: "prime" and "subprime." Prime borrowers comprise greater than 80% of the market and have credit quality and documentation that satisfy the requirements of the Government National Mortgage Association ("GNMA"), FNMA or FHLMC. Historically, the subprime mortgage loan market has been a highly fragmented niche market dominated by local brokers with direct ties to investors who owned and serviced this relatively higher margin, riskier product. Although there recently have been numerous new entrants into the subprime mortgage loan business, the Company believes that the subprime mortgage market is still highly fragmented. BUSINESS STRATEGY UPAM's strategic objective is to develop a national subprime residential mortgage business. In order to achieve this objective, UPAM intends to (i) continue to originate subprime mortgage loans through a balanced retail and wholesale network, (ii) develop the capability to sell or securitize these loans and (iii) over time develop an in-house collection capability to complement third-party sub-servicing. Until December 1997, UPAM sold substantially all of its loan originations with servicing released to mortgage companies and investors through whole loan packages offered for bid several times per month. UPAM completed its first securitization of mortgage loans in December 1997 and may sell or securitize mortgage loans on a periodic basis in the future. The Company believes that the subprime residential mortgage market is highly fragmented and that success in this market depends primarily on the ability to provide superior customer service and competitive pricing. UPAM seeks to (i) locate experienced loan officers in geographic proximity to large population centers, (ii) issue conditional loan approvals promptly, generally within 24 hours after receipt of an application, (iii) avoid imposing unnecessarily restrictive conditions on loan approvals, (iv) fund loans on a timely basis, generally within 15 to 20 days following conditional approval, and in accordance with approved terms, and (v) competitively price loans according to market conditions. 53 OPERATING SUMMARY The following table presents a summary of UPAM's key operating and statistical results on a quarterly basis for the years ended December 31, 1996 and 1997.
FOR THE QUARTER ENDED --------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1996 1997 1997 1997 1997 --------- -------- ------------- ------------ --------- -------- ------------- ------------ (DOLLARS IN THOUSANDS) LOAN ORIGINATION STATISTICS Loans originated........ $4,901 $15,168 $16,646 $34,796 $67,337 $108,481 $161,061 $241,743 Number of loans originated............. 51 144 171 345 606 933 1,466 2,540 Average principal balance per loan....... $ 96 $ 105 $ 97 $ 101 $ 111 $ 116 $ 110 $ 95 Weighted average interest rate Fixed-rate loans....... 10.21% 10.46% 11.61% 11.11% 10.60% 10.83% 10.78% 10.61% Adjustable-rate loans.. 9.46% 10.00% 9.6% 9.38% 9.27% 9.38% 9.51% 9.58% Weighted average loan- to-value ratio......... 70% 72% 72% 72% 73% 74% 76% 75% First mortgage loans.... 91% 94% 96% 96% 97% 97% 97% 95% Fixed-rate loans........ 42% 29% 10% 8% 11% 10% 16% 26% Owner occupied.......... 92% 93% 92% 86% 86% 88% 85% 88% Retail origination...... 7% 1% 8% 32% 35% 41% 44% 34% California.............. 21% 16% 36% 46% 53% 58% 50% 39% BORROWER QUALITY STATISTICS(1) AA or A-................ 55% 67% 69% 67% 73% 71% 71% 69% B or C.................. 40% 28% 28% 31% 23% 25% 25% 27% C- or D................. 5% 5% 3% 2% 4% 4% 4% 4% LOAN SALES STATISTICS Loans sold or securitized............ $1,097 $ 4,226 $16,234 $28,585 $40,254 $ 92,463 $140,363 $202,034 Average sales price (% of principal balance)............... -- 105.69% 105.32% 106.13% 106.15% 105.60% 105.73% 105.59% OPERATING STATISTICS States loans originated in..................... 4 7 7 7 10 14 19 29 Retail loan branches.... -- -- 2 3 6 9 12 17 Retail loan officers.... -- -- 7 17 41 59 79 119 Wholesale loan centers.. 1 1 1 2 2 4 5 5 Wholesale account executives............. 3 3 5 10 33 34 38 41
- ------- (1)See "--Loan Production by Borrower Risk Classification." LOAN ORIGINATION Retail Division. UPAM's retail origination growth strategy emphasizes geographic expansion and focused consumer marketing efforts through both direct mail and telemarketing. Although retail loan originations entail significantly higher operating costs than wholesale originations, the benefits of retail origination result from (i) greater fee retention to compensate for these costs and (ii) direct relationships with borrowers which create a more sustainable loan origination franchise and increased control over the lending process. During the twelve months ended December 31, 1997, the retail division originated $219.4 million in loans, or 38%, of UPAM's total loan production. As of December 31, 1997, the retail division employed 119 loan officers, located in 17 retail branches. Ten of these branches are located in California, two are in Arizona, and one each in Colorado, Washington, Nevada, New Mexico and Oregon. The retail division has implemented an expansion plan designed to control the significant operating expenses associated with establishing new branch offices. Under this plan, UPAM has housed several branches responsible for specific geographic areas in one centrally located retail office, thereby reducing overhead, increasing efficiency and allowing greater supervision, while retaining locally-focused marketing efforts. As an example, only one greater Los Angeles retail office exists (in Orange), but it houses six full- service branches responsible for the Pasadena, Orange, Long Beach, Ontario, West Los Angeles and Riverside areas. 54 UPAM targets markets for expansion based on demographics and its ability to recruit experienced sales office managers and other qualified personnel in particular markets. Retail marketing activities include direct mail, followed by outbound telemarketing calls from the local retail branch. Telemarketing activities are aimed at identifying potential borrowers with subprime credit characteristics. In December 1997, UPAM created a marketing department with the objective of expanding and refining the target markets for direct mail and telemarketing activities and increasing the overall effectiveness of existing marketing efforts. In February 1998, UPAM established a retail telemarketing group to maximize the retail division's lead generation and follow-up on direct mail activities. The telemarketing group will use a predictive dialer system which it expects to have operational in the second quarter of 1998. The following table sets forth selected information relating to UPAM's retail loan originations during the periods shown.
FOR THE QUARTER ENDED ------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1997 1997 1997 1997 ------------- ------------ --------- -------- ------------- ------------ (DOLLARS IN THOUSANDS) Loans originated........ $1,391 $11,158 $23,616 $44,151 $70,258 $81,361 Number of loans originated............. 19 102 222 372 604 778 Average principal balance per loan....... $ 73 $ 109 $ 106 $ 118 $ 116 $ 104 Weighted average loan- to-value ratio......... 63% 72% 74% 75% 77% 74% First mortgage loans.... 97% 98% 98% 98% 98% 94% Property securing loan Owner occupied........ 74% 72% 77% 83% 86% 85% Non-owner occupied.... 26% 28% 23% 17% 14% 15% Weighted average interest rate Fixed-rate loans...... 10.11% 10.50% 10.28% 10.47% 10.48% 10.25% Adjustable-rate loans................ 8.65% 8.73% 8.95% 8.99% 9.03% 8.99%
Wholesale Division. UPAM's wholesale origination growth strategy emphasizes (i) geographic expansion, (ii) expanding relationships with existing brokers through quality service, (iii) concentrating marketing efforts on a smaller number of high-volume brokers and (iv) developing correspondent relationships. The benefits of wholesale origination result from brokers conducting their own marketing and employing their own personnel to complete loan applications, allowing UPAM to increase quickly its loan origination volume through increased leverage of fixed costs. The wholesale division funded $359.2 million in loans, or 62% of UPAM's total loan production, during the twelve months ended December 31, 1997. At December 31, 1997, the wholesale division had five loan centers located in Washington, Utah, California, Florida and Ohio, and employed 41 account executives. These loan centers maintain relationships with brokers that provide loans to UPAM. During the twelve months ended December 31, 1997, UPAM originated loans through approximately 760 independent mortgage brokers, with the top 20 brokers generating 29% of those loans and the largest broker accounting for 5.0%. The wholesale division has established a correspondent group targeting mid- size brokers, which group commenced originating loans in April 1998. Loans are initially funded through the broker's warehouse lines (not affiliated with UPAM or the Bank) and delivered to UPAM on a whole loan basis for underwriting and program review. All loans purchased on this basis will have appraisal reviews performed and must conform with UPAM's credit and underwriting guidelines. Whereas the margins on correspondent business are generally less than traditional wholesale channels, efficiencies are gained as correspondents perform more of the traditional back-office work, allowing UPAM to purchase loans with a minimum of fixed overhead. 55 The following table sets forth selected information relating to wholesale loan originations during the periods shown.
FOR THE QUARTER ENDED ------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1997 1997 1997 1997 ------------- ------------ --------- -------- ------------- ------------ (DOLLARS IN THOUSANDS) Loans originated........ $15,255 $23,637 $43,721 $64,330 $90,803 $160,382 Number of loans originated............. 152 243 384 561 862 1,762 Average principal balance per loan....... $ 100 $ 97 $ 113 $ 114 $ 105 $ 91 Weighted average loan- to-value ratio......... 73% 72% 73% 74% 75% 75% First mortgage loans.... 96% 95% 96% 97% 96% 96% Property securing loan Owner occupied....... 93% 93% 91% 92% 85% 90% Non-owner occupied... 7% 7% 9% 8% 15% 10% Weighted average interest rate Fixed-rate loans..... 11.93% 11.49% 10.83% 11.22% 10.99% 10.89% Adjustable-rate loans................ 9.67% 9.69% 9.44% 9.63% 9.89% 9.83%
PRODUCTS AND PRICING UPAM offers both fixed-rate loans and ARMs, as well as loans with an interest rate that is initially fixed for a period of time and subsequently converts to an adjustable-rate. Most of the ARMs originated by UPAM are offered at a lower initial interest rate and are subject to lifetime interest rate caps. At each interest rate adjustment date, UPAM adjusts the rate, subject to certain limitations on the amount of any single adjustment, until the rate charged equals the lower of the fully indexed rate or the lifetime interest rate cap. There can be no assurance, however, that the interest rate on these loans will reach the fully indexed rate if interest rates rise rapidly, to the level of the cap, the loans are pre-paid or in cases of foreclosure. UPAM's borrowers are classified under one of six subprime risk classifications, and loan products are available at different interest rates and with different origination points and fees depending on the particular borrower's risk classification. UPAM's maximum loan amount is generally $400,000 with an LTV of 90%, $500,000 with an LTV of 85% and $750,000 with an LTV of 75%. Loans over $750,000 are made on a case-by-case basis. Loans originated by UPAM during the twelve months ending December 31, 1997 had an average loan amount of approximately $104,000 and an average LTV of approximately 75%. Unless prohibited by law or otherwise waived by UPAM upon the payment by the borrower of higher origination fees and a higher interest rate, UPAM generally imposes a prepayment penalty on the borrower. As of December 31, 1997, approximately 86% of UPAM's loans included a prepayment penalty. UNDERWRITING STANDARDS UPAM originates loans in accordance with underwriting criteria that generally do not satisfy traditional underwriting standards, such as those utilized by GNMA, FNMA or FHLMC, and therefore may result in rates of delinquencies and foreclosures that are higher, and may be substantially higher, than those rates experienced by loans underwritten in a more traditional manner. UPAM's underwriting guidelines are intended to evaluate the applicant's credit history and capacity to repay the loan, the value of the proposed collateral and the adequacy of such collateral for the loan. UPAM determines the loan terms, including interest rate and maximum LTV based upon the underwriting guidelines. Underwriters are required to have had either substantial subprime underwriting experience or substantial experience with UPAM in other aspects of the Company's subprime mortgage finance business before becoming part of UPAM's underwriting department. Underwriters are not given approval authority until their work has been reviewed by a corporate-based underwriter or a specifically identified branch underwriter. In addition, 56 a sampling of a new underwriter's work is reviewed by a corporate level underwriter. No branch-based underwriter has an approval limit greater than $400,000. All loans over $400,000 require approval of the Chief Credit Officer or a designated corporate-based underwriter. Exceptions from these established guidelines are also subject to approvals, often at the corporate level. This approval process is reviewed periodically by the Board of Directors. The Chief Credit Officer periodically re-evaluates the authority levels of all underwriting personnel. UPAM's underwriting guidelines require a credit report on each applicant from a credit reporting company. UPAM's underwriters review the applicant's credit history based on the information contained in the application and reports available from credit reporting bureaus in order to determine if the applicant's credit history meets UPAM's underwriting guidelines. A number of factors determine a loan applicant's creditworthiness, including debt ratios, payment history and the combined LTV for all existing mortgages on a property. Based on this review, the underwriter assigns a preliminary rating to the application. Assessment of the applicant's ability to pay is one of the principal elements differentiating UPAM's underwriting process from methods employed by traditional lenders that may rely heavily on automated credit scoring tools. UPAM's underwriters review the applicant's credit profile to evaluate whether an impaired credit history is a result of previous adverse circumstances or a continuing inability or unwillingness to meet credit obligations in a timely manner. All mortgaged properties are appraised by qualified independent appraisers prior to funding of the loan. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice. Review appraisals are required on substantially all wholesale loans (consistent with industry standards since the appraiser involved on a wholesale origination would generally not be on a list of approved appraisers maintained by UPAM) and retail loans where the appraisal was prepared by an appraiser who has not been approved by UPAM. UPAM has implemented a loan quality control process designed to ensure compliance with its policies and procedures. Prior to funding a loan, UPAM performs a pre-funding quality control audit which consists of verifying a loan applicant's credit and employment. UPAM also ensures that the documentation is complete once the loan is originated in order to facilitate its subsequent sale. The underwriting guidelines set forth in the following table, and the letter grades applied to each sub-prime borrower category, reflect solely the Company's internal standards, and may not be comparable to those used by other subprime mortgage lenders. UPAM continually evaluates its underwriting guidelines and periodically modifies the underwriting guidelines as required. 57
CREDIT CRITERIA MATRIX (LTV'S UP TO 85%) -------------------------------------------------------------- AA A- B -------------------- -------------------- -------------------- MORTGAGE Maximum one 30-day Maximum two 30-day Maximum four 30-day RATING late payment and no late payments and no late payments and LAST 12 MONTHS 60-day late payments 60-day late payments one 60-day late within last 12 within last 12 payment within last months. Rolling 30- months. Rolling 30- 12 months if LTV is day lates NOT day lates okay. Not 80% or less; no 60- allowed. Not more more than 29 days day late payments if than 29 days delinquent at LTV over 80%. delinquent at closing. Rolling 30-day lates closing. okay. Not more than 59 days delinquent at closing. EXCELLENT GOOD SATISFACTORY CONSUMER CREDIT -------------------- -------------------- -------------------- 24-MONTH HISTORY 12-MONTH HISTORY 12-MONTH HISTORY -------------------- -------------------- -------------------- All open and/or active - Excellent credit - Good credit prior - Reasonably good accounts in the review prior 24 months. 12 months. credit last 2 period, are considered Isolated Isolated months. Isolated when calculating the incidences of incidences of incidences of ratio of derogatory ac- minor minor credit counts to total ac- delinquencies delinquencies delinquencies counts. greater than 30 greater than 60 greater than 90 days will be days will be days will be considered. considered. considered. -Sufficient number -Sufficient number -Demonstrate of accounts paid of accounts paid ability/ as agreed to as agreed to willingness to pay offset isolated offset isolated majority of incidences of incidences of accounts as delinquencies delinquencies agreed. greater than 30 greater than 60 -Evidence of days. days. significant -Evidence of -Evidence of delinquencies significant significant greater than 90 delinquencies delinquencies days or 90 days greater than 30 greater than 60 overdue are not days not allowed. days not allowed. allowed. -< 25% of credit -< 35% of credit -< 50% of credit report items report items report items derogatory in last derogatory in last derogatory in last 24 months. 12 months. 12 months. -Minimum of 3 -Minimum of 3 -Minimum 3 accounts open for accounts open for accounts open for 6 months. 6 months. 6 months. If no minimum consumer credit, satisfactory "B" mortgage rating or VOR last 12 months required. BANKRUPTCY 3 years since If LTV is over 85%, 1 year since FORECLOSURE discharge/dismissal. 2 years since discharge--Chapter Re-established discharge--Chapter 7 7. excellent ("A") and Chapter 13. 1 year since filing credit since If LTV is 85% or Chapter 13. discharge/dismissal. less, 2 years since Must be discharged Minimum of 3 filing Chapter 13. prior to loan accounts open at Must be discharged application. least 6 months. No prior to loan Re-established good delinquency credit application. ("B") credit since report items since Re-established good discharge/dismissal; discharge/dismissal. ("A") credit since or 18 months, if no discharge/dismissal. re-established Minimum of 3 credit since accounts open at discharge/dismissal. least 6 months. No delinquent credit items since discharge/dismissal. No foreclosures last No foreclosures last No foreclosures last 3 years. 2 years. 2 years. COLLECTION No collections, No collections or No collections or CHARGE-OFF charge-offs allowed charge-offs in the charge-offs in the in last 24 months. last 12 months. last 12 months. TAX LIENS No liens, judgments No liens, judgments No liens, judgments JUDGMENTS last 24 months last 12 months last 12 months
58
CREDIT CRITERIA MATRIX (LTV'S UP TO 85%) ------------------------------------------------------------- C C- D ------------------- ------------------- ------------------- MORTGAGE Maximum six 30-day, Unlimited number of Greater than one RATING two 60-day and one 30-day, 60-day and 120-day late LAST 12 MONTHS 90-day late 90-day late payment within last payments within payments or one 12 months. Current last 12 months. 120-day late NOD allowed. Rolling 30-day payment within last lates okay. Not 12 months. Current more than 89 days NOD allowed. Not delinquent at more than 119 days closing. delinquent at closing. FAIR POOR POOR CONSUMER CREDIT ------------------- ------------------- ------------------- 12-MONTH HISTORY 24-MONTH HISTORY 12-MONTH HISTORY ------------------- ------------------- ------------------- All open and/or active - Moderate to - Majority of - Majority of accounts in the review significant credit report credit report period, are considered credit items derogatory items derogatory when calculating the derogatories in in last 12 months in last 12 ratio of derogatory ac- the past. -Percentage of months. counts to total ac- -Currently derogatory credit -Percentage of counts. delinquent items are not a derogatory credit accounts. factor. items are not a -< 100% of credit factor. report items derogatory in last 12 months. This category applies to Borrowers who do not have at least 3 accounts open for a minimum of 6 months. BANKRUPTCY 1 year since Bankruptcy filed Current bankruptcy FORECLOSURE bankruptcy filing within last 12 or recent Chapter 7 date with some re- months. Must be dismissal or established credit. discharged prior to discharge. Must be discharged loan application. Current bankruptcy prior to loan must be paid application. through loan. No foreclosures in Foreclosures cured N/A last 12 months. in last 12 months. COLLECTION Collections, Collections, Collections, CHARGE-OFF charge-offs last 12 charge-offs last 12 charge-offs last 12 months allowed. months allowed. months allowed. Unpaid collections Unpaid collections Unpaid collections in last 12 months in last 12 months in last 12 months must be paid must be paid must be paid through closing, or through closing, or through closing, or a monthly payment a monthly payment a monthly payment calculated and calculated and calculated and included in the included in the included in the borrower's DTI. borrower's DTI. borrower's DTI. Unpaid charge-offs Unpaid charge-offs Unpaid charge-offs may remain, no may remain, no may remain, no monthly payment monthly payment monthly payment calculation calculation calculation required. required. required. TAX LIENS Liens, judgments Liens, judgments Liens, judgments JUDGMENTS last 12 months last 12 months last 12 months
59 LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION The following table sets forth information concerning UPAM's loan production by subprime borrower risk classification for the periods shown. The letter grades applied to each subprime borrower category reflect solely the Company's internal standards, and may not be comparable to those used by other subprime mortgage lenders.
FOR THE QUARTER ENDED ------------------------------------------------------------------------ SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1997 1997 1997 1997 ------------- ------------ --------- -------- ------------- ------------ AA Risk Grade Percent of total originations......... 15% 14% 20% 27% 32% 33% Weighted average loan- to-value ratio....... 74% 74% 75% 75% 75% 74% Weighted average interest rate........ 8.91% 9.65% 8.88% 9.06% 9.22% 9.08% A- Risk Grade Percent of total originations......... 54% 53% 53% 44% 39% 41% Weighted average loan- to-value ratio....... 71% 71% 74% 76% 76% 75% Weighted average interest rate........ 9.48% 9.19% 9.28% 9.15% 9.55% 9.28% B Risk Grade Percent of total originations......... 24% 26% 21% 21% 21% 17% Weighted average loan- to-value ratio....... 75% 73% 72% 75% 78% 76% Weighted average interest rate........ 10.43% 9.69% 9.56% 9.77% 10.17% 9.86% C Risk Grade Percent of total originations......... 4% 5% 2% 4% 4% 5% Weighted average loan- to-value ratio....... 66% 69% 70% 69% 70% 68% Weighted average interest rate........ 11.53% 10.94% 10.81% 10.33% 10.61% 9.70% C- Risk Grade Percent of total originations......... 1% 2% 1% 2% 2% 2% Weighted average loan- to-value ratio....... 55% 66% 68% 64% 69% 72% Weighted average interest rate........ 12.23% 11.54% 11.58% 11.17% 10.89% 10.76% D Risk Grade Percent of total originations......... 2% -- 3% 2% 2% 2% Weighted average loan- to-value ratio....... 54% 53% 64% 59% 64% 64% Weighted average interest rate........ 13.25% 13.25% 12.61% 11.95% 12.88% 11.95%
60 LOAN PRODUCTION BY GEOGRAPHIC DISTRIBUTION The following table sets forth the percentage of UPAM's loans (based upon dollar amounts) originated by state for the periods shown.
FOR THE QUARTER ENDED ------------------------------------------------------------------------ SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1997 1997 1997 1997 ------------- ------------ --------- -------- ------------- ------------ California.............. 36% 46% 53% 58% 50% 39% Washington.............. 31% 27% 19% 12% 17% 12% Utah.................... 22% 23% 13% 11% 5% 5% Colorado................ 6% 1% 6% 5% 6% 8% Arizona................. -- -- 5% 5% 6% 4% Florida................. -- -- -- -- 5% 8% Maryland................ -- -- -- -- -- 2% Nevada.................. -- -- 2% 1% 1% 2% New Jersey.............. -- -- -- -- 2% 3% Oregon.................. 2% 1% 1% 5% 2% 3% Ohio.................... -- -- -- -- 2% 6% All others combined..... 3% 2% 1% 3% 4% 8% --- --- --- --- --- --- Total................. 100% 100% 100% 100% 100% 100% === === === === === ===
LOAN SALES AND SECURITIZATIONS Whole Loan Sales. During the twelve months ended December 31, 1997, UPAM sold, for cash paid in full at closing, $360.2 million of mortgage loans through whole loan sales at a weighted average sales price equal to 105.7% of the original principal balance of the loans sold. Whole loan sales are made on a non-recourse basis pursuant to a purchase agreement containing customary representations and warranties by UPAM regarding the underwriting criteria applied by UPAM in the origination process. In the event of a breach of such representations and warranties, UPAM may be required to repurchase or substitute loans. In addition, UPAM sometimes commits to repurchase or substitute a loan if a payment default occurs within the first month following the date the loan is funded, unless other arrangements are made between UPAM and the purchaser. UPAM also is required in some cases to repurchase or substitute a loan if the loan documentation is alleged to contain fraudulent misrepresentations made by the borrower. Since the inception of the Company's mortgage finance business in 1996, UPAM has repurchased seven loans in the aggregate principal amount of $1.2 million. UPAM seeks to maximize its premium on whole loan sales revenue by closely monitoring institutional purchasers' requirements and focusing on originating the types of loans that meet those requirements and for which institutional purchasers tend to pay higher premiums. During the twelve months ended December 31, 1997, UPAM sold loans to 16 institutional purchasers, four of which purchased approximately 78% of the loans sold by UPAM in this period. Securitizations. UPAM completed its first securitization of mortgage loans in December 1997, in the principal amount of $114.9 million, and expects to sell or securitize loans on a periodic basis in the future. Whether, when and how significantly UPAM enters the securitization market will depend upon economic and secondary market conditions and available financial resources. In connection with any mortgage loan securitizations, the Company will seek to maximize cash gains or arrange for the prompt sale of residual interests retained in the securitizations at or above their net book value. See "Risk Factors--General--Securitizations." LOAN SERVICING AND DELINQUENCIES UPAM currently sells most of its loans on a servicing released basis. All loans held for sale, loans securitized, and those loans that cannot be sold, are serviced and held by the Bank. The Bank subcontracts with a third-party sub-servicer to conduct its servicing operations, and monitors the sub- servicer's activities to ensure 61 that they comply with its guidelines. As UPAM securitizes additional mortgage loans, it expects to continue to use a third party sub-servicer to perform payment processing, account maintenance, tax and insurance escrow accounting and other primary servicing activities, but may develop expanded in-house capabilities for delinquency, foreclosure and REO activities management. UPAM began receiving applications for mortgage loans under its regular lending programs in January 1996 and to date has sold substantially all of its loans on a whole loan, servicing released basis. Accordingly, UPAM does not have representative historical delinquency, bankruptcy, foreclosure or default experience that may be referred to for purposes of estimating future delinquency, loss and prepayment data with respect to its loans. INSURANCE PREMIUM FINANCE BUSINESS OVERVIEW In May 1995, the Company entered a joint venture with BPN under the name "ClassicPlan." Under this joint venture, which commenced operations in September 1995, (i) the Bank underwrites and finances automobile insurance premiums in California and (ii) BPN markets this financing primarily to independent insurance agents that sell automobile insurance in California and, thereafter, services such loans for the Bank. IPF targets drivers who are classified by insurance companies as non-standard or high risk for a variety of reasons, including age, driving record, a lapse in insurance coverage or ownership of high value or high performance automobiles. Insurance companies that underwrite insurance for such drivers, including those participating in the assigned risk programs established by California law, generally either do not offer financing of insurance premiums or do not offer terms as flexible as those offered by IPF. Customers are directed to BPN through a non-exclusive network of insurance brokers and agents who sell automobile insurance and offer financing through programs like those offered by IPF. On a typical twelve-month insurance policy, the borrower makes a cash down payment of 15% or 20% of the premium (plus certain fees) and the balance is financed under a contract that contains a payment period of shorter duration than the policy term. In the event that the insured defaults on the loan, the Bank has the right to obtain directly from the insurance company the unearned insurance premium held by the insurance company, which can then be applied to the outstanding loan balance (premiums are earned by the insurance company over the life of the insurance policy). Each contract is designed to ensure that, at any point during the term of the underlying policy, the unearned premium under the insurance policy exceeds the unpaid principal amount due under the contract. Under the terms of the contract, the insured grants IPF a power of attorney to cancel the policy in the event the insured defaults under the contract. Upon cancellation, the insurance company is required by California law to remit the unearned premium to IPF which, in turn, offsets this amount against any amounts due from the insured. IPF does not sell or have the risk of underwriting the underlying insurance policy. IPF seeks to minimize its credit risk by (i) perfecting a security interest in the unearned premium, (ii) avoiding concentrations of policies with insurance companies that are below certain industry ratings and (iii) doing business to date only in California which maintains an insurance guaranty fund which protect consumers and insurance premium finance companies against losses from failed insurance companies. In addition to insurance premiums, IPF will also finance broker fees (i.e., fees paid by the insured to the agent). If a policy cancels, the agent repays any unearned broker fee financed by IPF. Broker fee financing represents approximately 3% of total loans outstanding. At December 31, 1997, approximately 81% of all broker fee financing was to a single insurance agency. When IPF agrees to finance an agent's broker fees, a credit limit is established for the agent. Agents are required to maintain deposits with the Bank to mitigate IPF's losses on broker fees financed. To date, the Bank has not charged-off a broker fee balance. The Company's portfolio of insurance premium finance contracts has grown from 54,927 contracts in the aggregate gross amount of $32.1 million at December 31, 1996 to 132,623 contracts in the aggregate gross amount of $40.0 million at December 31, 1997, primarily as a result of the adoption in California of mandatory automobile insurance. These contracts were originated solely in California by over 500 agents and were secured by policies underwritten by over 200 insurance companies. 62 In January 1998, the Company and BPN purchased from Providian National Bank and others for $450,000 the right to solicit new and renewal personal and commercial insurance premium finance business from brokers who previously have provided contracts to Providian National Bank and the servicers of its insurance premium finance business. The purchase price for the agreement was provided 60% by the Company and 40% by BPN. The relationship between the Company and BPN continues to be governed by the joint venture arrangement already in effect. See "--Relationship with BPN" below. The Company also acquired the Commonwealth name and certain equipment and software. The agreement also provides that Providian National Bank and the servicers of its insurance premium finance business may not solicit or engage in the insurance premium finance business in California for a period of three years from the date of the agreement. RELATIONSHIP WITH BPN BPN is headquartered in Chino, California, and markets the Company's insurance premium finance program under the trade name "ClassicPlan." The Company believes that IPF is the largest provider of financing for consumer automobile insurance premiums in California. On a very limited basis, IPF also finances insurance premiums for businesses purchasing property, casualty and liability insurance. At December 31, 1997, BPN had two stockholders and 45 employees. BPN solicits insurance agents and brokers to submit their clients' financing requests to the Bank. BPN is responsible for monitoring the agents' performance and assisting with IPF's compliance with applicable consumer protection, disclosure and insurance laws, and providing customer service, data processing and collection services to IPF. The Bank pays fees to BPN for these services. The amount of these fees is based on fixed charges, which include a loan service fee per contract and cancellation fees charged by the Bank, and the earnings of the loan portfolio, which include (i) 50% of the interest earned on portfolio loans after the Bank subtracts a specified floating portfolio interest rate and (ii) 50% of late fees and returned check fees charged by the Bank. Additionally, BPN and the Bank share equally (i) certain collection and legal expenses which may occur from time-to-time, (ii) all net loan losses experienced on the insurance premium loan portfolio and (iii) all net losses up to $375,000 experienced on the broker fees loan portfolio. BPN bears losses over $375,000 experienced on the broker fees loan portfolio. The stockholders of BPN have entered into certain guaranty agreements in favor of the Bank whereby they agree to pay any sums owed to the Bank and not paid by BPN. The total potential liability of the guarantors to the Bank is limited to $1,250,000 plus any amounts by which BPN is obligated to indemnify the Bank. Under these guaranties, all debts of BPN to the guarantors are subordinated to the full payment of all obligations of BPN to the Bank. The Company has entered into an option agreement with BPN and its stockholders whereby the Company may purchase all of the issued and outstanding shares of BPN (the "Share Option") and all additional shares of any BPN affiliate which may be organized outside of California (the "Affiliate Share Option"). The option period expires March 31, 2005. The Company has agreed not to exercise the Share Option prior to April 29, 1999 unless BPN or its stockholders have breached their outstanding agreements with the Company. Until the date occurring 90 days after delivery to the Company of a notice stating that BPN has had $30,000,000 or more in loans outstanding for the six months preceding delivery of such notice, which notice cannot be delivered prior to October 29, 1999, the Company may exercise the Share Option for $3,250,000 and must pay a $750,000 noncompete payment to certain stockholders and key employees of BPN (the "Noncompete Payment"). If the Share Option is exercised any time thereafter, the Noncompete Payment will be made and the option exercise price shall be the greater of (a) $3,250,000 or (b) four times BPN's pre-tax earnings for the twelve complete consecutive calendar months immediately preceding the date of exercise less the Noncompete Payment. The Affiliate Share Option may not be exercised independently of the Share Option. The exercise price of the Affiliate Share Option will equal the sum of four times BPN Affiliate's pre-tax earnings for the twelve month period prior to exercise. AUTOMOBILE INSURANCE PREMIUM FINANCE INDUSTRY Insurance Finance. The private passenger automobile insurance industry in the United States is estimated by A.M. Best Company ("A.M. Best"), a provider of independent ratings on the financial strength and claims 63 payment ability of insurance companies, to have been a $109 billion market in annual premium volume during 1996, with nonstandard automobile insurance comprising $23 billion of this market. Although reliable data concerning the size and composition of the personal lines premium finance market is not available, the Company believes that the industry is highly fragmented with no independent insurance premium finance company accounting for a significant share of the market. The Company believes that the insurance premium finance industry is attractive for the following reasons: (i) the nonstandard automobile insurance premium market has grown rapidly in recent years, growing 56.7% over the past five years; (ii) the insurance premium finance industry is consolidating nationwide as both producers and insurance companies reduce the number of their relationships with insurance premium finance companies; and (iii) additional states may follow California in legislating mandatory insurance coverage for all motorists. The Company believes that the insurance premium finance industry in California is somewhat more concentrated than elsewhere in the nation, with several long-established competitors. California Insurance Laws. Under current law, automobiles in the state of California cannot be registered without providing proof of automobile insurance or posting required bonds with the Department of Motor Vehicles. In California, as in most states, insurance companies fall into one of two categories, admitted or non- admitted. All insurance companies licensed to do business in California are required to be members of the California Insurance Guarantee Association ("CIGA"), and are classified as "admitted" companies. CIGA was established to protect insurance policyholders in the event the company that issued a policy fails financially, and to establish confidence in the insurance industry. Should an insurance company fail, CIGA is empowered to raise money by levying member companies. CIGA pays off claims against insurance companies, which protects both the customer and the premium financiers should an admitted insurance company fail. In such event, CIGA will refund any unearned premiums. This provides protection to companies, such as IPF, that provide insurance premium financing. As a result, IPF's policy is to limit financing of insurance policies issued by non-admitted carriers to less than 5% of its total portfolio. At December 31, 1997, policies issued by non- admitted carriers comprised 1.44% of IPF's total portfolio. Because insurance companies will not voluntarily insure drivers whom they consider to be excessively high risk, California has a program called the California Automobile Assigned Risk Program ("CAARP"), to which all admitted companies writing private passenger automobile insurance policies must belong. This 43-year-old program is an insurance plan for high-risk, accident-prone drivers who are unable to purchase insurance coverage from regular insurance carriers. CAARP policies are distributed to the admitted companies in proportion to their share of California's private passenger automobile insurance market. The companies participating in CAARP do not have any discretion in choosing the customers they insure under the program. The customers are arbitrarily assigned to them by CAARP. Although CAARP offers financing of its policy premiums, its terms are not as competitive as the insurance premium finance companies and, therefore, many CAARP policies are financed by others. At December 31, 1997, approximately 24.8% of the insurance policies financed by IPF were issued under CAARP. 64 BUSINESS STRATEGY IPF's business strategy is to increase profitably the volume of contracts originated and maintained in its portfolio by expanding its relationships with insurance brokers and agents and insurance companies in California and, potentially, in other states. IPF intends to implement this strategy by: . Strengthening its relationships with insurance brokers and agents by offering a variety of high-quality support services (e.g., computer hardware and software and customer reports) designed to enable them to better serve their customers; . Investing additional resources to ensure IPF's ability to continue to provide technologically advanced and efficient contract origination and servicing systems and support services; . Expanding its premium financing to other insurance lines of business (e.g., commercial, property, casualty and liability insurance); and . Expanding the Company's operations into new states either through joint ventures or the acquisition of existing insurance premium finance businesses in those states. OPERATING SUMMARY The following table presents a summary of IPF's key operating and statistical results for the years ended December 31, 1996 and 1997.
AT OR FOR THE YEAR ENDED DECEMBER 31, --------------------------- 1996 1997 ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PORTFOLIO AVERAGES) OPERATING DATA Loan originations................................ $ 99,012 $ 145,167 Loans outstanding at period end.................. 32,058 39,990 Average gross yield(1)........................... 19.18% 19.79% Average net yield(2)............................. 13.62% 14.01% Allowance for loan losses........................ $ 504 $ 450 LOAN QUALITY DATA Allowance for loan losses (% of loans outstanding).................................... 1.57% 1.13% Net charge-offs (% of average loans outstanding)(3)................................. 0.38% 0.35% Delinquencies (% of loans outstanding)(4)........ 1.18% 1.64% PORTFOLIO DATA Average monthly loan originations (number of loans).......................................... 6,986 10,443 Average loan size at origination................. $ 1,181 $ 1,158 Commercial insurance policies (% of loans outstanding).................................... 1.6% 2.1% CAARP policies (% of loans outstanding).......... 19.8% 24.8% Cancellation rate (% of premiums financed)....... 45.0% 49.0%
- -------- (1) Gross yield represents total rates and fees paid by the borrower. (2) Net yield represents the yield to the Bank after interest and fee sharing with BPN. (3) Includes only the Bank's 50% share of charge-offs. (4) This statistic measures delinquencies on canceled policy balances. Since IPF seeks recovery of unearned premiums from the insurance companies, which can take up to 90 days, loans are not considered delinquent until more than 90 days past due. PRODUCTS AND PRICING IPF generally charges from 16% to 23% annualized interest (depending on the amount financed) and a $40 processing fee for each consumer contract, which the Company believes is competitive in IPF's industry. In 65 addition, contracts provide for the payment by the insured of a delinquency charge and, if the default results in cancellation of any insurance policy listed in the contract, for the payment of a cancellation charge. Certain of these finance charges and fees are shared with BPN. See "--Relationship with BPN." The insured makes a minimum 15% down payment on an annual policy and pays the remainder in a maximum of ten monthly payments. IPF designs its programs so that the unearned premium is equal to or greater than the remaining principal amount due on the contract by requiring a down payment and having a contract term shorter than the underlying policy term. SALES AND MARKETING IPF currently markets its insurance premium finance program through a network of over 500 agents, primarily located in Los Angeles, Orange and San Bernardino counties. Relationships with agents are established by BPN's marketing representatives. The Company believes that IPF has been able to attract and maintain its relationship with agents by offering a higher level of service than its competitors. IPF focuses on providing each agent with up- to-date information on its customers' accounts, which allows the agent to service customers' needs and minimize the number of policies that are canceled. Many of IPF's largest agents have computer terminals provided by BPN in their offices which allow on-line access to customer information. Agents for IPF receive their producer fees ($20, equal to 50% of the aforementioned $40 processing fee per contract) in 30 days, as opposed to some of IPF's competitors, who hold back 50% of the fee as collateral against early cancellations. IPF does not require return of this $20 producer fee for early policy cancellation unless the policy pays off in the first 30 days. To minimize its exposure to reliance on a limited number of agents, the Company has instituted portfolio guidelines generally limiting the dollar amount of contracts originated by any agent to 15% of IPF's total portfolio. The Company performs a quarterly analysis of all agents based on information provided by BPN. At December 31, 1997, IPF had one agent that exceeded the 15% portfolio parameter, accounting for 23.9% of IPF's total portfolio. UNDERWRITING STANDARDS IPF is a secured lender, and upon default, relies on its security interest in the unearned premium held by the insurance company. IPF can, however, suffer a loss on an insurance premium finance contract for four reasons: (i) loss of all or a portion of the unearned premium due to its failure to cancel the contract on a timely basis; (ii) an insolvency of the insurance company holding the unearned premium not otherwise covered by CIGA; (iii) inadequacy of the unearned premium to cover charges in excess of unpaid principal amount; and (iv) cost of collection and administration, including the time value of money, exceeding the unpaid principal and other charges due under the contract. For the twelve months ended December 31, 1997, IPF canceled for nonpayment contracts representing approximately 49% of all premiums financed. Careful administration of contracts is critical to protecting IPF against loss. Credit applications are taken at the insurance agent's office. Given the secondary source of repayment on unearned premiums due from the insurance company on a canceled policy, and in most cases, access to CIGA, IPF does not carry out a credit investigation of a borrower on loans under $25,000. At December 31, 1997, IPF had one insurance premium finance loan with an original principal amount over $25,000. SERVICING AND COLLECTION The Company believes that an efficient and accurate servicing and collection system is the most important management tool that an insurance premium financing company can use to protect itself from losses as a result of an insured's default on a contract. The insurance premium finance industry is acutely time sensitive because insurance premiums are earned each day that an insurance policy remains in effect, thus reducing, on a daily basis, the collateral support provided by the unearned premium. 66 BPN's current computer system is an Advisor 216x, manufactured by Computer Design Systems, Inc. of Minneapolis. The system uses a UNIX operating system and is based on RISC architecture. Although this system satisfies IPF's current requirements for (i) application processing, (ii) payment processing and collections and (iii) monitoring and reporting, and has significant capacity remaining, BPN is developing a new generation of Oracle-based management information system software which will provide complete online, real-time information processing services. In addition, the system will provide direct electronic processing of many processing functions that currently are paper intensive. Billing Process. A customer's monthly payments are recorded in BPN's computer system on the date of receipt. BPN's computer system is designed to provide protection against principal loss by automatically canceling a policy no later than 18 days after the customer's latest payment due date. If a payment is not received on its due date, BPN's computer system automatically prints a notice of intent to cancel and assesses a late fee which is mailed to the insured and his or her insurance agent stating that payment must be received within 18 days after the due date or IPF will cancel the insurance policy. If payment is received within the 18 day period, BPN's computer system returns the account to normal status. Collections Process. If IPF does not receive payment within the statutory period set forth in the notice of intent to cancel, BPN's computer system will automatically generate a cancellation notice on the next business day, instructing the insurance company to cancel the insured's insurance policy and refund any unearned premium directly to IPF for processing. Although California law requires the insurance company to refund unearned premiums within 30 days of the cancellation date, most insurance companies pay on more extended terms. After cancellation, IPF charges certain allowable fees and continues to earn interest. Although the gross return premium may not fully cover the fees and accrued interest owed to IPF by the insured, principal generally is fully covered. Policies which are canceled in the first two months generally have a greater risk of loss of fees. IPF charges against income a general provision for possible losses on finance receivables in such amounts as management deems appropriate. Case-by- case direct write-offs, net of recoveries on finance receivables, are charged to IPF's allowance for possible losses. This allowance amount is reviewed periodically in light of economic conditions, the status of the outstanding contracts and other factors. Insurance Company Failure. One of the principal risks involved in financing insurance premiums is the possible insolvency of an insurance company. Another risk is that an insurance company's financial circumstances cause it to delay its refunds of unearned premiums. Either event can adversely affect the yield to an insurance premium finance company on a contract. Despite the protection afforded by CIGA, IPF also reviews the ratings assigned to the insurance companies by A.M. Best or their financial statements. To minimize its exposure to risks resulting from the insolvency of an insurance company, IPF limits the number of policies financed that are issued by insurance companies rated "B" or lower by A.M. Best. AUTOMOBILE FINANCE BUSINESS OVERVIEW The Company entered the subprime automobile finance business in February 1996 through the establishment of United Auto Credit Corporation as a subsidiary of the Bank. UACC purchases auto contracts primarily from dealers in used automobiles, approximately 77% of which are independent dealers and 23% of which are franchisees of automobile manufacturers. The borrowers on contracts purchased by UACC are classified as subprime because they typically have limited credit histories or credit histories that preclude them from obtaining loans through traditional sources. UACC maintains seven branch offices located in California and one each in Arizona, Oregon and Utah. At December 31, 1997, UACC's portfolio contained 4,750 auto contracts in the aggregate gross amount of $40.9 million, including unearned finance charges of $10.6 million. 67 SUBPRIME AUTOMOBILE FINANCE INDUSTRY Automobile financing is one of the largest consumer finance markets in the United States. In general, the automobile finance industry can be divided into two principal segments: a prime credit market and a subprime credit market. Traditional automobile finance companies, such as commercial banks, savings institutions, thrift and loan companies, credit unions and captive finance companies of automobile manufacturers, generally lend to the most creditworthy, or so-called prime, borrowers. The subprime automobile credit market, in which UACC operates, provides financing to borrowers who generally cannot obtain financing from traditional lenders. Historically, traditional lenders have not serviced the subprime market or have done so only through programs that were not consistently available. Recently, however, independent companies specializing in subprime automobile financing and subsidiaries of larger financial services companies have entered this segment of the automobile finance market, but it remains highly fragmented, with no company having a significant share of the market. BUSINESS STRATEGY UACC's business strategy includes controlled growth at the branch level, with limited volume goals and the gradual addition of new branches. Each branch is targeted to generate between $650,000 and $750,000 in gross contracts per month within four months of opening. The Company believes that UACC's strategy of (i) controlled growth, (ii) disciplined underwriting, (iii) strong internal audit procedures and (iv) focused servicing and collection efforts at the branch level, will result in sustainable profitability and lower levels of delinquency and loss than those experienced by many of its competitors, whose rapid growth has resulted in portfolio quality problems. The Company believes that the subprime automobile finance market is inconsistently or poorly serviced by the consumer finance industry. As a result, UACC's strategy is to differentiate itself by providing dealers with consistent, same day decisions and rapid funding of approved contracts. The Company believes that UACC is also more flexible than some of its competitors in financing older, higher mileage vehicles and maintenance warranties. 68 OPERATING SUMMARY The following table presents a summary of UACC's key operating and statistical results for the years ended December 31, 1996 and 1997.
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1997 ---------------- ---------------- (DOLLARS IN THOUSANDS, EXCEPT PORTFOLIO AND OTHER DATA) OPERATING DATA Gross contracts purchased.............. $ 12,216 $ 44,056 Gross contracts outstanding............ 10,830 40,877 Unearned finance charges............... 3,271 10,581 Net contracts outstanding.............. 7,559 30,296 Average purchase discount.............. 10.0% 9.79% APR to customers....................... 21.0% 21.0% Allowance for loan losses.............. $ 557 $ 1,791 LOAN QUALITY DATA Allowance for loan losses (% of net contracts)............................ 7.37% 5.91% Delinquencies (% of net contracts) 31-60 days............................ 0.38% 0.84% 61-90 days............................ 0.34% 0.20% 90+ days.............................. -- 0.22% Net charge-offs (% of average net contracts)............................ 1.50% 4.94% Repossessions (net) (% of net contracts)............................ 1.44% 0.64% PORTFOLIO DATA Used vehicles.......................... 98.7% 99.0% Vehicle age at time of contract (years)............................... 6.4 6.1 Original contract term (months)........ 37.0 38.4 Gross amount financed to WSBB(1)....... 119% 116% Net amount financed to WSBB(2) ........ 109% 105% Net amount financed per contract ...... $ 7,399 $ 7,517 Down payment........................... 22% 20% Monthly payment........................ $ 269 $ 270 OTHER DATA Number of branches..................... 4 10
- -------- (1) WSBB represents Kelly Wholesale Blue Book for used vehicles. (2) Net amount financed equals the gross amount financed less unearned finance charges or discounts. PRODUCTS AND PRICING UACC targets transactions which involve (i) a used automobile with an average age of five to eight years and (ii) an average original contract term of 38 to 42 months. The financial profile of the target transaction includes (i) an amount financed (before taxes, license, warranty and discount) equal to 95% to 100% of invoice for new vehicles or current WSBB for used vehicles (after tax, license, warranty and discount, the amount financed is targeted at 105% to 110%), (ii) a contract rate and discount which yields 28.5%, (iii) an amount financed of $7,000 to $10,000, with a down payment of 15% to 20%, and (iv) a monthly payment from $225 to $325. 69 The target profile of a UACC borrower includes (i) time on the job of three to five years, (ii) time at current residence of three to five years, (iii) a ratio of total debt to total income of 33% to 37% and (iv) a ratio of total monthly automobile payments to total monthly income of 12% to 15%. The application for an auto contract is taken by the dealer. UACC purchases the auto contract from the dealer at a discount which increases the effective yield on such contract. For the quarter ended December 31, 1997, the Company allocated 70% of the discount to the allowance for loan losses, representing 7% of the gross contract amount. Management periodically reviews the portion of the discount allocated to the allowance for loan losses in light of the Company's operations and, in January 1998, increased the allocation to 80% of the discount, representing 8% of the gross contract amount. SALES AND MARKETING UACC markets its financing program to both independent used and franchised automobile dealers. UACC's marketing approach emphasizes scheduled calling programs, marketing materials and consistent follow-up. The Company uses facsimile software programs to send marketing materials to established dealers and potential dealers on a twice weekly basis in each branch market. UACC's experienced local staff seeks to establish strong relationships with dealers in their vicinity. UACC solicits business from dealers through its branch managers who meet with dealers and provide information about UACC's programs, train dealer personnel in UACC's program requirements and assist dealers in identifying consumers who qualify for UACC's programs. In order to both promote asset growth and achieve required levels of credit quality, UACC compensates its branch managers on a salary with a bonus (up to 20% of base salary per year) that requires the achievement of delinquency, charge-off, volume and return on average assets targets established for the branch, as well as satisfactory audit results. As of December 31, 1997, UACC directly marketed its programs to dealers through its ten branch offices in California, Utah, Oregon and Arizona.
GROSS NUMBER OF CONTRACTS CONTRACTS PURCHASED OVER OUTSTANDING AT THE YEAR DECEMBER 31, ENDED DECEMBER 31, BRANCH LOCATION DATE ESTABLISHED 1997 1997 - --------------- ---------------- -------------- ------------------- (IN THOUSANDS) Irvine, CA.................. March 1996 $ 9,713 810 San Diego, CA............... June 1996 7,526 723 Riverside, CA............... September 1996 7,533 858 San Jose, CA................ November 1996 4,559 486 Los Angeles, CA............. March 1997 4,635 496 San Fernando, CA............ May 1997 3,589 410 Upland, CA.................. July 1997 1,679 196 Salt Lake City, UT.......... August 1997 894 108 Phoenix, AZ................. September 1997 723 97 Portland, OR................ December 1997 26 3 ------- ----- $40,877 4,187 ======= =====
When a UACC branch decides to begin doing business with a dealer, a dealer profile and investigation worksheet are completed. UACC and the dealer enter into an agreement that provides UACC with recourse to the dealer in cases of dealer fraud or a breach of the dealer's representations and warranties. When UACC holds auto contracts aggregating $50,000 or more from a dealer, UACC obtains a Dun and Bradstreet Analysis Report for such dealer. Branch management periodically monitors each dealer's overall performance and inventory to ensure a satisfactory quality level, and regional managers regularly conduct audits of the dealer's performance. 70 The following table sets forth certain data for auto contracts purchased by UACC for the periods indicated.
FOR THE QUARTER ENDED --------------------------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1997 1997 1997 1997 -------- ------------- ------------ --------- -------- ------------- ------------ (DOLLARS IN THOUSANDS) Gross amount of contracts.............. $2,628 $4,022 $5,351 $7,686 $9,520 $12,236 $14,813 Average original term of contracts (months)..... 36.9 36.9 37.0 36.1 38.0 38.2 38.4
At December 31, 1997, 95% of UACC's auto contracts were written by its California branches. In the quarter ended December 31, 1997, UACC expanded into Salt Lake City, Phoenix and Portland, and UACC opened an office in Denver at the end of January 1998. In addition to diversifying its geographic concentrations, UACC intends to maintain a broad dealer base to avoid dependence on a limited number of dealers. At December 31, 1997, no dealer accounted for more than 2.7% of UACC's portfolio and the ten dealers from which UACC purchased the most contracts accounted for approximately 19.0% of its aggregate portfolio. UNDERWRITING STANDARDS AND PURCHASE OF CONTRACTS Underwriting Standards and Purchase Criteria. Dealers submit credit applications directly to UACC's branches. UACC uses credit bureau reports in conjunction with information on the credit application to make a final credit decision or a decision to request additional information. Only credit bureau reports that have been obtained by UACC are acceptable. UACC's credit policy places specific accountability for credit decisions directly within the branches. The branch manager or assistant branch manager reviews all credit applications. In general, no branch manager will have credit approval authority for contracts greater than $15,000. Any transaction that exceeds a branch manager's approval limit must be approved by UACC's Regional Manager, Operations Manager or President. Verification. Upon approving or conditioning any application, all required stipulations are presented to the dealer and must be satisfied before funding. All dealers are required to provide UACC with written evidence of insurance in force on a vehicle being financed when submitting the contract for purchase. Prior to funding a contract, the branch must verify by telephone with the insurance agent the customer's insurance coverage with UACC as loss payee. If UACC receives notice of insurance cancellation or non-renewal, the branch will notify the customer of his or her contractual obligation to maintain insurance coverage at all times on the vehicle. However, UACC will not "force place" insurance on an account if insurance lapses and, accordingly, UACC bears the risk of an uninsured loss in these circumstances. Post-Funding Quality Reviews. UACC's Regional Manager and Operations Manager complete quality control reviews of the newly originated auto contracts. These reviews focus on compliance with underwriting standards, the quality of the credit decision and the completeness of auto contract documentation. Additionally, UACC's Regional Manager and Operations Manager complete regular branch audits that focus on compliance with UACC's policies and procedures and the overall quality of branch operations and credit decisions. SERVICING AND COLLECTION UACC services at the branch level all of the auto contracts it purchases. Billing Process. UACC sends each borrower a coupon book. All payments are directed to the customer's respective UACC branch. UACC also accepts payments delivered to the branch by a customer in person. 71 Collection Process. UACC's collection policy calls for the following sequence of actions to be taken with regard to all problem loans: (i) call the borrower at one day past due; (ii) immediate follow-up on all broken promises to pay; (iii) branch management review of all accounts at ten days past due; and (iv) Regional Manager or Operations Manager review of all accounts at 45 days past due. UACC will consider extensions or modifications in working a collection problem. All extensions and modifications require the prior approval of the branch manager, and are monitored by the Operations Manager. Repossessions. It is UACC's policy to repossess the financed vehicle only when (i) payments are substantially in default, (ii) the customer demonstrates an intention not to pay or (iii) the customer fails to comply with material provisions of the contract. All repossessions require the prior approval of the branch manager. In certain cases, the customer is able to pay the balance due or bring the account current, thereby redeeming the vehicle. When a vehicle is repossessed and sold at an automobile auction or through a private sale, the sale proceeds are subtracted from the net outstanding balance of the loan with any remaining amount recorded as a loss. UACC generally pursues all customer deficiencies. Allowance for Loan Losses. UACC's policy is to place on nonaccrual status accounts delinquent in excess of 120 days on a contractual basis, and to reverse all previously accrued but unpaid interest on such accounts. Accounts that have had their collateral repossessed are placed on nonaccrual by the end of the month in which they are repossessed regardless of delinquency status. Accounts are not returned to accrual status until they are brought current. UACC's policy is to charge-off accounts delinquent in excess of 120 days. The remaining balance of accounts where the collateral has been repossessed and sold is charged-off by the end of the month in which the collateral is sold and the proceeds collected. Loss reserves based on expected losses over the life of the contract are established when each contract is purchased from the dealer. The reserve is deducted from the discount that is taken on each transaction. Loss reserve analyses are performed regularly to determine the adequacy of current reserve levels. For the quarter ended December 31, 1997, the Company allocated 70% of the acquisition discount on each loan to the allowance for loan losses. The loss allowances recorded at the time of purchase represent an estimate of expected losses for these loans. If actual experience exceeds estimates, an additional provision for losses is established as a charge against earnings. Management periodically reviews the portion of the discount allocated to the allowance for loan losses in light of the Company's operations and, in January 1998, increased the allocation to 80% of the discount, representing 8% of the gross contract amount. 72 The following table reflects UACC's losses (i.e., net charge-offs as a percent of original net contract balances) for each contract pool (defined as the total dollar amount of net contracts purchased in a given quarter) purchased since UACC's inception.
QUARTER OF PURCHASE ------------------------------------------------------- 1996 1997 ----------------------- ------------------------------- NUMBER OF SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH MONTHS QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER OUTSTANDING ------- ------- ------- ------- ------- ------- ------- 1...................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2...................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3...................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4...................... 0.0% 0.0% 0.1% 0.1% 0.2% 0.1% 5...................... 0.0% 0.2% 0.1% 0.3% 0.2% 0.4% 6...................... 0.1% 0.5% 0.3% 0.6% 0.5% 0.8% 7...................... 0.6% 1.6% 0.8% 0.9% 0.9% 8...................... 1.0% 2.1% 1.0% 1.3% 1.2% 9...................... 1.7% 3.1% 1.4% 1.9% 1.4% 10..................... 1.9% 3.7% 2.2% 2.4% 11..................... 3.8% 3.9% 3.2% 2.9% 12..................... 4.5% 4.9% 3.4% 3.5% 13..................... 5.3% 5.6% 4.2% 14..................... 6.8% 6.2% 4.4% 15..................... 7.4% 7.0% 5.1% 16..................... 7.4% 7.5% 17..................... 7.7% 8.0% 18..................... 7.8% 8.4% 19..................... 7.9% 20..................... 8.3% 21..................... 8.6% Original Pool ($000)... $2,030 $2,855 $3,792 $5,505 $6,794 $8,781 $10,128 ====== ====== ====== ====== ====== ====== ======= Remaining Pool ($000).. $ 847 $1,396 $2,171 $3,801 $5,401 $7,663 $ 9,596 ====== ====== ====== ====== ====== ====== ======= (%)................... 42% 49% 57% 69% 79% 87% 95% ====== ====== ====== ====== ====== ====== =======
UACC purchased its first auto contracts in March 1996 and, accordingly, a maximum of 21 months loss history was available at December 31, 1997. THE BANK BUSINESS OVERVIEW The Bank is a federally chartered stock savings bank formed in 1994 to purchase from the RTC certain assets and to assume certain liabilities of the Bank's predecessor, Pan American Federal Savings Bank. The Bank has been the principal funding source to date for the Company's residential mortgage, insurance premium and automobile finance businesses primarily through its deposits, FHLB advances and whole loan sales. In addition, the Bank holds a portfolio of primarily traditional residential mortgage loans acquired from the RTC in 1994 and 1995 at a discount from the unpaid principal balance of such loans, which loans aggregated $82.0 million (before unearned discounts and premiums) at December 31, 1997. The Bank has focused its branch marketing efforts on building a middle income customer base, including efforts targeted at local Hispanic communities. The Bank has bilingual employees in each of its branches, and key members of the Company's and the Bank's Board of Directors and management are of Hispanic heritage and are active in communities served by the Bank. In addition to operating its retail banking business at four branches located in Northern California and one in Southern California, the Bank provides, subject to appropriate cost sharing arrangements, compliance, risk 73 management, executive, financial, facilities and human resources management to other business units of the Company. The business of the Bank is subject to substantial governmental supervision and regulatory requirements. See "-- Supervision and Regulation--Federal Savings Bank Regulation." COMPETITION Each of the Company's businesses is highly competitive. Competition in the Company's markets can take many forms, including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and terms of the loan, loan origination fees and interest rates. Many of the Company's competitors are substantially larger and have considerably greater financial, technical and marketing resources than the Company. The Company's competitors in subprime mortgage finance include other consumer finance companies, mortgage banking companies, commercial banks, credit unions, savings associations and insurance companies. The Company competes in the insurance premium finance business with other specialty finance companies, independent insurance agents who offer premium finance services, captive premium finance affiliates of insurance companies and direct bill plans established by insurance companies. The Company competes in the subprime automobile finance industry with commercial banks, the captive finance affiliates of automobile manufacturers, savings associations and companies specializing in subprime automobile finance, many of which have established relationships with automobile dealerships and may offer dealerships or their customers other forms of financing, including dealer floor plan financing and lending, which are not offered by the Company. In attracting deposits, the Bank competes primarily with other savings institutions, commercial banks, brokerage firms, mutual funds, credit unions and other types of investment companies. The profitability of the Company's lending activities and the low barriers to entry could attract additional competitors. Certain large, national finance companies and mortgage originators have announced their intention to adapt their mortgage loan origination programs and allocate resources to the origination of subprime loans. The Company and its competitors may also face increasing competition from government-sponsored entities, such as FNMA and FHLMC. FHLMC currently purchases what it terms "Alternative-A" mortgage loans and has announced its intention to establish a program to purchase what it terms "A-" mortgage loans in the near future. In addition, FHLMC has expressed its intention to purchase so-called "B" and "C" mortgage loans in the future. FHLMC also has purchased securities backed by subprime mortgage loans and has re-securitized them for resale. Additional competition may lower the rates the Company can charge borrowers, reduce the volume of the Company's loan originations and increase demand for the Company's key employees with the potential that such employees will leave the Company for its competitors. Fluctuations in interest rates and general and localized economic conditions also may affect the competition the Company faces. Competitors with lower costs of capital have a competitive advantage over the Company. During periods of declining interest rates, competitors may solicit the Company's customers to refinance their loans. In addition, during periods of economic slowdown or recession, the Company's borrowers may face financial difficulties and be more receptive to offers of the Company's competitors to refinance their loans. As the Company seeks to expand into new geographic markets, it will face additional competition from lenders already established in these markets. There can be no assurance that the Company will be able to compete successfully with these lenders. 74 SUPERVISION AND REGULATION Set forth below is a brief description of various laws and regulations affecting the operations of the Company and its subsidiaries. The description of laws and regulations contained herein does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations, and prospects of the Company. HOLDING COMPANY REGULATION The Company is a savings and loan holding company within the meaning of the Home Owners' Loan Act, as amended ("HOLA"). For purposes of this discussion, the description of holding company regulation also applies to Pan American Financial, Inc., a direct subsidiary of the Company and the parent of the Bank. The Company has registered with the OTS and is subject to OTS regulation, examination, supervision, and reporting requirements. In addition, the OTS has enforcement authority over the Company and its other subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the Bank. In addition, the Bank must notify the OTS at least 30 days before making any distribution to the Company and the OTS has the authority to preclude a savings association from paying a dividend under certain circumstances. See "--Federal Savings Bank Regulations--Limitations on Capital Distributions." HOLA prohibits a savings and loan holding company, directly or indirectly through one or more subsidiaries, from (i) acquiring another savings institution or holding company thereof, without prior written approval of the OTS, (ii) acquiring or retaining, with certain exceptions, more than 5% of the voting shares of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a nonsubsidiary company engaged in activities other than those permitted by HOLA, or (iii) acquiring or retaining control of a savings institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the Company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, and competitive factors. As a holding company that controls only one savings association, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a "qualified thrift lender" under HOLA ("QTL"). Upon any nonsupervisory acquisition by the Company of another savings association or savings bank that meets the QTL test and is deemed to be a savings institution by OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. HOLA generally limits the activities of a multiple savings and loan holding company and its uninsured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), subject to the prior approval of the OTS, and activities authorized by OTS regulation. Legislation has been proposed that would impose limits on the non-banking activities of companies that acquire savings associations. It is anticipated that the Company's holding company status would be "grandfathered" under such legislation, but there can be no assurance that the Company would be exempt from such limits. Furthermore, any available grandfathering might not continue to be available to the Company as a result of a possible merger of the federal banking agencies. Several proposals have been introduced in Congress over the past several years. If the OTS and Office of the Comptroller of the Currency (the "OCC") were merged, as one proposal would require, the federal thrift charter would be eliminated. If adopted, such a proposal would require that the Bank become a national bank and would subject it to regulation as such. One effect of such a requirement would be that the Bank could not engage in activities not permitted for national banks unless such activities were grandfathered. In addition, the ability to branch interstate would become subject to the restrictions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle Act"). Accordingly, any out-of-state branches of the Bank in existence upon the effectiveness of such a proposal that are not permissible 75 under the Riegle Act and, if not grandfathered, could be required to be divested. There are also some benefits to such a charter conversion. For example, the Bank would not, under regulations currently applicable to national banks, be subject to the QTL test described below. Federal law generally provides that no company may acquire control of a federally insured savings institution without obtaining the approval of the OTS. Such acquisitions of control may be disapproved if it is determined, among other things, that the acquisition would substantially lessen competition or the financial and managerial resources and further prospects of the acquiror and savings institution involved or that the acquisition would be detrimental to the institution or present enhanced insurance risk to the SAIF or Bank Insurance Fund ("BIF"). REGULATION OF MORTGAGE FINANCE OPERATION The consumer financing industry is a highly regulated industry. UPAM's business is subject to extensive and complex rules and regulations of, and examinations by, various federal, state and local government authorities. These rules and regulations impose obligations and restrictions on UPAM's loan origination, credit activities and secured transactions. In addition, these rules limit the interest rates, finance charges and other fees UPAM may assess, mandate extensive disclosure to UPAM's customers, prohibit discrimination and impose multiple qualification and licensing obligations on UPAM. Failure to comply with these requirements may result in, among other things, demands for indemnification or mortgage loan repurchases, certain rights of rescission for mortgage loans, class action lawsuits, administrative enforcement actions and civil and criminal liability. Management of UPAM believes that UPAM is in compliance with these rules and regulations in all material respects. UPAM's loan origination activities are subject to the laws and regulations in each of the states in which those activities are conducted. For example, state usury laws limit the interest rates UPAM can charge on its loans. UPAM presently is in the process of applying for licenses in California and other states in which such licenses are required to conduct UPAM's activities. Until such licenses are obtained, all such activities are being conducted by the Bank or, to the extent permitted by such licensing laws, by UPAM on behalf of the Bank. UPAM's lending activities are also subject to various federal laws, including those described below. UPAM is subject to certain disclosure requirements under TILA and the Federal Reserve Board's Regulation Z promulgated thereunder. TILA is designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loan and credit transactions. TILA also guarantees consumers a three-day right to cancel certain credit transactions, including loans of the type originated by UPAM. Such three-day right to rescind may remain unexpired for up to three years if the lender fails to provide the requisite disclosures to the consumer. UPAM originates loans which are subject to the High Cost Mortgage Act, which makes certain amendments to TILA. The High Cost Mortgage Act generally applies to consumer credit transactions secured by the consumer's principal residence, other than residential mortgage transactions, reverse mortgage transactions or transactions under an open-end credit plan, in which the loan has either (i) total points and fees upon origination in excess of the greater of eight percent of the loan amount or $400 or (ii) an annual percentage rate of more than ten percentage points higher than United States Treasury securities of comparable maturity ("Covered Loans"). The High Cost Mortgage Act imposes additional disclosure requirements on lenders originating Covered Loans. In addition, it prohibits lenders from, among other things, originating Covered Loans that are underwritten solely on the basis of the borrower's home equity without regard to the borrower's ability to repay the loan and including prepayment fee clauses in Covered Loans to borrowers with a debt-to-income ratio in excess of 50% or Covered Loans used to refinance existing loans originated by the same lender. The High Cost Mortgage Act also restricts, among other things, certain balloon payments and negative amortization features. UPAM commenced originating Covered Loans during 1996. 76 UPAM is also required to comply with ECOA and the Federal Reserve Board's Regulation B promulgated thereunder, FCRA, RESPA and HMDA. Regulation B restricts creditors from requesting certain types of information from loan applicants. FCRA requires lenders, among other things, to supply an applicant with certain information if the lender denies the applicant credit. RESPA requires lenders, among other things, to supply an applicant with certain disclosures concerning settlement fees and charges and mortgage servicing transfer practices. It also prohibits the payment or receipt of kickbacks or referral fees in connection with the performance of settlement services. In addition, beginning with loans originated in 1994, UPAM must file an annual report with the Department of Housing and Urban Development pursuant to HMDA, which requires the collection and reporting of statistical data concerning loan transactions. In the course of its business, UPAM may acquire properties securing loans that are in default. There is a risk that hazardous or toxic waste could be found on such properties. In such event, UPAM could be held responsible for the cost of cleaning up or removing such waste, and such cost could exceed the value of the underlying properties. Because UPAM's business is highly regulated, the laws, rules and regulations applicable to UPAM are subject to regular modification. There are currently proposed various laws, rules and regulations which, if adopted, could materially affect UPAM's business. There can be no assurance that these proposed laws, rules and regulations, or other such laws, rules or regulations, will not be adopted in the future which could make compliance much more difficult or expensive, restrict UPAM's ability to originate, broker or sell loans, further limit or restrict the amount of commissions, interest and other charges earned on loans originated, brokered or sold by UPAM, or otherwise adversely affect the business or prospects of UPAM. REGULATION OF INSURANCE PREMIUM FINANCE COMPANIES The auto insurance premium finance industry is subject to state regulation. The regulatory structure of each state places certain restrictions on the terms of loans made to finance insurance premiums. These restrictions, among other things, generally provide that the lender must provide certain cancellation notices to the insured and the insurer in order to exercise an assigned right to cancel an automobile insurance policy in the event of a default under an insurance premium finance agreement and to obtain in connection therewith a return from the insurer of any unearned premiums that have been assigned by the insured to the lender. Such state laws also require that certain disclosures be delivered by the insurance agent or broker arranging for such credit to the insured regarding the amount of compensation to be received by such agent or broker from the lender. REGULATION OF SUBPRIME AUTOMOBILE LENDING UACC's automobile lending activities are subject to various federal and state consumer protection laws, including TILA, ECOA, FCRA, the Federal Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Federal Reserve Board's Regulations B and Z, and state motor vehicle retail installment sales acts, retail installment sales acts and other similar laws regulate the origination and collection of consumer receivables and impact UACC's business. These laws, among other things, (i) require UACC to obtain and maintain certain licenses and qualifications, (ii) limit the finance charges, fees and other charges on the contracts purchased, (iii) require UACC to provide specified disclosures to consumers, (iv) limit the terms of the contracts, (v) regulate the credit application and evaluation process, (vi) regulate certain servicing and collection practices and (vii) regulate the repossession and sale of collateral. These laws impose specific statutory liabilities upon creditors who fail to comply with their provisions and may give rise to defense to payment of the consumer's obligation. In addition, certain of the laws make the assignee of a consumer installment contract liable for the violations of the assignor. See "--Regulation of Mortgage Finance Operation." Each dealer agreement contains representations and warranties by the dealer that, as of the date of assignment, the dealer has compiled with all applicable laws and regulations with respect to each contract. The dealer is obligated to indemnify UACC for any breach of any of the representations and warranties and to repurchase any non-conforming contracts. UACC generally verifies dealer compliance with usury laws, but does 77 not audit a dealer's full compliance with applicable laws. There can be no assurance that UACC will detect all dealer violations or that individual dealers will have the financial ability and resources either to repurchase contracts or indemnify UACC against losses. Accordingly, failure by dealers to comply with applicable laws, or with their representations and warranties unless the dealer agreement, could have a material adverse effect on UACC. UACC believes it is currently in compliance in all material respects with applicable laws, but there can be no assurance that UACC will be able to maintain such compliance. The failure to comply with such laws, or a determination by a court that UACC's interpretation of any such law was erroneous, could have a material adverse effect upon UACC. Furthermore, the adoption of additional laws, changes in the interpretation and enforcement of current laws or the expansion of UACC's business into jurisdictions that have adopted more stringent regulatory requirements than those in which UACC currently conducts business, could have a material adverse effect upon UACC. If a borrower defaults on a contract, UACC, as the servicer of the contract, is entitled to exercise the remedies of a secured party under the Uniform Commercial Code as adopted in a particular state (the "UCC"), which typically includes the right to repossession by self-help unless such means would constitute a breach of peace. The UCC and other state laws regulate repossession and sales of collateral by requiring reasonable notice to the borrower of the date, time and place of any public sale of collateral, the date after which any private sale of the collateral may be held and the borrower's right to redeem the financed vehicle prior to any such sale, and by providing that any such sale must be conducted in a commercially reasonable manner. Financed vehicles repossessed generally are resold by UACC through unaffiliated wholesale automobile networks or auctions which are attended principally by used automobile dealers. FEDERAL SAVINGS BANK REGULATION Business Activities. The activities of savings associations are governed by HOLA and, in certain respects, the Federal Deposit Insurance Act, as amended ("FDI Act"). HOLA and the FDI Act were amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended ("FIRREA"), and the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"). FIRREA was enacted to resolve issues relating to problem institutions, including thrifts, establish a new thrift insurance fund, reorganize the regulatory structure applicable to savings associations and impose bank-like standards on savings associations. FDICIA, among other things, requires that federal banking agencies intervene promptly when a depository institution experiences financial difficulties, mandates the establishment of a risk-based deposit insurance assessment system, and requires imposition of numerous additional safety and soundness operational standards and restrictions. Both FIRREA and FDICIA contain provisions affecting numerous aspects of the operations and regulations of federally insured savings associations and empower the OTS and the FDIC, among other agencies, to promulgate regulations implementing their provisions. Provisions of the federal banking statutes, as amended by FIRREA and FDICIA, among other matters (i) restrict the use of brokered deposits by savings associations that are not well capitalized, (ii) prohibit the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, (iii) subject to OTS waiver, restrict the aggregate amount of loans secured by non-residential real estate property to 400% of total capital, (iv) permit savings and loan holding companies to acquire up to 5% of the voting shares of non- subsidiary savings associations or savings and loan holding companies without prior approval, (v) permit bank holding companies to acquire healthy savings associations, (vi) require the federal banking agencies to establish by regulation standards for extensions of credit secured by real estate and (vii) restrict transactions between a savings association and its affiliates. Loans to One Borrower. Under HOLA, savings associations are generally subject to the national bank limits on loans to one borrower. Generally, a savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution's unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is fully secured by readily 78 marketable collateral, which is defined to include certain securities and bullion, but generally does not include real estate. QTL Test. Savings associations that do not meet a QTL test are subject to certain restrictions. Any savings institution is a QTL if (i) it qualifies as a domestic building and loan association under Section 7701(a)(19) of the Internal Revenue Code (which generally requires that at least 60% of the institution's assets constitute loans secured by residential real estate or deposits, educational loans, cash or certain governmental obligations) or (ii) at least 65% of its "portfolio assets" (total assets less (a) specified liquid assets up to 20% of total assets, (b) intangibles, including goodwill, and (c) the value of property used to conduct business) consist of certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) on a monthly basis in nine out of every 12 months. A savings association that fails the QTL test for four or more months out of the prior 12-month period must either convert to a bank charter or operate under certain restrictions. If the savings association does not convert to a national bank charter, generally it will be prohibited from: (i) making any new investment or engaging in any new activity not permissible for a national bank; (ii) paying dividends not permissible under national bank statutes and regulations; (iii) obtaining any new advances from any FHLB; and (iv) establishing any new branch office in a location not permissible for a national bank with its head office located in the association's home state. Any bank chartered as a result of failure of the QTL test must pay exit and entrance fees as a consequence of leaving the SAIF and entering the BIF as further described below. In addition, beginning three years after the association fails the QTL test and unless it has requalified as a QTL, the association will be prohibited from engaging in any activity or retaining any investment not permissible for a national bank and will have to repay any outstanding advances from the FHLB as promptly as possible consistent with safety and soundness. One year from the date the association fails the QTL test and unless it has requalified as a QTL, any holding company that controls the association must register as and be deemed to be a bank holding company, subject to the restrictions and limitations of the BHC Act, and to the regulations of the Federal Reserve. The Company believes that the Bank met the QTL test at December 31, 1997. Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of associations that are based primarily on an institution's capital level. An institution that has capital which is equal to or exceeds all capital requirements before and after a proposed capital distribution ("Tier I Institution") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its risk based capital requirements) at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions would require prior regulatory approval. If the Bank's capital falls below its capital requirements or the OTS notifies it that it is in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, that would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. At December 31, 1997, the Bank was a Tier I Institution. See "Risk Factors--Risks Associated With the Company and the Offering--Absence of Dividends" and "Dividend Policy." Liquidity. The Bank must maintain an average daily balance of liquid assets and short-term liquid assets equal to a monthly average of not less than specified percentages of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS. Monetary penalties may be imposed for failure to meet these liquidity requirements. Since its acquisition in 1994, the Bank has never failed to meet its liquidity requirements. 79 Classification of Assets. Savings institutions are required to classify their assets on a regular basis, establish appropriate allowances for losses and report the results of such classification quarterly to the OTS. A savings institution is also required to set aside adequate valuation allowances and establish liabilities for off-balance sheet items, such as letters of credit, when a loss becomes probable and estimable. The OTS has the authority to review the institution's classification of its assets and to determine whether additional assets must be classified or the institution's valuation allowances must be increased. Community Reinvestment. Under the Community Reinvestment Act (the "CRA"), as implemented by OTS regulations, a savings institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate- income neighborhoods. The CRA does not establish specific lending requirements or programs for financial associations nor does it limit an institution's discretion to develop the types of products and services that it believes are best- suited to its particular community. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in evaluating certain applications by such institution. The CRA also requires all associations to publicly disclose their CRA rating. The Bank received a CRA rating of "satisfactory" in its most recent examination. Insurance of Accounts and Regulation by the FDIC. The Bank is a member of the SAIF, which is administered by the FDIC. Savings deposits are insured up to $100,000 by the FDIC per insured member (as defined by law and regulation). Such insurance is backed by the full faith and credit of the United States. As insurer, the FDIC imposes deposit insurance assessments and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the FDIC. The FDIC also may initiate enforcement actions against savings associations and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. FDICIA required the FDIC to implement a risk-based deposit insurance assessment system. Pursuant to this requirement, the FDIC has adopted a risk- based assessment system under which all SAIF-insured depository associations are placed into one of nine categories and assessed insurance assessments based upon their level of capital and supervisory evaluation. Under this system, associations classified as well capitalized and considered healthy pay the lowest assessment while associations that are less than adequately capitalized and considered of substantial supervisory concern pay the highest assessment. In addition, under FDICIA, the FDIC may impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. The FDIC may increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. Presently, well capitalized institutions, such as the Bank, are not required to pay these special assessments. By contrast, financial institutions that are members of the BIF, which had higher reserves and previously did not have an obligation to pay interest on debt to the Financial Corporation ("FICO"), had certain competitive advantages. The disparity in deposit insurance assessments between SAIF and BIF members was exacerbated by the statutory requirement that both the SAIF and the BIF funds be recapitalized to a 1.25% reserved deposits ratio and that a portion of most thrifts' deposit insurance assessments be used to service bonds issued by FICO. To address this rate disparity, on September 30, 1996, the President signed legislation intended to enable the SAIF to reach the designated reserve ratio. The legislation provided for a one-time special assessment of 0.657% to be imposed upon all SAIF deposits as of March 31, 1995. Based on the Bank's SAIF deposits as of March 31, 1995, the cost of the one-time special assessment was approximately $820,000 (pre-tax). This amount was accrued in December 1996 and paid in June 1997. 80 The legislation also provides for BIF members to service a growing portion of the FICO bond payments. Until January 1, 2000, annual assessments of 0.013% of BIF deposits and 0.0648% of SAIF deposits will service the annual payments due on the FICO bonds. Accordingly, the Bank's assessment rate on the FICO bonds is 0.0648% of the deposits. This legislation provides for subsequent full pro rata sharing of FICO bond payments by BIF and SAIF institutions. Accordingly, the effect of this legislation has been to lessen the competitive advantage of BIF members over SAIF members because of the disparity in deposit insurance assessments and FICO payments. The legislation called for a merger of the SAIF and BIF as of January 1, 1999, but only if the thrift charter has been eliminated. The financing corporations created by FIRREA and the Competitive Equality Banking Act of 1987 are also empowered to assess premiums on savings associations to help fund the liquidation or sale of troubled associations. Such premiums cannot, however, exceed the amount of SAIF assessments and are paid in lieu thereof. Transactions With Related Parties. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution with certain exceptions) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA") and Section 11 of HOLA. Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low-quality assets from affiliates is generally prohibited. Section 23B generally requires that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition to restrictions imposed under Sections 23A and 23B, Section 11 of HOLA prohibits savings institutions from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the BHC Act. Further, no savings institution may purchase the securities of any affiliate other than a subsidiary. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings associations such as the Bank and has the authority to bring enforcement action against all "institution-related parties," including shareholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action that caused or is likely to cause more than a minimal financial loss to, or a significant adverse effect on, an insured depository institution. Civil penalties cover a wide range of violations and actions and range up to $25,000 per day unless a finding of reckless disregard is made, in which case fines of up to $1 million per day are permitted. Criminal penalties for most financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to the capital requirements. Possible enforcement action ranges from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. The Bank is not presently subject to any of the foregoing enforcement actions. Standards for Safety and Soundness. FDICIA requires each federal banking agency to prescribe for all insured depository institutions and, to some extent, their holding companies standards relating to internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits, and such other operational and managerial standards as the agency deems appropriate. In addition, federal banking regulatory agencies are required to prescribe by regulation: (i) maximum classified assets to capital ratios; (ii) minimum earnings sufficient to absorb losses without impairing capital; (iii) to the extent feasible, a minimum ratio of market value to book value for publicly traded shares of depository institutions or the depository institution holding companies; (iv) standards for extensions of credit secured by real estate or made for the purpose of financing the construction of improvements on real estate; and (v) such other standards relating to asset quality, earnings, and valuation as the agency deems 81 appropriate. Finally, each federal banking agency is required to prescribe standards for employment contracts and other compensation arrangements of executive officers, employees, directors, and principal shareholders of insured depository associations that would prohibit compensation, benefits and arrangements that are excessive or that could lead to a material financial loss for the institution. If an insured depository institution or its holding company fails to meet any of the standards described above, it must submit to the appropriate federal banking agency a plan specifying the steps that will be taken to cure the deficiency. If an institution fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will require the institution or holding company to correct the deficiency and, until corrected, may impose restrictions on the institution or the holding company, including any of the restrictions applicable under the prompt corrective action provisions of FDICIA. See "--Prompt Corrective Action." Capital Requirements. FDICIA added a provision establishing "capital categories" in order to facilitate prompt corrective action by federal banking regulators. The purpose of this amendment is to impose more scrutiny and restrictions on institutions, and to prohibit savings institutions from making capital distributions or paying certain management fees that would leave the institution undercapitalized. FDICIA established five capital categories for this purpose: . An institution will be deemed to be well-capitalized if it (i) has a total risk-based capital ratio of 10% or more, (ii) has a Tier 1 risk- based capital ratio of 6% or more, (iii) has a leverage ratio of 5% or more and (iv) is not subject to any regulatory order or directive regarding capital. . An institution will be deemed to be adequately capitalized if it (i) has a total risk-based capital ratio of at least 8%, (ii) has a Tier I risk- based capital ratio of at least 4% and (iii) subject to certain exceptions, has a leverage ratio of at least 4%. . An institution will be deemed to be undercapitalized if it (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier I risk- based capital ratio that is less than 4%, or (iii) subject to certain exceptions, has a leverage ratio of less than 4%. . An institution will be deemed to be significantly undercapitalized if it (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier I risk-based capital ratio of less than 3%, or (iii) has a leverage ratio of less than 3%. . An institution will be deemed to be critically undercapitalized if it has a ratio of tangible equity to total assets of less than 2%. Recent Legislation. Congress has been considering legislation in various forms that would require federal thrifts, such as the Bank, to convert their charters to national or state bank charters. The Treasury Department has been studying the development of a common charter for federal savings associations and commercial banks. In the event that the thrift charter is eliminated by January 1, 1999, the Economic Growth and Paperwork Reduction Act of 1996 would require the merger of the BIF and the SAIF into a single Deposit Insurance Fund on that date. In the absence of appropriate "grandfather" provisions, legislation eliminating the thrift charter could have a material adverse effect on the Bank and the Company because, among other things, the regulatory, capital and accounting treatment for national and state banks and savings associations differs in certain significant respects. The Bank cannot determine whether, or in what form, such legislation eventually may be enacted, and there can be no assurance that any legislation that is enacted would contain adequate grandfather rights for the Bank and the Company. Year 2000 Compliance. In May 1997, the Federal Financial Institutions Examination Council issued an interagency statement to the chief executive officers of all federally supervised financial institutions regarding year 2000 project management awareness. It is expected that, unless financial institutions address the technology issues relating to the coming of the year 2000, there will be major disruptions in the operations of financial institutions. The statement provides guidance to financial institutions, providers of data services, and all examining personnel of the federal banking agencies regarding the year 2000 problem. The federal banking agencies intend to conduct year 2000 compliance examinations, and the failure to implement a year 2000 program may be seen by the federal banking agencies as an unsafe and unsound banking practice. In addition, federal banking agencies will be taking into account year 2000 compliance programs when analyzing applications and may deny an application based on year 2000 related issues. 82 Prompt Corrective Action. FDICIA establishes a system of prompt corrective action to resolve the problem of undercapitalized associations. Under that system, banking regulators must take certain supervisory actions against undercapitalized associations, the severity of which depends upon the institution's level of capitalization. Generally, subject to a narrow exception, FDICIA requires the appropriate federal banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. FDICIA authorizes banking regulators to specify the ratio of tangible capital to assets at which an institution becomes critically undercapitalized and requires that ratio to be no less than 2% of assets. A savings association may be reclassified to an even lower category than is indicated by its current capital position if the OTS determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution to correct deficiencies following receipt of a less-than- satisfactory rating on its most recent examination report. Among other things, undercapitalized institutions are subject to growth limitations and are required to submit capital restoration plans. If an institution fails to submit an acceptable plan or fails in any material respect to implement an approved plan, it is treated as significantly undercapitalized. Pan American Bank's Capital Ratios. The following table indicates the Bank's regulatory capital ratios at December 31, 1997.
AS OF DECEMBER 31, 1997 ------------------------------------- RISK- CORE CAPITAL BASED TANGIBLE CAPITAL (LEVERAGE) CAPITAL ---------------- ------------ ------- (DOLLARS IN THOUSANDS) Shareholder's equity/GAAP capital... $22,918 $22,918 $22,918 Reductions to capital Goodwill and other intangibles.... (457) (457) (457) Disallowed portion of deferred taxes............................ (82) (82) (82) Additions to capital General valuation allowances...... -- -- 2,559 ------- ------- ------- Regulatory capital as reported to the OTS............................ 22,379 22,379 24,938 Minimum capital requirements as reported to the OTS................ 4,619 9,239 16,171 ------- ------- ------- Regulatory capital-excess........... $17,760 $13,140 $ 8,767 ======= ======= ======= Capital ratios...................... 7.27% 7.27% 12.34% Well-capitalized requirement........ 3.00% 5.00% 10.00%
Federal Home Loan Bank System. The Bank is a member of the FHLB system. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available to members loans (i.e., advances) in accordance with the policies and procedures established by the Board of Directors of the individual FHLB. As a member, the Bank is required to own capital stock in an FHLB in an amount equal to the greater of: (i) 1% of the aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year, (ii) 0.3% of total assets, or (iii) 5% of its FHLB advances (borrowings). At December 31, 1997, the Bank had $1.9 million in FHLB stock, which was in compliance with this requirement. The FHLBs must provide funds to service the FICO bonds and contribute funds for affordable housing programs. These requirements have affected adversely the level of FHLB dividends paid and could continue to do so. Such requirements could also result in the FHLB imposing a higher rate of interest on advances to their members and could have an adverse effect on the value of FHLB stock in the future, with a corresponding reduction in the Bank's capital. For the years ended December 31, 1995, 1996 and 1997, dividends from the FHLB to the Bank amounted to $37,000, $74,000, and $95,000, respectively. If dividends were reduced, the Bank's income would likely also be reduced. 83 Federal Reserve System. Federal Reserve regulations require savings associations to maintain non-interest earning reserves against their transaction accounts (primarily regular checking and NOW accounts). The Bank is in compliance with these regulations. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements imposed by the OTS. Because required reserves must be maintained in the form of vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. FHLB system members are also authorized to borrow from the Federal Reserve, but applicable regulations require associations to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. LEGAL PROCEEDINGS The Company is from time to time involved in litigation incidental to the conduct of its businesses. The Company currently is not a party to any material pending litigation. PROPERTIES The Company's principal executive offices occupy approximately 8,881 square feet of office space located at 1300 South El Camino Real, San Mateo, California 94402. As of December 31, 1997, the Company maintained five branches for its banking business, 22 branches for its mortgage finance business, ten branches for its automobile finance business and one branch for its insurance premium finance business. The size of the branches typically range from 250 square feet to 19,081 square feet. All of the Company's leased properties are leased for terms expiring on dates ranging from the date hereof to March 2006, many with options to extend the lease term. The Company believes that no single lease is material to its operations, its facilities are adequate for the foreseeable future and alternative sites presently are available at market rates. EMPLOYEES At December 31, 1997, the Company had 490 full-time equivalent employees. The Company believes its relations with its employees are satisfactory. 84 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth information regarding the directors, executive officers and key employees of the Company.
NAME AGE POSITION ---- --- -------- Directors and Executive Officers Guillermo Bron.................. 46 Chairman of the Board and a director of the Company and the Bank Lawrence J. Grill............... 61 President, Chief Executive Officer, Secretary and a director of the Company and the Bank John T. French.................. 66 Director of the Company and Chairman of the Board, President and Chief Executive Officer of United PanAm Mortgage Corporation Ray C. Thousand................. 40 President and Chief Executive Officer of United Auto Credit Corporation Carol M. Bucci.................. 40 Senior Vice President, Treasurer and Chief Financial Officer of the Company and the Bank Edmund M. Kaufman(1)(2)......... 68 Director of the Company and the Bank Luis Maizel(1)(2)............... 47 Director of the Company Daniel L. Villanueva(1)(2)...... 39 Director of the Company and the Bank Key Employees Stephen W. Haley................ 44 Senior Vice President--Compliance and Risk Management of the Company and the Bank Sharon Macchiarella............. 48 Vice President of the Bank
- -------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. DIRECTORS AND EXECUTIVE OFFICERS Guillermo Bron has served as Chairman of the Board and a director of the Company and the Bank since April 1994. Mr. Bron is President of BVG West Corp., the sole general partner of Pan American Financial, L.P. Mr. Bron founded the Company and organized an Hispanic investor group that acquired certain assets and assumed certain liabilities of the Bank's predecessor from the RTC in April 1994. Since July 1994, Mr. Bron has been an officer, director and principal stockholder of a general partner of Bastion Capital Fund, L.P., a private equity investment fund. Previously, Mr. Bron was a Managing Director of Corporate Finance and Mergers and Acquisitions at Drexel Burnham Lambert. Mr. Bron is a director of Telemundo Group, Inc. Lawrence J. Grill has served as the President, Chief Executive Officer, Secretary and a director of the Company and the Bank since April 1994. From 1984 through 1994, Mr. Grill was President of Lawrence J. Grill & Associates, a consulting firm specializing in business strategy and operations improvement for financial institutions, and in connection therewith served as a director, officer and consultant to various thrifts and banks. Previously, Mr. Grill held senior executive positions with Kaufman and Broad, Wickes Companies and AM International and practiced corporate law in California and Illinois. Mr. Grill is a CPA in Illinois and is licensed to practice law in California and Illinois. John T. French has served as a director of the Bank since October 1996 and as a director of the Company and Chairman of the Board, President and Chief Executive Officer of United PanAm Mortgage Corporation since October 1997. From 1986 through March 1995, he served as Chief Executive Officer of Plaza Home Mortgage, and also founded and was Chairman of Option One Mortgage Corporation. From 1977 through 1985, Mr. French 85 served as President of the General Loan Brokerage division of Western Real Estate Financial, a general loan brokerage company. Mr. French has over 38 years of experience in the mortgage industry. Ray C. Thousand has served as President, Chief Executive Officer and a director of United Auto Credit Corporation since February 1996. Previously, Mr. Thousand held positions in consumer and commercial lending with Norwest Financial (from 1979 to 1985), and executive positions with Bank of America/Security Pacific Credit (from 1985 to 1993), TransAmerica Business Credit (1994) and Fidelity Funding Financial Group (from 1994 to 1995) with emphasis on lending to consumer finance companies engaged in indirect automobile lending. Carol M. Bucci has served as Senior Vice President and Controller of the Bank since January 1997 and as Senior Vice President and the Chief Financial Officer of the Company since October 1997. She served as Vice President and Controller of the Bank from December 1995 to December 1996. From February 1995 to December 1995, she served as Vice President and Controller of Home Federal Savings and Loan in San Francisco, California. She served as Vice President and Chief Financial Officer of American Liberty Mortgage Corp. from April 1992 through December 1994, as First Vice President and Assistant Controller of First Nationwide Bank from January 1990 to April 1992 and as Executive Vice President and Chief Financial Officer of Cal America Savings and Loan from May 1987 to April 1989. Ms. Bucci is a CPA in California. Edmund M. Kaufman has served as a director of the Bank since August 1996 and of the Company since October 1997. Mr. Kaufman is a partner in the Los Angeles law firm of Irell & Manella, where he has specialized for 37 years in mergers and acquisitions and corporate finance. Mr. Kaufman also serves as a director of the Los Angeles Music Center Opera Company and of Structural Research and Analysis, a software corporation. Luis Maizel has served as a director of the Company since October 1997. Mr. Maizel has been President of LM Capital Management since 1988 and LM Advisors Inc. since 1984. Both such companies are pension funds management and financial consulting firms of which he is the principal stockholder. From 1980 to 1984, he was President of Industrias Kuick, S.A. and Blount Agroindustras, S.A., manufacturers of agribusiness equipment. Daniel L. Villanueva has served as a director of the Bank since August 1994 and of the Company since October 1997. Mr. Villanueva is President of the Los Angeles Galaxy Soccer Team and was a co-founder of Moya, Villanueva & Associates, a marketing and public relations firm which is now part of Manning, Selvage & Lee, where he worked from 1986 until 1996. Officers serve at the discretion of the Board of Directors. None of the directors or executive officers were selected pursuant to any arrangement or understanding, other than with the directors and executive officers of the Company acting within their capacity as such. KEY EMPLOYEES Stephen W. Haley has served as Senior Vice President--Compliance and Risk Management of the Bank and the Company since August 1997. From November 1996 to August 1997, he was a management consultant with Coopers & Lybrand LLP. From April 1991 to November 1996, Mr. Haley was a self-employed management consultant and from July 1981 to April 1991, he was a management consultant with KPMG Peat Marwick LLP's financial services group, where he was a partner for the last four years. Sharon Macchiarella has served as Vice President of the Bank since February 1997, Vice President - Administrator Corporate Risk Management of the Bank since April 1997 and IPF Administrator of the Company since November 1995. Ms. Macchiarella also served as an insurance premium finance consultant with the Bank from March 1995 to November 1995 and Rancho Vista National Bank from January 1995 to December 1995. Previously, Ms. Macchiarella held executive positions in insurance premium finance with World Trade Bank, N.A. (from March 1988 to July 1992), First National Bank of Marin (from September 1992 to September 1994) and First Deposit National Corporation (from July 1992 to September 1992). 86 COMMITTEES OF THE BOARD The Board of Directors has an Audit Committee and a Compensation Committee, each of which consists of two or more independent directors who serve at the pleasure of the Board of Directors. The Audit Committee is chaired by Mr. Maizel, and its other members are Messrs. Kaufman and Villanueva. The primary purposes of the Audit Committee are (i) to review the scope of the audit and all non- audit services performed by the Company's independent certified public accountants and the fees incurred by the Company in connection therewith, (ii) to review the results of such audit, including the independent accountants' opinion and letter of comment to management and management's response thereto, (iii) to review with the Company's independent accountants, the Company's internal accounting principles, policies and practices and financial reporting, (iv) to make recommendations regarding the selection of the Company's independent accountants and (v) to review the Company's quarterly financial statements prior to public issuance. The Compensation Committee is chaired by Mr. Kaufman, and its other members are Messrs. Maizel and Villanueva. The primary purposes of the Compensation Committee are (i) to review and recommend to the Board of Directors the salaries, bonuses and perquisites of the Company's executive officers, (ii) to determine the individuals to whom, and the terms upon which, awards under the Company's Stock Incentive Plan, management incentive plans and 401(k) plan are granted, (iii) to make periodic reports to the Board of Directors as to the status of such plans and (iv) to review and recommend to the Board of Directors additional compensation plans. DIRECTOR COMPENSATION The Company pays each director who is not employed by the Company $500 for each meeting of the Board of Directors attended and $300 for each meeting of a committee of the Board of Directors attended (other than a telephonic meeting). In addition, each Committee Chairman receives a $500 quarterly fee. The Company reimburses directors for all reasonable and documented expenses incurred as a director. Directors who are also employees of the Company, including Messrs. Bron, Grill and French, are not compensated for their services as directors. The Board of Directors may change such compensation in the future. 87 EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth the compensation paid or accrued by the Company for services rendered in all capacities during the fiscal year ended December 31, 1997 to the President and Chief Executive Officer and the Company's four other most highly compensated executive officers during 1997 (the "Named Executives").
LONG-TERM COMPENSATION ------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------- ----------------------- ------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER BONUS COMPENSATION RESTRICTED OPTIONS/ LTIP COMPENSATION NAME AND PRINCIPAL POSITION SALARY ($) ($) ($)(1) STOCK AWARDS SARS(2) PAYOUTS ($) - --------------------------- ---------- ------- ------------ ------------ ---------- ------- ------------ Lawrence J. Grill....... 176,667 75,000 4,725 -- -- -- -- President and Chief Executive Officer Guillermo Bron.......... 137,500 -- -- -- -- -- -- Chairman of the Board John T. French.......... 95,000 100,000 -- -- 60,000 -- -- Chairman of the Board, President and Chief Executive Officer of United PanAm Mortgage Corporation(3) Ray C. Thousand......... 137,283 33,750 2,200 -- -- -- -- President and Chief Executive Officer of United Auto Credit Corporation Carol M. Bucci.......... 104,600 18,000 -- -- 10,000 -- -- Senior Vice President, Treasurer and Chief Financial Officer
- -------- (1) Consists primarily of an automobile allowance. (2) Consists of shares issuable pursuant to options granted under the Stock Incentive Plan. (3) Mr. French was a consultant to United PanAm Mortgage Corporation and the Bank, and in that capacity was acting President and Chief Executive Officer of United PanAm Mortgage Corporation from March 11, 1997 until October 1, 1997 when he became the Chairman of the Board, President and Chief Executive Officer of United PanAm Mortgage Corporation. 88 Stock Option Grants. The following table sets forth certain information concerning the grant of stock options during fiscal 1997 to the Named Executives pursuant to the Stock Incentive Plan. OPTION GRANTS IN FISCAL YEAR 1997
INDIVIDUAL GRANTS -------------------------------------------------- SHARES OF POTENTIAL REALIZABLE VALUE COMMON PERCENT OF AT ASSUMED ANNUAL RATES STOCK TOTAL OPTIONS OF STOCK PRICE APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM(1) OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------------- NAME GRANTED FISCAL YEAR PRICE(4) DATE 5% 10% ---- ---------- ------------- -------- ---------------- ------------- -------------- John T. French(2)....... 60,000 10% $10.50 October 15, 2007 $ 31,500 $ 63,000 Carol M. Bucci(3)....... 10,000 2% $10.50 October 15, 2007 $ 5,250 $ 10,500
- -------- (1) The Potential Realizable Value is the product of (a) the difference between (i) the product of the market price per share at the date of grant and the sum of (A) 1 plus (B) the assumed rate of appreciation of the Common Stock compounded annually over the term of the option and (ii) the per share exercise price of the option and (b) the number of shares of Common Stock underlying the option at December 31, 1997. These amounts represent certain assumed rates of appreciation only. Actual gains, if any, on stock option exercises are dependent on a variety of factors, including market conditions and the price performance of the Common Stock. There can be no assurance that the rate of appreciation presented in this table can be achieved. (2) The options vest in four equal annual installments commencing on October 15, 1997. (3) The options vest in four equal annual installments commencing on October 15, 1998. (4) The Company believes that the exercise price is equal to or greater than the fair market value of the Common Stock on the date of grant, based upon the book value of the Common Stock and the early stage of the Company's development. Option Exercises and Holdings. The following table sets forth certain information with respect to the Named Executives concerning the exercise of options during fiscal 1997 and unexercised options held by the Named Executives as of December 31, 1997. AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES OF COMMON STOCK VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT YEAR-END AT YEAR-END(1) SHARES ACQUIRED VALUE ------------------------- ------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- -------- ----------- ------------- ----------- ------------- Lawrence J. Grill....... 281,250 -- -- 93,750 -- $909,375 John T. French.......... -- -- 80,625 110,625 $636,563 $636,563 Carol M. Bucci.......... -- -- 28,125 38,125 $272,813 $272,813
- -------- (1) The value of unexercised "in-the-money" options is the difference between the market price of the Common Stock on December 31, 1997 and the exercise price of the option, multiplied by the number of shares subject to the option. Management Incentive Plans. Key management employees of the Bank and its subsidiaries and divisions are eligible to participate in a management incentive plan. Under this plan, a bonus pool is established for the payment of bonuses. These bonuses are established based on the achievement of corporate, divisional and personal goals. A minimum level of pre-tax profits must be achieved for the payment of any bonus under this plan. Bonuses earned during the calendar year are paid out subsequent to the certified audit of the fiscal year during which the bonus was earned. The Company intends to establish similar plans for each of its businesses. 89 Employment Agreements. The Company has entered into employment agreements with Messrs. Bron, Grill, French and Thousand. All other executive officers are employed on an "at will" basis. The Company has entered into an employment agreement with Guillermo Bron under which Mr. Bron has been employed as the Chairman of the Board of the Company and the Bank for the term commencing on October 1, 1997 and ending on December 31, 2000, unless extended by the Company to December 31, 2001. Under this agreement, Mr. Bron is entitled to (i) an annual base salary of $150,000, (ii) an annual cash bonus of up to 100% of his base salary, in an amount determined by the Board of Directors, (iii) $500,000 of term life insurance above the amount normally provided to employees under the Company's group term life insurance, (iv) a monthly car allowance of $500 and (v) the premium cost under the Company's plan for family medical, dental, vision, long-term disability and accidental death and dismemberment insurance. In addition, concurrently with the sale of the shares of Common Stock offered hereby, Mr. Bron will be granted a ten-year option to purchase 60,000 shares of Common Stock at an exercise price of equal to 110% of the initial Offering price, which options vest 25% per year, commencing on October 15 1998. In the event the Company terminates his employment without cause, or Mr. Bron terminates his employment as the result of a reduction in authority, Mr. Bron shall be entitled to receive (i) a lump sum payment equal to his base salary from the date of termination to the next to occur of December 31, 1999, 2000 or 2001, but in no event less than six months salary, (ii) a lump sum payment equal to the bonus received by him in the prior year prorated for that portion of the current year for which Mr. Bron was employed by the Company and (iii) any additional benefits accrued through the date of termination. In the event the Company terminates Mr. Bron's employment with cause, the Company is obligated to pay the compensation required by the agreement only through the date of termination. The Bank has entered into a salary continuation agreement with Mr. Bron pursuant to which Mr. Bron is entitled to receive an annual benefit of up to $100,000 payable over a period of 15 years upon either (i) the termination of his employment by the Bank for any reason other than termination for cause after attaining 65 years of age or (ii) his death if he is actively employed by the Bank at such time. Upon the termination of his employment for any of the following reasons, Mr. Bron is entitled to receive reduced annual benefits before 2003 which increase to $100,000 if such termination occurs in or after 2003: (i) the termination of his employment by the Bank without cause or after the occurrence of a change of control of the Bank or the Company, (ii) the termination of his employment due to disability, (iii) the termination of his employment as the result of a reduction in authority or (iv) the voluntary termination of his employment prior to attaining 65 years of age. The Bank may purchase insurance on the life of Mr. Bron to fund payments to Mr. Bron under this agreement. Any such insurance policy will be an asset of the Bank in which Mr. Bron will have no rights. The Bank is not required to make any payments under this agreement if Mr. Bron is terminated for cause. The Company has entered into an employment agreement with Lawrence J. Grill under which Mr. Grill has been employed as the President, Chief Executive Officer and Secretary of the Company and the Bank for the term commencing on October 1, 1997 and ending on December 31, 2000, unless extended by the Company to December 31, 2001. Under this agreement, Mr. Grill is entitled to (i) an annual base salary of $190,000, (ii) an annual cash bonus of up to 50% of his base salary based upon the satisfaction of performance goals relating to pre-tax net income, return on stockholders' equity and such other factors as may be established by the Board of Directors, (iii) $500,000 of term life insurance above the amount normally provided to employees under the Company's group term life insurance, (iv) a monthly car allowance of $500 and (v) the premium cost under the Company's plan for family medical, dental, vision, long-term disability and accidental death and dismemberment insurance. In addition, concurrently with the sale of the shares of Common Stock offered hereby, Mr. Grill will be granted a ten-year option to purchase 60,000 shares of Common Stock at an exercise price equal to the initial Offering price, which options vest 25% per year, commencing on October 15, 1998. In the event the Company terminates his employment without cause, or Mr. Grill terminates his employment as the result of a reduction in authority, Mr. Grill shall be entitled to receive (i) a lump sum payment equal to his base salary from the date of termination to the next to occur of December 31, 1999, 2000 or 2001, but in no event less than six months salary, (ii) a lump sum payment equal to the bonus received by him in the prior year prorated for that portion of the 90 current year for which Mr. Grill was employed by the Company, (iii) any additional benefits accrued through the date of termination and (iv) continuation of group medical, disability and life insurance coverage for up to the balance of the stated term. In the event the Company terminates Mr. Grill's employment with cause, the Company is obligated to pay the compensation required by the agreement only through the date of termination. The Bank has entered into a salary continuation agreement with Mr. Grill pursuant to which Mr. Grill is entitled to receive an annual benefit of up to $100,000 payable over a period of 15 years upon either (i) the termination of his employment by the Bank for any reason other than termination for cause after attaining 67 years of age or (ii) his death if he is actively employed by the Company at such time. Upon the termination of his employment for any of the following reasons, Mr. Grill is entitled to receive reduced annual benefits before 2003 which increase to $100,000 if such termination occurs in or after 2003: (i) the termination of his employment by the Bank without cause or after the occurrence of a change of control of the Bank or the Company, (ii) the termination of his employment due to disability, (iii) the termination of his employment as the result of a reduction in authority or (iv) the voluntary termination of his employment prior to attaining 67 years of age. The Bank may purchase insurance on the life of Mr. Grill to fund payments to Mr. Grill under this agreement. Any such insurance policy will be an asset of the Bank in which Mr. Grill will have no rights. The Bank is not required to make any payments under this agreement if Mr. Grill is terminated for cause. United PanAm Mortgage Corporation has entered into an employment agreement with John T. French under which Mr. French has been employed as Chairman of the Board, President and Chief Executive Officer for the term commencing on October 1, 1997 and ending on September 30, 1999. Under this agreement, Mr. French is entitled to (i) a monthly base salary of $16,667, (ii) an annual cash bonus in an amount determined by the Board of Directors, but in no event less than $100,000 if Mr. French reasonably performs his obligations under the agreement, (iii) participate in all benefits made generally available by the company to its executives and (iv) the assumption by the company of an office lease in an amount not to exceed $1,500 per month for a term expiring on October 31, 1998. In addition, Mr. French has been granted a ten-year option to purchase 60,000 shares of Common Stock at an exercise price of $10.50 per share, which options vest in four equal annual installments commencing on October 15, 1997. Notwithstanding the option period described above, the options will fully vest on September 30, 1999 if Mr. French is an employee of the company on that date and the company and Mr. French neither renew this agreement nor enter into a new employment agreement. In the event the company terminates his employment without cause, or Mr. French terminates his employment for specified causes, Mr. French shall make himself available to perform such consulting services as the company deems reasonable and, in consideration thereof, shall be entitled to receive a monthly consulting fee of $10,000, all for the period from the date of termination to the later of the first anniversary of such termination or September 30, 1999, unless such consulting term is extended by the company for one additional year. In the event the company terminates Mr. French's employment with cause, the company is obligated to pay only the base salary through the date of termination. The Company has entered into an employment agreement with Ray C. Thousand under which Mr. Thousand has been employed as the President and Chief Executive Officer of United Auto Credit Corporation for the three years commencing on December 7, 1995. Under this agreement, Mr. Thousand is entitled to (i) an annual base salary of $135,000, (ii) an annual cash bonus of up to 100% of his base salary based upon the satisfaction of specified performance goals relating to loan volume, pre-tax profit, delinquencies and charge-offs and (iii) a monthly automobile allowance of $200. In addition, Mr. Thousand has been granted an option to purchase up to a 7.5% ownership interest in United Auto Credit Corporation at an exercise price equal to the book value of such interest (subject to certain adjustments), which option vests 20% per year and are exercisable based upon the satisfaction of specified performance goals. In the event the Company terminates his employment before the end of the stated term without cause, Mr. Thousand shall be entitled to receive the base salary until the earlier to occur of the end of the stated term or the first anniversary of the date of termination, all compensation required by the agreement accrued to the date of termination and a prorated bonus. In the event the Company terminates Mr. Thousand's employment before the end of the stated term as a result of the failure of United Auto Credit Corporation to achieve specified performance goals, he shall be entitled to receive 15% of the remaining base salary that would have been paid under the agreement. In the event the Company terminates Mr. Thousand's 91 employment before the end of the stated term with cause, the Company is obligated to pay the compensation required by the agreement only through the date of termination, and any accrued but unpaid bonus is forfeited. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION All decisions involving executive officer compensation are made by the Company's Compensation Committee, consisting of Messrs. Kaufman, Maizel and Villanueva. STOCK INCENTIVE PLAN General. In 1994, the Company adopted a stock option plan and, on November 5, 1997, amended and restated such plan as the United PanAm Financial Corp. 1997 Employee Stock Incentive Plan. Pursuant to the Stock Incentive Plan, officers, directors, employees and consultants of the Company are eligible to receive shares of Common Stock or other securities or benefits with a value derived from the value of the Common Stock. The purpose of the Stock Incentive Plan is to enable the Company to attract, retain and motivate officers, directors, employees and consultants by providing for or increasing their proprietary interests in the Company and, in the case of non-employee directors, to attract such directors and further align their interests with those of the Company's shareholders by providing for or increasing their proprietary interests in the Company. The maximum number of shares of Common Stock that may be issued pursuant to awards granted under the Stock Incentive Plan currently is 2,287,500 (subject to adjustment to prevent dilution). Administration. The Stock Incentive Plan is administered by a committee of two or more directors appointed by the Board of Directors of the Company (the "Committee"). The Committee has full and final authority to select the recipients of awards and to grant such awards. Subject to the provisions of the Stock Incentive Plan, the Committee has a wide degree of flexibility in determining the terms and conditions of awards and the number of shares to be issued pursuant thereto, including conditioning the receipt or vesting of awards upon the achievement by the Company of specified performance criteria. The expenses of administering the Stock Incentive Plan are borne by the Company. Terms of Awards. The Stock Incentive Plan authorizes the Committee to enter into any type of arrangement with an eligible recipient that, by its terms, involves or might involve the issuance of Common Stock or any other security or benefit with a value derived from the value of Common Stock. Awards are not restricted to any specified form or structure and may include, without limitation, sales or bonuses of stock, restricted stock, stock options, reload stock options, stock purchase warrants, other rights to acquire stock, securities convertible into or redeemable for stock, stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares. An award may consist of one such security or benefit or two or more of them in tandem or in the alternative. An award granted under the Stock Incentive Plan may include a provision accelerating the receipt of benefits upon the occurrence of specified events, such as a change of control of the Company or a dissolution, liquidation, merger, reclassification, sale of substantially all of the property and assets of the Company or other significant corporate transactions. The Committee may grant options that either are intended to be "incentive stock options" as defined under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or are not intended to be incentive stock options ("non- qualified stock options"). Awards to consultants and non-employee directors may only be non-qualified stock options. An award may permit the recipient to pay all or part of the purchase price of the shares or other property issuable pursuant thereto by (i) delivering previously owned shares of capital stock of the Company or other property or (ii) reducing the amount of shares or other property otherwise issuable pursuant to the award. If an option permits the recipient to pay for the shares issuable pursuant thereto with previously owned shares, the recipient would be able to exercise the option in successive transactions, starting with a relatively small number of shares and, by a series of exercises using shares acquired from each such transaction to pay the purchase price 92 of the shares acquired in the following transaction, to exercise an option for a large number of shares with no more investment than the original share or shares delivered. The exercise price is payable in cash by consultants and non-employee directors, although the Committee at its discretion may permit such payment by delivery of shares of Common Stock, or by delivery of broker instructions authorizing a loan secured by the shares acquired upon exercise or payment of proceeds from the sale of such shares. Subject to limitations imposed by law, the Board of Directors may amend or terminate the Stock Incentive Plan at any time and in any manner. However, no such amendment or termination may deprive the recipient of an award previously granted under the Stock Incentive Plan of any rights thereunder without his consent. Pursuant to Section 16(b) of the Exchange Act, directors, certain officers and ten percent shareholders of the Company are generally liable to the Company for repayment of any "short-swing" profits realized from any non- exempt purchase and sale of Common Stock occurring within a six-month period. Rule 16b-3, promulgated under the Exchange Act, provides an exemption from Section 16(b) liability for certain transactions by an officer or director pursuant to an employee benefit plan that complies with such Rule. Specifically, the grant of an option under an employee benefit plan that complies with Rule 16b-3 will not be deemed a purchase of a security for purposes of Section 16(b). The Stock Incentive Plan is designed to comply with Rule 16b-3. Awards may not be granted under the Stock Incentive Plan after the tenth anniversary of the adoption of the Stock Incentive Plan. Although any award that was duly granted on or prior to such date may thereafter be exercised or settled in accordance with its terms, no shares of Common Stock may be issued pursuant to any award after the twentieth anniversary of the adoption of the Stock Incentive Plan. The business criteria on which performance goals are based under the Stock Incentive Plan will be determined on a case-by-case basis, except that with respect to stock options and stock appreciation rights compensation is based on increases in value of the Common Stock after the date of grant or award. Similarly, the maximum amount of compensation that could be paid to any participant or the formula used to calculate the amount of compensation to be paid to the participant if a performance goal is obtained will be determined on a case-by-case basis, except that in the case of stock options maximum possible compensation will be calculated as the difference between the exercise price of the option and the fair market value of the Common Stock on the date of option exercise, times the maximum number of shares for which grants may be made to any participant (200,000 shares per year under the Stock Incentive Plan). Recent Awards. Since 1994, options have been granted to (i) Lawrence J. Grill, the President and Chief Executive Officer of the Company, to purchase up to 375,000 shares of Common Stock at an exercise price of $0.80 per share, (ii) Carol M. Bucci, Senior Vice President, Treasurer and Chief Financial Officer of the Company, to purchase up to 56,250 shares of Common Stock at an exercise price of $0.80 per share and up to an additional 10,000 shares at $10.50 per share, (iii) Stephen W. Haley, the Senior Vice President-Compliance and Risk Management of the Company, to purchase up to 60,000 shares of Common Stock at an exercise price of $10.50 per share, (iv) Daniel L. Villanueva, a director of the Company, to purchase up to 18,750 shares of Common Stock at an exercise price of $0.80 per share, (v) Edmund M. Kaufman, a director of the Company, to purchase up to 18,750 shares of Common Stock at an exercise price of $0.80 per share, (vi) John T. French, a director of the Company and the Chairman of the Board, President and Chief Executive Officer of United PanAm Mortgage Corporation, to purchase up to 131,250 shares of Common Stock at an exercise price of $0.80 per share and up to an additional 60,000 shares at an exercise price of $10.50 per share, and (vii) 24 current or former employees or consultants of the Company to purchase up to an aggregate of 1,131,250 shares at an average exercise price of $4.92 per share. Such options vest in installments before October 15, 2001 and expire on or before October 15, 2007. Concurrently with the sale of the shares of Common Stock offered hereby, options will be granted to (i) Guillermo Bron, the Chairman of the Board of the Company, to purchase up to 60,000 shares of Common Stock at an exercise price equal to 110% of the initial public offering price, (ii) Mr. Grill to purchase up to 60,000 shares of Common Stock at an exercise price equal to the initial public offering price, (iii) Mr. Maizel to 93 purchase up to 20,000 shares of Common Stock at an exercise price equal to the initial public offering price and (iv) Ms. Bucci to purchase up to 30,000 shares of Common Stock at an exercise price equal to the initial public offering price. These options will become exercisable in four equal annual installments commencing on the first anniversary of the date of grant and will expire on the tenth anniversary of the date of grant. The Company intends to register under the Securities Act the shares of Common Stock issuable pursuant to the Stock Option Plans. See "Description of Capital Stock--Shares Eligible For Future Sale." PROFIT SHARING PLAN The Bank maintains the Pan American Bank 401(k) Profit Sharing Plan (the "401(k) Plan"), initially effective as of April 1, 1995, for the benefit of all eligible employees of the Company. The purpose of the 401(k) Plan is to provide participating employees a vehicle for deferring a part of their pre- tax salary to provide security for their retirement. All employees of the Company who have completed six months of service are eligible to participate in the 401(k) Plan on the first day of the month following completion of the service requirement. The 401(k) Plan provides for two types of contributions: employee elective deferrals and employer profit sharing contributions. Participating employees can contribute, by way of payroll deductions, up to the lesser of 15% of their pre-tax salary or the annual dollar limit of $9,500 for 1997 as an elective deferral, subject to certain legal limits. In addition, the 401(k) Plan permits participating employees to make rollover contributions. The 401(k) Plan does not permit participants to make voluntary after-tax contributions. The 401(k) Plan provides for discretionary profit sharing contributions. Each plan year (which is the calendar year), the Board of Directors of the Bank will determine whether or not to make a contribution to the 401(k) Plan and, if so, in what amount. If the Bank determines to make a contribution to the 401(k) Plan, the amounts contributed by each affiliated employer will be allocated to the accounts of participating employees who are employed on the last day of the plan year on a pro rata basis. The Bank has not elected to make a discretionary profit sharing contribution for any of the plan years that the 401(k) Plan has been in existence. Effective January 1, 1998, the Company may commence matching contributions to the 401(k) Plan. Participating employees have the right to invest all contributions allocated to their accounts under one or more of the six investment options offered. A participating employee is always 100% vested in elective deferrals. Participating employees become vested in their employer contributions 20% after the completion of one year of service and 20% for each year thereafter, with 100% vesting after the completion of five or more years of service. Upon a participating employee's retirement, death, total and permanent disability, attainment of age 59 1/2 or other termination of employment with the Company, he is entitled to receive a distribution of vested benefits. The participating employee will receive these benefits in the form of a lump sum. While a participating employee is still in the employ of the Company, he may withdraw benefits only from his elective deferral account and only upon a showing of financial hardship. A participating employee may also borrow against his vested benefits, but those benefits must be repaid. Tax law limits deductible contributions in 1998 to the lesser of 15% of the total amount of pre-tax salary paid during the plan year or $10,000 to participating employees. The 401(k) Plan is designed to qualify under Section 401(k) of the Code and, therefore, contributions by the Company and the participating employees are deductible by the Company and not includible in the income of participating employees for federal income tax purposes. The Internal Revenue Service has determined that the 401(k) Plan is a qualified plan within the meaning of Section 401(a) and 401(k) of the Code as of September 20, 1996. The Bank, through its Board of Directors, appoints one or more administrators to administer the 401(k) Plan. Pursuant to the terms of the 401(k) Plan, the plan administrator will operate the 401(k) Plan so as not to discriminate in favor of participating employees who are officers, shareholders or highly compensated employees of the Company. All trust assets are held in trust by the trustee for the exclusive benefit of the participating employees and their beneficiaries under the 401(k) Plan. 94 The account balances of the Named Executives under the 401(k) Plan, consisting solely of such officers' electing deferrals as of December 31, 1997, are as follows.
NAME ACCOUNT BALANCE ---- --------------- Lawrence J. Grill............................................ $35,745.01 Guillermo Bron............................................... $10,273.38 John T. French............................................... $ 9,302.22 Ray C. Thousand.............................................. -0- Carol M. Bucci............................................... $17,976.03
CERTAIN TRANSACTIONS Subsequent to July 1, 1997, the shareholders of the Company loaned the Company an aggregate of $2.0 million, each substantially in proportion to the number of shares of Common Stock held by the shareholder. The amount borrowed was used to finance the establishment and initial operations of United PanAm Mortgage Corporation. These loans are unsecured, bear interest at an annual rate of 8% payable on July 15, 1998 and June 30, 1999 and are due and payable on June 30, 1999. The Company intends to use a portion of the net proceeds of the Offering to repay this indebtedness. See "Use of Proceeds." On October 15, 1997, the Company loaned $225,000 to Lawrence J. Grill to finance his exercise of an option to purchase 281,250 shares of Common Stock. This loan is secured by the shares purchased, bears interest at an annual rate of 5.81% payable annually and is due and payable on the earlier of October 15, 2000 or the termination of Mr. Grill's employment by the Company. United Auto Credit Corporation has granted to certain of its key employees the right to purchase up to a 13.5% ownership interest in that company, and may, in the future, grant options to purchase an additional 1.5%. These options generally vest over a five-year period beginning with the date of employment and are exercisable at prices which increase for each subsequent installment. In addition, the options held by senior management, representing 11.5% of the 13.5% contingent ownership interest, generally may only be exercised if the company has achieved a 30% cumulative annual return on equity from inception through the date of vesting. 95 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the shares of Common Stock beneficially owned as of March 31, 1998, and as adjusted to reflect the sale of the shares offered hereby, by (i) each person known to the Company to be the beneficial owner of more than five percent of the outstanding Common Stock, (ii) each director and Named Executive and (iii) all directors and executive officers as a group.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING(2) AFTER OFFERING(2)(3) ----------------------------- ----------------------------- NUMBER OF PERCENT OF NUMBER OF PERCENT OF NAME AND ADDRESS(1) SHARES CLASS(4) SHARES CLASS(4) ------------------- --------------- ------------- --------------- ------------- Pan American Financial, L.P.(5) 1999 Avenue of the Stars, Suite 2960 Los Angeles, California 90067.................... 8,681,250 79.3% 8,681,250 52.8% BVG West Corp.(6)......... 1,368,750 12.5% 1,368,750 8.3% 1999 Avenue of the Stars, Suite 2960 Los Angeles, California 90067 Lawrence J. Grill(7)...... 615,000 5.6% 615,000 3.7% Guillermo Bron(8)......... -- -- -- -- John T. French(9)......... 80,625 * 80,625 * Ray C. Thousand........... -- -- -- -- Carol M. Bucci(10)........ 42,188 * 42,188 * Edmund M. Kaufman(11)..... 9,375 * 9,375 * Daniel L. Villanueva(12).. 18,750 * 18,750 * Luis Maizel(13)........... -- -- -- -- All directors and executive officers as a group (eight persons)(14)............. 765,938 6.8% 765,938 4.6%
- -------- * Less than one percent. (1) The business address of each director and executive officer of the Company is 1300 South El Camino Real, San Mateo, California 94402. (2) Each person has sole voting and investment power over the shares of Common Stock shown as beneficially owned, subject to community property laws where applicable. (3) Assumes no exercise of the Underwriters' over-allotment option. (4) Shares of Common Stock which the person (or group) has the right to acquire within 60 days after March 31, 1998 are deemed to be outstanding in calculating the percentage ownership of the person (or group), but are not deemed to be outstanding as to any other person or group. (5) PAFLP is a Delaware limited partnership, the sole general partner of which is BVG West Corp. BVG West Corp. is wholly owned by Mr. Bron. Mr. Bron and members of his family hold 58.9% of the Class A Limited Partnership Units and 52.2% of the Class B Limited Partnership Units of PAFLP, which entitle the holders to receive 5,002,419 shares of the Common Stock held by PAFLP. Mr. Bron and BVG West Corp. each disclaims beneficial ownership of the shares of Common Stock held by PAFLP. (6) BVG West Corp. is the sole general partner of PAFLP and is wholly owned by Mr. Bron. Mr. Bron disclaims beneficial ownership of the shares of Common Stock held by BVG West Corp. (7) Includes 93,750 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are exercisable within 60 days after March 31, 1998. Excludes (i) 37,500 shares held by Mr. Grill's adult children and 1,875 shares held by Mr. Grill's father-in-law, as to which shares he disclaims beneficial ownership, and (ii) 60,000 shares issuable upon the exercise of stock options to be granted pursuant to the Stock Incentive Plan concurrently with the completion of the Offering. See "Management--Stock Incentive Plan." Mr. Grill holds 10.2% of the Class B Limited Partnership Units of PAFLP which entitle Mr. Grill to receive 168,465 shares of the Common Stock held by PAFLP. Mr. Grill disclaims beneficial ownership of the shares of Common Stock held by PAFLP. 96 (8) Excludes (i) 1,368,750 shares held by BVG West Corp., a corporation owned by Mr. Bron, (ii) 8,681,250 shares held by PAFLP the sole general partner of which is BVG West Corp., and (iii) 60,000 shares issuable upon the exercise of stock options to be granted pursuant to the Stock Incentive Plan concurrently with the completion of the Offering. See "Management-- Stock Incentive Plan." (9) Consists of shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan. Excludes 110,625 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days of March 31, 1998. See "Management--Stock Incentive Plan." Mr. French holds 12.4% of the Class B Limited Partnership Units of PAFLP which entitle Mr. French to receive 204,890 shares of the Common Stock held by PAFLP. Mr. French disclaims beneficial ownership of the shares of Common Stock held by PAFLP. (10) Consists of shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan. Excludes (i) 24,062 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days after March 31, 1998, and (ii) 30,000 shares issuable upon the exercise of stock options to be granted pursuant to the Stock Incentive Plan concurrently with the completion of the Offering. See "Management--Stock Incentive Plan." (11) Consists of shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan. Excludes 9,375 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days after March 31 1998. See "Management--Stock Incentive Plan." Mr. Kaufman holds 1.8% of the Class B Limited Partnership Units of PAFLP which entitle Mr. Kaufman to receive 30,354 shares of the Common Stock held by PAFLP. Mr. Kaufman disclaims beneficial ownership of the shares of Common Stock held by PAFLP. (12) Consists of shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan. Excludes 150,000 shares and warrants to purchase an additional 75,000 shares held by Villanueva Management Inc., an investment company owned by Daniel D. Villanueva. See "Management--Stock Incentive Plan." Daniel L. Villanueva holds 2.7% of the Class B Limited Partnership Units by PAFLP which entitle Mr. Villanueva to receive 45,531 shares of the Common Stock held by PAFLP. Mr. Villanueva disclaims beneficial ownership of the shares of Common Stock held by Villanueva Management Inc. or PAFLP. (13) Excludes 20,000 shares issuable upon the exercise of stock options to be granted pursuant to the Stock Incentive Plan concurrently with the completion of the Offering. Mr. Maizel holds 1.1% of the Class A Limited Partnership Units and 1.8% of the Class B Limited Partnership Units of PAFLP which entitle Mr. Maizel to receive 106,239 shares of the Common Stock held by PALFP. See "Management--Stock Option Plan." (14) Includes 255,001 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan. Excludes (i) 193,749 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days after March 31, 1998 and (ii) 170,000 shares issuable upon the exercise of stock options to be granted pursuant to the Stock Incentive Plan concurrently with the completion of the Offering. See "Management--Stock Incentive Plan." 97 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock. At March 31, 1998, there were 10,950,000 shares of Common Stock outstanding, held of record by nine persons. The following description of capital stock reflects the consummation of the reincorporation of the Company in California. COMMON STOCK Each holder of Common Stock is entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. While the Company's shareholders currently may cumulate their votes for the election of directors, cumulative voting will no longer be required or permitted under the Company's Articles of Incorporation (the "Articles") at such time as the Company's shares of Common Stock are listed on the Nasdaq National Market and the Company has at least 800 holders of its equity securities as of the record date of the Company's most recent annual meeting of shareholders. At such time, the Company will divide its Board into two classes of directors. Subject to preferences which may be granted to the holders of Preferred Stock, each holder of Common Stock is entitled to share ratably in distributions to shareholders and to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor and, in the event of the liquidation, dissolution or winding up of the Company, is entitled to share ratably in all assets of the Company remaining after payment of liabilities. Holders of Common Stock have no conversion, preemptive or other rights to subscribe for additional shares, and there are no redemption rights or sinking fund provisions with respect to the Common Stock. The outstanding shares of Common Stock are, and the shares to be sold by the Company in this Offering will be, when issued and delivered against receipt of the consideration set forth in this Prospectus, validly issued, fully paid and nonassessable. Additional shares of Common Stock may be issued by the Company from time to time. PREFERRED STOCK The Board of Directors, without further action by the holders of Common Stock, may issue shares of Preferred Stock in one or more series and may fix or alter the relative, participating, optional or other rights, preferences, privileges and restrictions, including the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation preferences and conversion rights, and the description of and number of shares constituting any wholly unissued series of Preferred Stock. The Board of Directors, without further shareholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. No shares of Preferred Stock presently are outstanding, and the Company currently has no plans to issue shares of Preferred Stock. The issuance of Preferred Stock in certain circumstances may delay, defer or prevent a change in control of the Company without further action by the shareholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price, and the voting and other rights of the holders, of Common Stock. CERTAIN PROVISIONS IN THE COMPANY'S ARTICLES AND BYLAWS SHAREHOLDER MEETING The Articles provide that any action required to be taken or that may be taken at any meeting of the Company's shareholders may only be taken at a meeting of shareholders or by the written consent of the holders of two-thirds of the outstanding voting shares. Special meetings of shareholders may only be called by the Company's Board of Directors, Chairman of the Board or Chief Executive Officer, or at the written request of holders of not less than 10% of the Company's voting shares. In addition, if a shareholder wishes to propose an item for consideration at a special meeting of shareholders, or at the annual meeting of shareholders to be held in May 1999, he must give written notice to the Company not less than 30 nor more than 60 days prior to the meeting or, if later, the tenth day following the first public announcement of such meeting, or such other date as is necessary to comply with applicable federal proxy solicitation rules or other regulations. The Bylaws of the Company (the "Bylaws") provide that, if a shareholder wishes to propose an item for consideration at any annual meeting of shareholders, he must give written notice to the Company not less than 120 days prior to the day and month on which, in the immediately preceding year, the proxy statement for such year had been released to shareholders. 98 BOARD OF DIRECTORS The Bylaws provide that the number of directors shall be not less than five nor more than nine until changed by an amendment duly adopted by the Company's shareholders. The Bylaws further provide that the exact number of directors shall be fixed from time to time, within such range, by the Board of Directors. The number of directors currently is fixed at six. The Articles provide that, upon the satisfaction of certain conditions, the Board of Directors will be divided into two classes of directors, each serving for staggered two-year terms. It is anticipated that this will occur at the next annual meeting of shareholders of the Company, which is scheduled to be held in May 1999. AMENDMENT OF ARTICLES AND BYLAWS The Bylaws may not be amended without the approval of the holders of at least two-thirds of the outstanding voting shares or the approval of at least a majority of the authorized directors; provided, however, that the provisions of the Bylaws relating to shareholder proposals and the number and nomination of directors require the approval of the holders of at least two-thirds of the outstanding voting shares. In addition, the provisions contained in the Articles and Bylaws with respect to the required vote for shareholder action without a meeting, the classification of the Board of Directors, the elimination of cumulative voting and indemnification of directors, officers and others may not be amended without the affirmative vote of at least two- thirds of the outstanding voting shares. The foregoing provisions of the Articles and the Bylaws may delay, defer or prevent a change in control of the Company without further action by the shareholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of the Common Stock. TRANSFER AGENT AND REGISTRAR The Company has appointed U.S. Stock Transfer Corporation, Glendale, California as the transfer agent and registrar for the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has been no market for the Common Stock. Future sales of substantial amounts of the Common Stock in the public market could adversely affect prevailing market prices. Upon completion of the Offering, there will be 16,450,000 shares of Common Stock outstanding. Of these shares, the 5,500,000 shares sold in the Offering will be freely tradable without restriction or further registration under the Securities Act, except for any such shares held by an "affiliate" of the Company. The remaining 10,950,000 shares (the "Restricted Shares"), and any shares purchased in the Offering by an "affiliate" of the Company, may not be sold without registration under the Securities Act or pursuant to an applicable exemption therefrom. In general, under Rule 144 promulgated under the Securities Act, as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner other than an "affiliate" of the Company), or who is an "affiliate" of the Company, is entitled to sell within any three- month period a number of such Restricted Shares or, in the case of an "affiliate," a number of such Restricted Shares and shares purchased in the public market, that does not exceed the greater of (i) 1% of the then outstanding shares of the Common Stock (approximately 164,500 shares immediately after the Offering) or (ii) the average weekly trading volume of the Common Stock in the public market during the four calendar weeks immediately preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and availability of current public information regarding the Company. A person who has not been an "affiliate" of the Company at any time during the 90 days preceding a sale, and who has beneficially owned Restricted Shares for at least two years, is entitled to sell such 99 shares under Rule 144 without regard to the volume limitations, manner of sale provisions or notice requirements. As of March 31, 1998, 10,668,750 of the Restricted Shares may be deemed to have been held for more than one year. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 under the Securities Act ("Rule 701") may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisers prior to the closing of the Offering, pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Commission has indicated that Rule 701 will apply to stock options granted by the Company under its employee benefit plans before the Offering, along with the shares of Common Stock acquired upon exercise of such options. Securities issued in reliance on Rule 701 are deemed to be restricted securities and, beginning 90 days after the date of this Prospectus (unless subject to the lock-up agreements described below), may be sold by persons other than affiliates of the Company subject only to the manner-of-sale provisions of Rule 144 and by affiliates of the Company under Rule 144 without compliance with its minimum holding period requirement. All of the Company's officers and directors and certain of its other shareholders have agreed that they will not, without the prior written consent of NationsBanc Montgomery Securities LLC (which consent may be withheld in its sole discretion) and subject to certain limited exceptions, directly or indirectly, sell, offer, contract or grant any option to sell, make any short sale, pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise dispose of any shares of Common Stock, options or warrants to acquire Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock currently owned either of record or beneficially by them or announce the intention to do any of the foregoing, for a period commencing on the date of this Prospectus and continuing to a date 180 days after such date. NationsBanc Montgomery Securities LLC may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. In addition, the Company has agreed that, for a period of 180 days after the date of this Prospectus, it will not, without the consent of NationsBanc Montgomery Securities LLC, issue, offer, sell or grant options to purchase or otherwise dispose of any equity securities or securities convertible into or exchangeable for equity securities except for (i) the issuance of shares of Common Stock offered hereby and (ii) the grant of options to purchase shares of Common Stock pursuant to the Stock Incentive Plan and shares of Common Stock issued pursuant to the exercise of such options, provided that such options shall not vest, or the Company shall obtain the written consent of the grantee not to transfer such shares, until the end of such 180-day period. See "Underwriting." The Company has granted options to purchase up to 1,580,000 shares of Common Stock pursuant to the Stock Incentive Plan. Concurrently with the sale of the shares offered hereby, the Company will grant options to purchase an additional 170,000 shares of Common Stock pursuant to the Stock Incentive Plan. An additional 537,500 shares currently are reserved for issuance under the Stock Incentive Plan. The Company intends to register the sale of such shares under the Securities Act. See "Management--Stock Incentive Plan." Accordingly, as awards under the Stock Incentive Plan vest, shares issued pursuant thereto will be freely tradable, except such shares as may be acquired by an "affiliate" of the Company. 100 UNDERWRITING The Underwriters named below represented by NationsBanc Montgomery Securities LLC and Piper Jaffray Inc. (the "Representatives") have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus:
UNDERWRITER NUMBER OF SHARES ----------- ---------------- NationsBanc Montgomery Securities LLC.......................... Piper Jaffray Inc.............................................. --------- Total........................................................ 5,500,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of such shares if any are purchased. The Representatives have advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more that $ per share, and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the Offering, the offering price and other selling terms may be changed by the Representatives. The shares of Common Stock are offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 825,000 additional shares of Common Stock to cover over-allotments, if any, at the offering price less the underwriting discount set forth on the cover page of this Prospectus. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Offering. The Underwriting Agreement provides that the Company and certain of its shareholders will indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or will contribute to payments that the Underwriters may be required to make in respect thereof. All of the Company's officers and directors and certain of its other shareholders have agreed that they will not, without the prior written consent of NationsBanc Montgomery Securities LLC (which consent may be withheld in its sole discretion) and subject to certain limited exceptions, directly or indirectly, sell, offer, contract or grant any option to sell, make any short sale, pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of Common Stock, options or warrants to acquire Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock currently owned either of record or beneficially by them or announce the intention to do any of the foregoing, for a period commencing on the date of this Prospectus and continuing to a date 180 days after such date. NationsBanc Montgomery Securities LLC may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. In addition, the Company has agreed that, for a period of 180 days after the date of this Prospectus, it will not, without the consent of 101 NationsBanc Montgomery Securities LLC, issue, offer, sell or grant options to purchase or otherwise dispose of any equity securities or securities convertible into or exchangeable for equity securities except for (i) the issuance of shares of Common Stock offered hereby and (ii) the grant of options to purchase shares of Common Stock pursuant to the Stock Incentive Plan and shares of Common Stock issued pursuant to the exercise of such options, provided that such options shall not vest, or the Company shall obtain the written consent of the grantee not to transfer such shares, until the end of such 180-day period. See "Management--Stock Incentive Plan" and "Description of Capital Stock--Shares Eligible for Future Sale." Prior to the Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price will be determined by negotiations among the Company and the Representatives. Among the factors to be considered in such negotiations are the history of, and prospects for, the Company and the industry in which it competes, an assessment of the Company's management, its past and present operations and financial performance, the prospects for further earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the Offering, the market prices of and demand for the publicly traded common stock of comparable companies in recent periods and other factors deemed relevant. Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or predictions as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Representatives have informed the Company that the Underwriters do not expect to make sales to accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. LEGAL MATTERS Certain matters relating to the offering are being passed upon for the Company by Manatt, Phelps & Phillips, LLP, Los Angeles, California. Certain legal matters will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California. 102 EXPERTS The consolidated financial statements of the Company as of December 31, 1996 and 1997, for each of the years in the three year period ended December 31, 1997 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers to a change in the Company's method of accounting for transfers and servicing of financial assets in 1997. ADDITIONAL INFORMATION The Company has filed a Registration Statement under the Securities Act with the Commission with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits thereto on file with the Commission pursuant to the Securities Act and the rules and regulations of the Commission. Statements contained in this Prospectus, such as the contents of any contract or other document referred to, are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Upon completion of the Offering, the Company will be subject to the information reporting requirements of the Exchange Act and, in accordance therewith, will file reports and other information with the Commission. A copy of the Registration Statement, including the exhibits thereto, may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048. Copies of such materials may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon the payment of certain fees prescribed by the Commission. The Commission also maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. The address of the site is http://www.sec.gov. 103 UNITED PANAM FINANCIAL CORP. INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report................................................ F-2 Consolidated Statements of Financial Condition as of December 31, 1997 and 1996........................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995............................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995............................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............................... F-6 Consolidated Statements of Cash Flows, Continued for the years ended December 31, 1997, 1996 and 1995............................... F-7 Notes to Consolidated Financial Statements.................................. F-8
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors United PanAm Financial Corp.: We have audited the accompanying consolidated statements of financial condition of United PanAm Financial Corp. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1997. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United PanAm Financial Corp. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows, for each of the years in the three year period ended December 31, 1997 in conformity with generally accepted accounting principles. As discussed in Note 2 of the consolidated financial statements, effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125 "Accounting for Transactions and Servicing of Financial Assets and Extinguishment of Liabilities". /s/ KPMG Peat Marwick LLP San Francisco, California March 6, 1998 F-2 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ----------------- 1996 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- ASSETS Cash and due from banks...................................... $ 5,063 $ 15,026 Short term investments....................................... 21,000 4,000 -------- -------- Cash and cash equivalents.................................... 26,063 19,026 Securities available for sale, at fair value................. -- 1,002 Residual interests in securitizations, at fair value......... -- 8,230 Loans, net................................................... 134,821 148,535 Loans held for sale.......................................... 20,766 120,002 Federal Home Loan Bank stock, at cost........................ 1,288 1,945 Accrued interest receivable.................................. 845 1,494 Real estate owned, net....................................... 988 562 Premises and equipment, net.................................. 822 3,085 Deferred tax assets.......................................... 1,392 3,171 Intangible assets............................................ 584 457 Other assets................................................. 1,174 3,333 -------- -------- Total assets............................................... $188,743 $310,842 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits..................................................... $159,061 $233,194 Federal Home Loan Bank advances.............................. 4,000 28,000 Notes payable................................................ 10,930 12,930 Warehouse line of credit..................................... -- 6,237 Accrued expenses and other liabilities....................... 7,991 17,472 -------- -------- Total liabilities.......................................... 181,982 297,833 -------- -------- Commitments and contingencies................................ -- -- Preferred stock (par value $0.01 per share): Authorized, 2,000,000 shares None issued and outstanding................................ -- -- Common stock (par value $0.01 per share): Authorized, 20,000,000 shares Issued and outstanding, 10,668,750 and 10,950,000 shares at December 31, 1996 and 1997, respectively................... 107 110 Additional paid-in capital................................... 5,130 5,127 Retained earnings............................................ 1,524 7,772 -------- -------- Total stockholders' equity................................. 6,761 13,009 -------- -------- Total liabilities and stockholders' equity................. $188,743 $310,842 ======== ========
See accompanying notes to consolidated financial statements. F-3 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------- 1995 1996 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ---------------- -------- INTEREST INCOME: Loans.................................................... $ 9,207 $ 15,159 $ 25,150 Accretion of discount on loans purchased................. 873 696 722 RTC interest............................................. 248 -- -- Short term investments and securities available for sale................................................ 3,205 706 639 ------- -------- -------- Total interest income.................................. 13,533 16,561 26,511 ------- -------- -------- INTEREST EXPENSE: Deposits................................................. 7,240 7,225 10,095 Federal Home Loan Bank advances.......................... -- 72 1,103 Warehouse line of credit................................. -- -- 544 Notes payable............................................ 487 556 669 ------- -------- -------- Total interest expense................................. 7,727 7,853 12,411 ------- -------- -------- Net interest income.................................. 5,806 8,708 14,100 Provision for loan losses................................ 120 194 507 ------- -------- -------- Net interest income after provision for loan losses.. 5,686 8,514 13,593 ------- -------- -------- NON-INTEREST INCOME: Gain on sale of loans, net............................... 90 2,333 26,526 Loan related charges and fees............................ 48 116 422 Service charges and fees................................. 121 272 230 Other income............................................. 59 55 50 ------- -------- -------- Total non-interest income.............................. 318 2,776 27,228 ------- -------- -------- NON-INTEREST EXPENSE: Compensation and benefits................................ 2,750 5,248 19,043 Occupancy expense........................................ 407 809 2,891 SAIF special assessment.................................. -- 820 -- Other expenses........................................... 2,005 2,772 8,148 ------- -------- -------- Total non-interest expense............................. 5,162 9,649 30,082 ------- -------- -------- Income before income taxes............................. 842 1,641 10,739 Income taxes............................................. 384 691 4,491 ------- -------- -------- Net income............................................... $ 458 $ 950 $ 6,248 ======= ======== ======== Earnings per share-basic................................. $ 0.04 $ 0.09 $ 0.58 ======= ======== ======== Earnings per share-diluted .............................. $ 0.04 $ 0.09 $ 0.53 ======= ======== ========
See accompanying notes to consolidated financial statements. F-4 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL NUMBER OF COMMON PAID-IN RETAINED STOCKHOLDERS' SHARES STOCK CAPITAL EARNINGS EQUITY (DOLLARS IN THOUSANDS) ---------- ------ ---------- -------- ------------- Balance, December 31, 1994..................... 10,668,750 $107 $5,130 $ 116 $ 5,353 Net income................ -- -- -- 458 458 ---------- ---- ------ ------ ------- Balance, December 31, 1995..................... 10,668,750 107 5,130 574 5,811 Net income................ -- -- -- 950 950 ---------- ---- ------ ------ ------- Balance, December 31, 1996..................... 10,668,750 107 5,130 1,524 6,761 Net income................ -- -- -- 6,248 6,248 Options exercised......... 281,250 3 222 -- 225 Note receivable from shareholder.............. -- -- (225) -- (225) ---------- ---- ------ ------ ------- Balance, December 31, 1997..................... 10,950,000 $110 $5,127 $7,772 $13,009 ========== ==== ====== ====== =======
See accompanying notes to consolidated financial statements. F-5 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 (DOLLARS IN THOUSANDS) -------- -------- --------- Cash flows from operating activities: Net income..................................... $ 458 $ 950 $ 6,248 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Gain on sale of loans......................... (90) (2,333) (26,526) Origination of mortgage loans held for sale... -- (71,848) (582,433) Sales of mortgage loans held for sale......... -- 52,224 493,526 Provision for loan losses..................... 120 194 507 Accretion of discount on loans................ (873) (696) (722) Depreciation and amortization................. 142 270 842 FHLB stock dividend........................... (37) (74) (95) Decrease (increase) in accrued interest receivable................................... 669 324 (649) Decrease (increase) in other assets........... 3,181 (117) (2,159) Deferred income taxes......................... 93 (420) (1,779) Increase in accrued expenses and other liabilities.................................. 114 6,127 9,481 -------- -------- --------- Net cash (used in) provided by operating activities.................................. 3,777 (15,399) (103,759) -------- -------- --------- Cash flows from investing activities: Proceeds from maturities of investment securities................................... -- -- 1,000 Originations, net of repayments, of mortgage loans........................................ 10,728 19,538 22,431 Purchase of mortgage loans.................... (75,878) -- -- Sales of mortgage loans....................... 3,470 -- -- Originations, net of repayments, of non- mortgage loans............................... (16,771) (22,485) (29,782) Purchase of securities available for sale..... -- -- (2,002) Purchase of premises and equipment............ (212) (776) (2,975) Purchase of FHLB stock, net................... -- (448) (563) Proceeds from sale of real estate owned....... -- 923 2,243 -------- -------- --------- Net cash used in investing activities........ (78,663) (3,248) (9,648) -------- -------- --------- Cash flows from financing activities: Net increase (decrease) in deposits........... (21,190) 17,137 74,133 Proceeds, net of repayments, from warehouse line of credit............................... -- -- 6,237 Proceeds from notes payable................... -- -- 2,000 Proceeds, net of repayments, from FHLB advances..................................... -- 4,000 24,000 -------- -------- --------- Net cash provided by (used in) financing activities.................................... (21,190) 21,137 106,370 -------- -------- --------- Net increase (decrease) in cash and cash equivalents................................... (96,076) 2,490 (7,037) Cash and cash equivalents at beginning of period........................................ 119,649 23,573 26,063 -------- -------- --------- Cash and cash equivalents at end of period..... $ 23,573 $ 26,063 $ 19,026 ======== ======== =========
See accompanying notes to consolidated financial statements. F-6 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) ------------------------ 1995 1996 1997 ------------------------ Supplemental disclosures of cash flow information: Cash paid for: Interest.......................................... $ 7,720 $ 7,856 $ 12,087 ======= ======= ======== Taxes............................................. $ 763 $ 1,512 $ 5,360 ======= ======= ======== Supplemental schedule of non-cash investing and financing activities: Acquisition of real estate owned through foreclosure of related mortgage loans........................... $ 298 $ 1,613 $ 1,817 ======= ======= ========
See accompanying notes to consolidated financial statements. F-7 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS ORGANIZATION United PanAm Financial Corp. (the "Company"), was organized as a holding company for Pan American Financial, Inc. ("PAFI") and Pan American Bank, FSB (the "Bank") to purchase certain assets and assume certain liabilities (the "Purchase Agreement") of Pan American Federal Savings Bank from the Resolution Trust Corporation (the "RTC") on April 29, 1994. The Company, PAFI and the Bank are considered to be minority owned. The Company is owned substantially by Pan American Financial, LP and individual investors. PAFI is a wholly-owned subsidiary of the Company and the Bank is a wholly-owned subsidiary of PAFI. United PanAm Mortgage Corporation was organized in 1997 as a wholly-owned subsidiary of the Company and is presently acting as agent for the Bank in secondary marketing activities. These financial statements have been prepared in conformity with generally accepted accounting principles. In preparing these financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. In 1997, the Company changed its fiscal year end from June 30 to December 31 for financial reporting purposes. For income tax purposes, the Company has filed an application with the appropriate taxing authorities to change its fiscal year end from June 30 to December 31. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of United PanAm Financial Corp., Pan American Financial, Inc., United PanAm Mortgage Corporation and Pan American Bank, FSB. Substantially all of the Company's revenues are derived from the operations of the Bank and United PanAm Mortgage Corporation and they represent substantially all of the Company's consolidated assets and liabilities as of December 31, 1997 and 1996. Significant inter- company accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS For financial statement purposes, cash and cash equivalents include cash on hand, non-interest-bearing deposits, certificates of deposit, Federal funds sold, Commercial Paper and highly liquid interest-bearing deposits with maturities of three months or less. In accordance with regulations, the Bank must maintain an amount equal to 4% of the sum of total deposits and short-term borrowings in cash and U.S. Government and other approved securities that are readily convertible to cash. The Bank exceeded these requirements at December 31, 1997 and 1996. SECURITIES Securities are classified in one of three categories; held to maturity, trading, or available for sale. Investments classified as held to maturity are carried at amortized cost because management has both the intent and ability to hold these investments to maturity. Investments classified as trading are carried at fair value with any gains and losses reflected in earnings. All other investments are classified as available for sale and are carried at fair value with any unrealized gains and losses included as a separate component of stockholders' equity, net of applicable taxes. LOANS The Company originates and purchases loans for investment as well as for sale in the secondary market. At the date of acquisition, loans are designated as either held for sale or held for investment, and accounted for F-8 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) accordingly. Loans held for sale are reported at the lower of cost or market value applied on an aggregate basis. Market values of loans held for sale are based upon prices available in the secondary market for similar loans. Loans which are held for investment are reported at cost, net of unamortized discounts or premiums, unearned loan origination fees and allowances for losses. Transfers of loans from the held for sale portfolio to the held for investment portfolio are recorded at the lower of cost or market value on the transfer date. INTEREST INCOME Interest income is accrued as it is earned. Loan origination fees and certain direct loan origination costs are deferred and recognized in interest income over the contractual lives of the related loans using the interest method. When a loan is paid-off or sold, the unamortized balance of these deferred fees and costs is recognized in income. The Company ceases to accrue interest on mortgage loans that are delinquent 90 days or more and on non- mortgage loans delinquent 120 days or more, or earlier, if the ultimate collectibility of the interest is in doubt. Interest income deemed uncollectible is reversed. The Company ceases to amortize deferred fees on non-performing loans. Income is subsequently recognized only to the extent cash payments are received, until in management's judgment, the borrower's ability to make periodic interest and principal payments is in accordance with the loan terms, at which time the loan is returned to accrual status. RESIDUAL INTERESTS IN SECURITIZATIONS In December 1997, the Company completed a securitization and sale of approximately $115.0 million in mortgage loans held for sale and recorded a net gain on sale of $5.9 million. As a result of this securitization, the Company recorded residual interests in securitizations consisting of beneficial interests in the form of an interest-only strip representing the subordinated right to receive cash flows from the pool of securitized loans after payment of required amounts to the holders of the securities and certain costs associated with the securitization. The Company classifies its residual interests in securitizations as trading securities and records them at fair market value with any unrealized gains or losses recorded in the results of operations. Valuations of the residual interests in securitizations at each reporting period are based on discounted cash flow analyses. Cash flows are estimated as the amount of the excess of the weighted-average coupon on the loans sold over the sum of the pass-through on the senior certificates, a servicing fee, an estimate of annual future credit losses and prepayment assumptions and other expenses associated with the securitization, discounted at an interest rate which the Company believes is commensurate with the risks involved. The Company uses prepayment and default assumptions that market participants would use for similar instruments subject to prepayment, credit and interest rate risks. In connection with its securitization transaction, the Company is required to maintain an overcollateralization amount which serves as credit enhancement to the senior certificate holders. The overcollateralization amount initially consists of the excess of the principal balance of the mortgage loans sold, less the principal balance of the certificates sold to investors. The overcollateralization is required to be maintained at a specified target level of the principal balance of the certificates and can be increased as specified in the related securitization documents. Cash flows received in excess of the obligations to the senior certificate holders and certain costs of the securitization are deposited into a trust account until the overcollateralization target is reached. Once this target is reached, distributions of excess cash from the trust account are remitted to the Company. F-9 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) GAIN ON SALE OF LOANS Gains or losses resulting from sales of mortgage loans are recognized at settlement and are based on the difference between the sales proceeds and the carrying value of the related loans sold. Non-refundable fees and direct costs associated with the origination of mortgage loans are deferred and recognized when the loans are sold. For securitizations, the gain on sale is calculated based on the excess of cash received and residual interests retained over the net book value of loans sold. The retained interest in the securitization is measured by allocating the previous carrying value between the loans sold and the interest retained, based on their relative fair values at the date of securitization. ALLOWANCE FOR LOAN LOSSES The Company charges current earnings with a provision for estimated losses on loans. The provision consists of losses identified specifically with certain problem loans and a general provision for losses not specifically identified in the loan portfolio. In addition, the allowance for loan losses includes a portion of acquisition discounts from the Company's purchase of automobile installment contracts. Management's analysis takes into consideration numerous factors, including an assessment of the credit risk inherent in the portfolio, prior loss experience, the levels and trends of non-performing loans, the concentration of credit, current and prospective economic conditions and other factors. Additionally, regulatory authorities, as an integral part of their examination process, review the Company's allowance for estimated losses based on their judgment of information available to them at the time of their examination and may require the recognition of additions to the allowance. PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight- line method over the shorter of the estimated useful lives of the related assets or terms of the leases. Furniture, equipment, computer hardware, software and data processing equipment are currently depreciated over 3-5 years. PURCHASE ACCOUNTING The Company applied business combinations purchase accounting principles to its acquisition of assets and liabilities from the RTC. The purchase price was allocated primarily to the assets acquired by the Company. The fair value was determined based on management's best estimates in conformity with Accounting Principles Board Opinion ("APB") No. 16 "Business Combinations". Loan discount resulting from the valuation of the Company's loan portfolio under purchase accounting requirements at the acquisition date is netted against loans. The discount is being amortized over the contractual terms of the related loans using the interest method. INTANGIBLE ASSETS Intangible assets consist of the difference between the estimated fair values of the liabilities assumed over the amount paid to the RTC to acquire the Company's Panorama City branch. At December 31, 1996 and 1997 intangible assets totaling $584,000 and $457,000, respectively, are being amortized over seven years, the estimated life of the acquired assets, using the straight-line method. REAL ESTATE OWNED Real estate owned consists of properties acquired through foreclosure and is recorded at the lower of cost or fair value at the time of foreclosure. Subsequently, allowance for estimated losses are established when the F-10 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) recorded value exceeds fair value less estimated costs to sell. As of December 31, 1996 and 1997, there were no such allowances. Real estate owned at December 31, 1996 and 1997 consisted of one to four unit residential real estate. INCOME TAXES The Company uses the asset/liability method of accounting for income taxes. Under the asset/liability method, deferred tax assets and liabilities are recognized for the future consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (temporary differences). Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are recovered or settled. The effect of deferred tax assets and liabilities from a change in tax rate is recognized in income in the period of enactment. For income tax return purposes, the Company files as part of a consolidated group. Income taxes are allocated to the group members in accordance with an income tax allocation agreement adopted by each party in the group. EARNINGS PER SHARE At December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share. Under SFAS No. 128, basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock. RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets, and distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. In December 1996, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127") was issued as an amendment to SFAS No. 125. On January 1, 1997, the Company adopted SFAS 125. 3. SECURITIES AVAILABLE FOR SALE Securities available for sale are as follows:
DECEMBER 31, DECEMBER 31, 1996 1997 --------------- ---------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE (DOLLARS IN THOUSANDS) --------- ----- --------- ------ U. S. Agency securities....................... $-- $-- $1,002 $1,002
The weighted average yield on U. S. agency securities was 6.54% at December 31, 1997. At December 31, 1997 there were no gross unrealized gains or losses. The following is a summary of the contractual terms to maturity of securities at their fair value as of December 31, 1997:
CONTRACTUAL MATURITY --------------------------------------- AFTER ONE AFTER THREE WITHIN THROUGH THROUGH ONE YEAR THREE YEARS FOUR YEARS TOTAL (DOLLARS IN THOUSANDS) -------- ----------- ----------- ------ U. S. Agency securities................ $1,002 $-- $-- $1,002
F-11 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. LOANS Loans are summarized as follows:
YEARS ENDED DECEMBER 31, ------------------ 1996 1997 (DOLLARS IN THOUSANDS) -------- -------- Mortgage loans: Fixed rate................................................. $ 19,505 $ 16,480 Adjustable rate............................................ 84,522 70,890 -------- -------- 104,027 87,370 -------- -------- Consumer loans: Insurance premium financing................................ 32,058 39,990 Automobile installment contracts........................... 10,830 40,877 Other...................................................... 230 267 -------- -------- 43,118 81,134 -------- -------- Total loans............................................... 147,145 168,504 Less: Unearned discounts and premiums............................ (3,697) (2,901) Unearned finance charges................................... (3,271) (10,581) Allowance for loan losses.................................. (5,356) (6,487) -------- -------- Total loans, net.......................................... $134,821 $148,535 ======== ======== Contractual weighted average interest rate.................. 10.20% 13.01% -------- --------
At December 31, 1996 and 1997, approximately 99% of the Company's mortgage loans were collateralized by first deeds of trust on one-to-four family residences. At December 31, 1996 and 1997, approximately 81% and 82%, respectively, of the Company's loan portfolio is related to collateral or borrowers located in California. The activity in the allowance for loan losses consists of the following:
YEARS ENDED DECEMBER 31, ---------------------- 1995 1996 1997 (DOLLARS IN THOUSANDS) ------ ------ ------ Balance at beginning of period........................ $ 378 $5,250 $5,356 Provision for loan losses............................. 120 194 507 Purchase discounts allocated to the allowance for loan losses, net.......................................... 4,860 356 1,953 Charge-offs........................................... (108) (718) (2,474) Recoveries............................................ -- 274 1,145 ------ ------ ------ Net charge-offs...................................... (108) (444) (1,329) ------ ------ ------ Balance at end of period.............................. $5,250 $5,356 $6,487 ====== ====== ======
The discounts allocated to the allowance for loan losses in 1996 and 1997 are comprised primarily of acquisition discounts on the Company's purchase of automobile installment contracts. The discounts allocated to the allowance for loan losses in 1995 primarily relate to the purchase of loan portfolios from the RTC. The Company allocated the estimated amount of discounts attributable to credit risk to the allowance for loan losses. F-12 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table sets forth information with respect to the Company's non-performing assets:
DECEMBER 31, -------------- 1996 1997 (DOLLARS IN THOUSANDS) ------ ------ Nonaccrual loans................................................ $5,835 $6,633 Real estate owned, net.......................................... 988 562 ------ ------ Totals........................................................ $6,823 $7,195 ====== ====== Percentage of non-performing assets to total assets............. 3.61% 2.31% ====== ======
A loan is impaired when, based on current information and events, management believes it will be unable to collect all amounts contractually due under a loan agreement. Loans are evaluated for impairment as part of the Company's normal internal asset review process. When a loan is determined to be impaired, a valuation allowance is established based upon the difference between the Company's investment in the loan and the fair value of the collateral securing the loan. At December 31, 1997, the aggregate investment in loans considered to be impaired was $6,630,000 of which $6,490,000 were on a nonaccrual basis. At December 31, 1996 the aggregate investment in loans considered to be impaired was $7,298,000 of which $6,196,000 were on a nonaccrual basis. Allowance for loan losses was provided for all impaired loans at December 31, 1997 and 1996; the related allowances were $1,033,000 and $984,000, respectively. For the years ended December 31, 1997 and 1996, the Company recognized interest income on impaired loans of $239,000 and $408,000, respectively. The average recorded investment in impaired loans during the years ended December 31, 1997 and 1996 was approximately $6,774,000 and $7,022,000, respectively. Under Federal regulations, the Company may not make real estate loans to one borrower in an amount exceeding 15% of its unimpaired capital and surplus, plus an additional 10% for loans secured by readily marketable collateral. At December 31, 1996 and 1997, such limitation would have been approximately $2.5 million and $3.4 million, respectively, or $4.1 million and $5.7 million if secured by readily marketable collateral. There are no loans in excess of these limitations. 5. FEDERAL HOME LOAN BANK STOCK The Bank is a member of the Federal Home Loan Bank System ("FHLB") and as such is required to maintain an investment in capital stock of the FHLB of San Francisco. At December 31, 1996 and 1997 the Bank owned 12,880 and 19,450 shares, respectively, of the FHLB's $100 par value capital stock. The amount of stock required is adjusted annually based on a determination made by the FHLB. The determination is based on the balance of the Bank's outstanding residential loans and advances from the FHLB. 6. INTEREST RECEIVABLE Interest receivable is as follows:
DECEMBER 31, (DOLLARS IN THOUSANDS) ----------- 1996 1997 ---- ------ Loans............................................................... $824 $1,429 Investment securities............................................... 21 65 ---- ------ Total............................................................. $845 $1,494 ==== ======
F-13 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. PREMISES AND EQUIPMENT Premises and equipment are as follows:
DECEMBER 31, (DOLLARS IN THOUSANDS) ------------- 1996 1997 ----- ------ Furniture and equipment.......................................... $ 867 $3,650 Leasehold improvements........................................... 173 366 ----- ------ 1,040 4,016 Less accumulated depreciation and amortization................... (218) (931) ----- ------ $ 822 $3,085 ===== ======
Depreciation and amortization expense was $50,000, $163,000 and $715,000 for the years ended December 31, 1995, 1996 and 1997, respectively. 8. DEPOSITS Deposits are summarized as follows:
DECEMBER 31, ------------------------------------------- 1996 1997 --------------------- --------------------- WEIGHTED WEIGHTED AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE (DOLLARS IN THOUSANDS) -------- ------------ -------- ------------ Deposits with no stated maturity: Regular and money market passbook........................ $ 17,054 2.84% $ 26,095 3.76% NOW accounts..................... 7,757 .88 6,558 .80 Money market checking............ 2,885 2.49 3,401 2.35 -------- ---- -------- ---- 27,696 2.25 36,054 3.09 -------- ---- -------- ---- Time deposits less than $100,000... 123,914 5.47 144,926 5.56 Time deposits $100,000 and over.... 7,451 5.89 52,214 5.89 -------- ---- -------- ---- 131,365 5.49 197,140 5.65 -------- ---- -------- ---- Total deposits................... $159,061 4.68% $233,194 5.25% ======== ==== ======== ====
A summary of certificate accounts by remaining maturity is as follows:
DECEMBER 31, ----------------- 1996 1997 (DOLLARS IN THOUSANDS) -------- -------- Maturity within one year..................................... $103,369 $181,858 Maturity within two years.................................... 26,819 14,984 Maturity within three years.................................. 1,177 298 -------- -------- Total...................................................... $131,365 $197,140 ======== ========
Broker-originated deposits totaled $17.5 million at December 31, 1997. There were no broker-originated deposits at December 31, 1996. F-14 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. FEDERAL HOME LOAN BANK ADVANCES The Company had short term FHLB advances of $4.0 million and $28.0 million at December 31, 1996 and 1997, respectively. The advances outstanding at December 31, 1996 and 1997 had a weighted average interest rate of 5.70% and 7.07%, respectively, and were secured by the Company's stock in the FHLB of San Francisco and by pledges of certain mortgages with an aggregate balance of $55.3 million at December 31, 1997. 10. NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, --------------- 1996 1997 (DOLLARS IN THOUSANDS) ------- ------- RTC notes payable.............................................. $10,930 $10,930 Notes payable to stockholders.................................. -- 2,000 ------- ------- $10,930 $12,930 ======= =======
The RTC notes payable were issued in connection with the Company's acquisition of certain assets and liabilities from the RTC. See Note 15 for a description of the terms and conditions of these notes. The notes payable to stockholders are unsecured loans bearing interest at 8% per year with interest payable semi-annually and principal maturing on June 30, 1999. The proceeds from the notes payable were contributed to United PanAm Mortgage Corporation, a wholly-owned subsidiary of United PanAm Financial Corp., for working capital purposes. The notes payable may be prepaid at any time, without penalty. The maturities of notes payable at December 31, 1997 are as follows: Due in 1 year or less........................................... $ -- Due in 1 to 3 years............................................. 12,930 ------- $12,930 =======
11. WAREHOUSE LINE OF CREDIT The Company has available a $100.0 million uncommitted master repurchase credit facility bearing interest based on one month LIBOR. At December 31, 1997, $6.2 million was outstanding under this credit facility at an interest rate of 6.70%. The maximum amount outstanding at any month-end during the year and the average amount outstanding during the year was $64.4 million and $8.9 million, respectively. The credit facility is secured by mortgage loans held for sale. F-15 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. INCOME TAXES The provision for income taxes is comprised of the following:
YEARS ENDED DECEMBER 31, ------------------ 1995 1996 1997 (DOLLARS IN THOUSANDS) ---- ---- ------- Federal taxes: Current.................................................... $233 $807 $ 4,705 Deferred................................................... 55 (302) (1,386) ---- ---- ------- 288 505 3,319 ---- ---- ------- State taxes: Current.................................................... 58 304 1,565 Deferred................................................... 38 (118) (393) ---- ---- ------- 96 186 1,172 ---- ---- ------- Total..................................................... $384 $691 $ 4,491 ==== ==== =======
The tax effects of significant items comprising the Company's net deferred taxes as of December 31 are as follows:
DECEMBER 31, -------------- 1996 1997 (DOLLARS IN THOUSANDS) ------ ------ Deferred tax assets: Franchise taxes................................................ $ 239 $ 462 Loans marked to market for tax purposes........................ 1,348 2,866 Intangible assets.............................................. 82 95 Other.......................................................... 72 172 ------ ------ Total gross deferred tax assets............................... 1,741 3,595 ------ ------ Deferred tax liabilities: Residual interests in securitizations.......................... -- (116) Loan loss allowances........................................... (240) (197) FHLB stock dividends........................................... (73) (98) Other.......................................................... (36) (13) ------ ------ Total gross deferred tax liabilities.......................... (349) (424) ------ ------ Net deferred tax assets......................................... $1,392 $3,171 ====== ======
The Company believes a valuation allowance is not needed to reduce the net deferred tax assets as it is more likely than not that the deferred tax assets will be realized through recovery of taxes previously paid or future taxable income. The Company's effective income tax rate differs from the federal statutory rate due to the following:
YEARS ENDED DECEMBER 31, ---------------- 1995 1996 1997 ---- ---- ---- Expected statutory rate....................................... 34.0% 34.0% 34.0% State taxes, net of federal benefits.......................... 7.5 7.5 7.2 Other, net.................................................... 4.1 0.6 0.6 ---- ---- ---- Effective tax rate............................................ 45.6% 42.1% 41.8% ==== ==== ====
F-16 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company filed its income tax returns using a fiscal year end of June 30, 1996 and 1997. Accordingly, the amounts reflected in this note are management's estimates of income tax expenses and deferred income taxes at the dates presented. 13. REGULATORY CAPITAL REQUIREMENTS The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") established new capital standards for savings institutions, requiring the Office of Thrift Supervision ("OTS") to promulgate regulations to prescribe and maintain uniformly applicable capital standards for savings institutions. Such regulations include three capital requirements: a tangible capital requirement equal to 1.5% of adjusted total assets, a leverage limit or core capital requirement equal to 3.0% of adjusted total assets, and a risk-based capital requirement equal to 8.0% of risk-weighted assets. At December 31, the Bank had the following regulatory capital requirements and capital position:
DECEMBER 31, 1996 DECEMBER 31, 1997 ------------------------- -------------------------- ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS (DOLLARS IN THOUSANDS) ------- -------- ------- ------- -------- ------- Tangible capital........ $16,499 $2,795 $13,704 $22,379 $ 4,619 $17,760 Tangible capital ratio.. 8.85% 1.50% 7.35% 7.27% 1.50% 5.77% Core capital............ $16,499 $5,590 $10,909 $22,379 $ 9,239 $13,140 Core capital (leverage) ratio.................. 8.85% 3.00% 5.85% 7.27% 3.00% 4.27% Risk-based capital...... $17,893 $8,751 $ 9,142 $24,938 $16,171 $ 8,767 Percent of risk-weighted assets................. 16.36% 8.00% 8.36% 12.34% 8.00% 4.34%
The FDIC Improvement Act of 1991 ("FDICIA") required each federal banking agency to implement prompt corrective actions for institutions that it regulates. In response to these requirements, the OTS adopted final rules, effective December 19, 1992, based upon FDICIA's five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well capitalized" if its leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its total risk-based capital ratio is 10% or greater, and the institution is not subject to a capital directive. As used herein, leverage ratio means the ratio of core capital to adjusted total assets, Tier 1 risk-based capital ratio means the ratio of core capital to risk-weighted assets, and total risk-based capital ratio means the ratio of total capital to risk-weighted assets, in each case as calculated in accordance with current OTS capital regulations. Under these new regulations, the Bank is deemed to be "well capitalized". The Bank had the following regulatory capital calculated in accordance with FDICIA's capital standards for a "well capitalized" institution:
DECEMBER 31, 1996 DECEMBER 31, 1997 ------------------------- -------------------------- ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS (DOLLARS IN THOUSANDS) ------- -------- ------ ------- -------- ------- Leverage................ $16,499 $ 9,316 $7,183 $22,379 $15,398 $ 6,981 Leverage ratio.......... 8.85% 5.00% 3.85% 7.27% 5.00% 2.27% Tier 1 risk-based....... $16,499 $ 6,563 $9,936 $22,379 $12,128 $10,251 Tier 1 risk-based ratio.................. 15.08% 6.00% 9.08% 11.07% 6.00% 5.07% Total risk-based........ $17,893 $10,939 $6,954 $24,938 $20,213 $ 4,725 Total risk-based ratio.. 16.36% 10.00% 6.36% 12.34% 10.00% 2.34%
F-17 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At periodic intervals, both the OTS and Federal Deposit Insurance Corporation ("FDIC") routinely examine the Bank's financial statements as part of their legally prescribed oversight of the savings and loan industry. Based on these examinations, the regulators can direct that the Bank's financial statements be adjusted in accordance with their findings. On September 30, 1996, the Economic Growth and Regulatory Paperwork Reduction Act ("Act") of 1996 was enacted. The Act included a Special Assessment ("Special SAIF Assessment") related to the recapitalization of the SAIF, which was levied based on a rate of 65.7 cents per $100 of SAIF-insured domestic deposits held as of March 31, 1995. As a result of the Act, the Company recorded a pre-tax charge of $820,000 in the year ended December 31, 1996. 14. COMMITMENTS AND CONTINGENCIES Certain branch and office locations are leased by the Company under operating leases expiring at various dates through the year 2006. Rent expense was $227,000, $475,000 and $1,462,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Future minimum rental payments as of December 31, 1997 under existing leases are set forth as follows:
(DOLLARS IN THOUSANDS) YEAR ENDING DECEMBER 31: 1998............................................................ $1,930 1999............................................................ 1,837 2000............................................................ 1,457 2001............................................................ 971 2002............................................................ 589 Thereafter...................................................... 437 ------ Total......................................................... $7,221 ======
Under the RTC Minority Preference Resolution Program, the Company's Mission Street branch is subject to a rent-free lease and purchase option. This lease and purchase option is available to minority owned institutions for branches located in a predominantly minority neighborhood. The term of the lease is five years with an option to purchase the branch at a price equal to 95% of the appraised value at the time of the purchase and can be exercised anytime during the term of the lease. The lease was effective as of April 30, 1994. In order to meet the borrowing needs of its customers, the Company is a party to certain commitments to extend credit which have specified interest rates and fixed expiration dates. These commitments, substantially all of which are to fund mortgages on one-to-four family residences, are considered off-balance sheet financial instruments. These instruments involve elements of credit risk and interest rate risk in excess of amounts recognized in the accompanying statements of financial condition. The Company's exposure to credit loss from these commitments to extend credit, in the event of borrower nonperformance, is represented by the contractual amount of these commitments. Certain of the commitments are expected to expire without being drawn upon and, accordingly, the total commitment amounts do not necessarily represent future cash requirements. At December 31, 1996 and 1997, the Company had outstanding commitments to originate loans of approximately $19.1 million and $117.4 million, respectively. Commitments outstanding included $17.1 million and $93.3 million of adjustable rate loans at December 31, 1996 and 1997 and $2.0 million and $24.1 million of fixed rate loans at December 31, 1996 and 1997, respectively. The fixed rate loan commitments have interest rates ranging from 8.88% to 14.90% at December 31, 1996 and 7.75% to 16.0% at December, 1997. At F-18 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) December 31, 1996 and 1997, the Company had outstanding commitments to sell loans on a nonrecourse basis of $1.3 million and $16.2 million, respectively. The Company has entered into loan sale agreements with investors in the normal course of business which include standard representations and warranties customary to the mortgage banking industry. Violations of these representations and warranties may require the Company to repurchase loans previously sold or to reimburse investors for losses incurred. In the opinion of management, the potential exposure related to the Company's loan sale agreements will not have a material effect on the financial position and operating results of the Company. The Company is involved in various claims or legal actions arising in the normal course of business. In the opinion of management, the ultimate disposition of such matters will not have a material effect on the financial position and operating results of the Company. 15. NOTES PAYABLE, RESTRICTION ON DIVIDEND PAYMENTS AND PLEDGE OF BANK STOCK. In accordance with Federal Regulation 12 CFR 563.134, federal savings banks which meet fully phased-in capital requirements may distribute dividends up to 100% of their net income to date plus the amount that would reduce by one-half their surplus capital ratio at the beginning of the calendar year. The Bank exceeds the fully phased-in capital requirements. In connection with the April 29, 1994 purchase of assets and assumption of certain liabilities from the RTC, the Bank and the Company, entered into a five year Interim Capital Assistance Loan Agreement ("ICA") with the RTC (the Bank is not a direct or indirect obligor, or a guarantor of the loan) for $6,930,000 at a fixed interest rate of 3.69% for two years and 0.125% above the 13-week Treasury Bill auction rate for the remaining three years, adjusted annually. On September 9, 1994, the Bank acquired deposits from the RTC totaling approximately $65,000,000 located in Panorama City in Southern California. This branch is located in a "Predominately Minority Neighborhood," as defined by the RTC. In connection with this acquisition, the RTC provided the Bank's Holding Company, Pan American Financial, Inc., $4,000,000 in the form of an additional ICA loan for a term of five years with interest at 0.125% above the 13 week Treasury Bill auction rate, adjusted quarterly. The entire amount was invested in the Bank and qualifies as regulatory capital for the Bank. In addition, the OTS required $750,000 of additional capital from the shareholders to be invested in the Bank in connection with the Panorama City branch acquisition. These Agreements, as amended, provide among other things, that the Bank may not declare or pay any dividends until the loan is repaid by the Company. Dividends may be paid to the Company if the funds are used exclusively for payment of principal or interest on the obligation of PAFI to the RTC or the Bank has provided the FDIC with 30 days prior written notice of its intent to declare or pay such dividends and the Bank is in compliance with certain conditions as required under the Agreements. The stock of the Bank was pledged by PAFI to the RTC as collateral for the loan. 16. STOCK OPTIONS In 1994, the Company adopted a stock option plan and, in November 1997, amended and restated such plan as the United PanAm Financial Corp. 1997 Employee Stock Incentive Plan (the "Plan"). The maximum number of shares that may be issued to officers, directors, employees or consultants under the Plan is 2,287,500. Options issued pursuant to the Plan have been granted at an exercise price of not less than fair market value on the date of grant. Options generally vest over a three to five year period and have a maximum term of ten years. F-19 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Stock option activity is as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE 1995 PRICE 1996 PRICE 1997 PRICE (DOLLARS IN THOUSANDS) ------- -------- --------- -------- --------- -------- Balance at beginning of period................. 900,000 $0.80 900,000 $0.80 1,143,750 $0.80 Granted................. -- -- 243,750 .80 717,500 9.06 Canceled or expired..... -- -- -- -- -- -- Exercised............... -- -- -- -- (281,250) 0.80 ------- --------- --------- Balance at end of period................. 900,000 $0.80 1,143,750 $0.80 1,580,000 $4.55 ======= ========= ========= Options exercisable..... 225,000 510,938 833,125 ======= ========= ========= Weighted average fair value per share of options granted during the year............... -- $ 0.23 $ 2.61 ======= ========= =========
Shares exercised in 1997 were executed by a stockholder and officer of the Company. In connection with this transaction, the Company loaned this individual $225,000 to finance the exercise of these options which loan is full recourse and secured by the shares purchased. The loan bears interest at an annual rate of 5.81% payable on the earlier of October 15, 2000 or the termination of this individual's employment with the Company. The Company applies APB Opinion No. 25 in accounting for the Plan and accordingly, no compensation cost has been recognized for its stock option plan in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share would have been reduced to the pro-forma amounts indicated below for the years ended December 31:
YEARS ENDED DECEMBER 31, ------------ 1996 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ----- ------ Net income to common stockholders: As reported................................................. $ 950 $6,248 Pro-forma................................................... $ 942 $6,031 Net income per share: As reported-basic........................................... $0.09 $ 0.58 As reported - diluted....................................... $0.09 $ 0.53 Pro-forma - basic........................................... $0.09 $ 0.56 Pro-forma - diluted......................................... $0.09 $ 0.51
The fair value of options granted under the Plan was estimated on the date of grant using the Black-Sholes option-pricing model with the following weighted average assumptions used: no dividend yield, no volatility, risk-free interest rate of 7% and expected lives of 5 years. The Company's auto finance subsidiary has granted options to certain of its key employees to purchase up to 13.5% of that subsidiary. These options are exercisable only upon an initial public offering or sale of such subsidiary. These options vest based upon the satisfaction of specified performance goals. F-20 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. OTHER EXPENSES Other expenses are comprised of the following:
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 (DOLLARS IN THOUSANDS) -------- -------- -------- Marketing........................................... $ 78 $ 171 $ 1,740 Telephone........................................... 71 185 921 Professional fees................................... 224 339 788 Travel and entertainment............................ 88 170 885 Stationery and supplies............................. 115 217 741 Postage and delivery................................ 51 167 560 Data processing..................................... 284 364 529 Deposit insurance premiums.......................... 395 371 309 Loan servicing expense.............................. 84 168 349 Insurance premiums.................................. 102 93 253 Amortization of intangible assets................... 169 132 127 Other............................................... 344 395 946 -------- -------- -------- Total........................................... $ 2,005 $ 2,772 $ 8,148 ======== ======== ========
18. EARNINGS PER SHARE On December 31, 1997, the Company adopted SFAS 128 for calculating earning per share as shown below:
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- Earnings per share - basic: Net income applicable to common stock (numerator).. $ 458 $ 950 $ 6,248 ======== ======== ======== Average common shares outstanding (denominator).... 10,669 10,669 10,739 ======== ======== ======== Per share.......................................... $ 0.04 $ 0.09 $ 0.58 ======== ======== ======== Earnings per share - diluted: Net income (numerator)............................. $ 458 $ 950 $ 6,248 ======== ======== ======== Average common shares outstanding.................. 10,669 10,669 10,739 Add: Stock options................................. -- -- 1,136 -------- -------- -------- Average common shares outstanding - diluted (denominator)..................................... 10,669 10,669 11,875 ======== ======== ======== Per share.......................................... $ 0.04 $ 0.09 $ 0.53 ======== ======== ========
19. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of the Company's financial instruments are as follows at the dates indicated:
DECEMBER 31, DECEMBER 31, 1996 1997 ----------------- ----------------- FAIR FAIR CARRYING VALUE CARRYING VALUE VALUE ESTIMATE VALUE ESTIMATE (DOLLARS IN THOUSANDS) -------- -------- -------- -------- Assets: Cash and cash equivalents.................. $ 26,063 $ 26,063 $ 19,026 $ 19,026 Securities................................. -- -- 1,002 1,002 Residual interests in securitizations...... -- -- 8,230 8,230 Loans, net................................. 134,821 143,926 148,535 161,324 Loans held for sale........................ 20,766 21,767 120,002 126,782 Federal Home Loan Bank Stock............... 1,288 1,288 1,945 1,945 Accrued interest........................... 845 845 1,494 1,494 Liabilities: Deposits................................... $159,061 $159,506 $233,194 $233,538 Notes payable.............................. 10,930 10,930 12,930 12,930 Federal Home Loan Bank advances............ 4,000 4,000 28,000 28,000 Warehouse line of credit................... -- -- 6,237 6,237
F-21 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following summary presents a description of the methodologies and assumptions used to estimate the fair value of the Company's financial instruments. Because no ready market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents: Cash and cash equivalents are valued at their carrying amounts included in the consolidated statements of financial condition, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. Securities: Securities are valued at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Residual interests in securitizations: The fair value of residual interests in securitizations is determined by discounting the estimated cash flows received over the life of the asset using prepayment, default, and interest rate assumptions that market participants would use for similar financial instruments also subject to prepayment, credit and interest rate risk. Loans, net: For real estate loans, fair values were estimated using quoted prices for equivalent yielding loans as adjusted for interest rates, margin differences and other factors. For non-mortgage loans, fair values were estimated at carrying amounts due to their short-term maturity and portfolio interest rates that are equivalent to present market interest rates. Loans held for sale: The fair value of loans held for sale is based on current pricing of whole loan transactions that a purchaser unrelated to the seller would demand for a similar loan. Federal Home Loan Bank Stock: Since no secondary market exists for FHLB stock and the stock is bought and sold at par by the FHLB, fair value of these financial instruments approximates the carrying value. Accrued interest: The carrying amounts of accrued interest approximate their fair values. Deposits: The fair values of demand deposits, passbook accounts, money market accounts, and other deposits immediately withdrawable, by definition, approximate carrying values for the respective financial instruments. For fixed maturity deposits, the fair value was estimated by discounting expected cash flows by the current offering rates of deposits with similar terms and maturities. Federal Home Loan Bank advances: The fair value of FHLB advances are valued at their carrying amounts included in the consolidated statements of financial condition, which are reasonable estimates of fair value due to the relatively short period to maturity of the advances. Notes payable: The fair value of notes payable is considered to approximate carrying value as their note rates are consistent with present market rates. Warehouse line of credit: The fair value of the warehouse line of credit is considered to approximate carrying value as the note rate is consistent with present market rates. Financial Instruments With Off-Balance Sheet Risk: No fair value is ascribed to the Company's outstanding commitments to fund loans since commitment fees are not significant and predominantly all such commitments are variable-rate loan commitments. There were no significant unrealized gains and losses on commitments to sell loans. F-22 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 20. HOLDING COMPANY FINANCIAL INFORMATION Following are the financial statements of United PanAm Financial Corp. (holding company only):
DECEMBER 31, DECEMBER 31, (DOLLARS IN THOUSANDS) 1996 1997 - ---------------------- ------------ ------------ STATEMENTS OF FINANCIAL CONDITION Cash........................................ $ 32 $ 290 Other assets................................ 29 297 Investment in subsidiary.................... 6,700 14,696 ------ ------- Total assets............................... $6,761 $15,283 ====== ======= Notes payable............................... -- $ 2,000 Other liabilities........................... -- 274 ------ ------- Total liabilities.......................... -- 2,274 Stockholders' equity........................ 6,761 13,009 ------ ------- Total liabilities and stockholders' equity.................................... $6,761 $15,283 ====== ======= YEARS ENDED DECEMBER 31, --------------------------------- 1995 1996 1997 ------------ ------------ ------- STATEMENTS OF OPERATIONS Equity in income of subsidiary.............. $ 470 $ 952 $ 6,294 Interest income............................. 1 1 11 ------ ------- ------- Total income............................... 471 953 6,305 ------ ------- ------- Interest expense............................ -- -- 74 Other expense............................... 22 4 25 ------ ------- ------- Total expense.............................. 22 4 99 ------ ------- ------- Income before income taxes.................. 449 949 6,206 Income tax benefit.......................... 9 1 42 ------ ------- ------- Net income................................. $ 458 $ 950 $ 6,248 ====== ======= ======= STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income................................. $ 458 $ 950 $ 6,248 Equity in earnings of subsidiary........... (470) (952) (6,294) (Increase) decrease in other assets........ (35) 7 (268) Increase in other liabilities.............. -- -- 274 ------ ------- ------- Net cash provided by (used in) operating activities............................... (47) 5 (40) ------ ------- ------- Cash flows from financing activities: Capital contributed to subsidiary.......... -- -- (1,702) Increase in notes payable from shareholders.............................. -- -- 2,000 ------ ------- ------- Net cash provided by financing activities.. -- -- 298 ------ ------- ------- Net increase (decrease) in cash and cash equivalents............................... (47) 5 258 Cash and cash equivalents at beginning of period.................................... 74 27 32 ------ ------- ------- Cash and cash equivalents at end of period.................................... $ 27 $ 32 $ 290 ====== ======= =======
F-23 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No dealer, salesperson or any other person has been authorized to given any information or to make any representations other than those contained in this Prospectus in connection with the offer made in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of any offer to buy any securities other than the shares of Common Stock to which it relates or an of- fer to, or a solicitation of, any person in any jurisdiction where such an of- fer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any impli- cation that the information contained herein is correct as of any time subse- quent to the date hereof. ---------------------------- TABLE OF CONTENTS ----------------------------
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 12 Use of Proceeds.......................................................... 23 Dividend Policy.......................................................... 24 Dilution................................................................. 24 Capitalization........................................................... 25 Selected Consolidated Financial Data..................................... 26 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 29 Business................................................................. 51 Management............................................................... 85 Principal Shareholders................................................... 96 Description of Capital Stock............................................. 98 Underwriting............................................................. 101 Legal Matters............................................................ 102 Experts.................................................................. 103 Additional Information................................................... 103 Index to Consolidated Financial Statements............................... F-1
---------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI- TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN- DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5,500,000 SHARES UNITED PANAM LOGO FINANCIAL CORP. COMMON STOCK ----------------- PROSPECTUS ----------------- NationsBanc MontgomerySecurities LLC Piper Jaffray Inc. , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses in connection with the Offering are as follows: SEC registration fee............................................... $ 24,394 NASD filing fee.................................................... 8,550 Nasdaq National Market filing fee.................................. 58,641 Blue Sky filing fees and expenses.................................. 15,000 Printing and engraving expenses.................................... 200,000 Legal fees and expenses............................................ 325,000 Accounting fees and expenses....................................... 200,000 Registrar and transfer agent fees.................................. 15,000 Miscellaneous...................................................... 103,415 -------- Total............................................................ $950,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The California General Corporations Law provides that California corporations may include provisions in their Articles of Incorporation relieving directors of monetary liability for breach of their fiduciary duty as directors, except for the liability of a director resulting from (i) any transaction from which the director derives an improper personal benefit, (ii) acts or omissions involving intentional misconduct or a knowing and culpable violation of law, (iii) acts or omissions that a director believes to be contrary to the best interest of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iv) acts or omissions constituting an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders, (v) acts or omissions showing a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or its shareholders, (vi) any improper transaction between a director and the corporation in which the director has a material financial interest, or (vii) the making of an illegal distribution to shareholders or any illegal loan or guaranty. The Registrant's Articles of Incorporation contain such a provision. The Underwriting Agreement, a proposed form of which is filed as Exhibit 1.1 hereto, provides for the indemnification of directors, officers, employees, agents and controlling persons of the Registrant by the Underwriters under certain circumstances. The Bylaws of the Registrant, in the form attached as Exhibit 3.2.2, require the Registrant to indemnify its directors, and permit the Registrant to indemnify its officers, to the fullest extent permitted by applicable law. The Registrant has entered into indemnification agreements with its directors and executive officers that require the Registrant to indemnify the directors and executive officers to the fullest extent permitted by applicable law. The Registrant maintains a standard policy of officers' and directors' liability insurance. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since November 1, 1994, the Registrant has issued and sold (without payment of any selling commission to any person) the following securities, which were not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on Section 4(2) of the Securities Act as not involving a public offering. On October 18, 1994, the Registrant granted Lawrence J. Grill an option, as partial consideration for his employment by the Registrant, to purchase 375,000 shares of Common Stock at $0.80 per share pursuant to the Stock Incentive Plan. On October 15, 1997, Lawrence J. Grill exercised the option to purchase 281,250 shares of Common Stock for an aggregate purchase price of $225,000. The balance of the option will vest on May 1, 1998 and will expire on October 18, 2004. On June 1, 1996, the Registrant granted Ron R. Duncanson an option, as partial consideration for his services as a director of the Registrant, to purchase 18,750 shares of Common Stock at $0.80 per share pursuant to the Stock Incentive Plan. Fifty percent of the option vested on June 1, 1996 and 25% on May 1, 1997, and 25% will vest on May 1, 1998. The option expires on April 30, 2006. On June 1, 1996, the Registrant granted Daniel L. Villanueva an option, as partial consideration for his services as a director of the Registrant, to purchase 18,750 shares of Common Stock at $0.80 per share pursuant to the Stock Incentive Plan. Fifty percent of the option vested on June 1, 1996 and 25% on May 1, 1997, and 25% will vest on May 1, 1998. The option expires on April 30, 2006. On June 1, 1996, the Registrant granted Carol M. Bucci an option, as partial consideration for her services as an officer of the Registrant, to purchase 56,250 shares of Common Stock at $0.80 per share pursuant to the Stock Incentive Plan. Twenty-five percent of the option vested on each of June 1, 1996, March 1, 1997 and March 1, 1998, and 25% will vest on March 1, 1999. The option expires on April 30, 2006. On August 1, 1996, the Registrant granted Edmund M. Kaufman an option, as partial consideration for his services as a director of the Registrant, to purchase 18,750 shares of Common Stock at $0.80 per share pursuant to the Stock Incentive Plan. Twenty-five percent of the option vested on August 1, 1996 and 25% on October 16, 1997, and 25% will vest on October 16, 1998 and 25% on October 16, 1999. The option expires on April 30, 2006. On October 1, 1996, the Registrant granted John T. French an option, as partial consideration for his services as a consultant to the Registrant, to purchase 131,250 shares of Common Stock at $0.80 per share pursuant to the Stock Incentive Plan. Twenty-five percent of the option vested on October 1, 1996 and 25% on October 1, 1997, and 25% will vest on October 1, 1998 and 25% on October 1, 1999. The option expires on April 30, 2006. On March 5, 1997, the Registrant granted Robert Wilson an option, in connection with the termination of his employment by the Registrant, to purchase 112,500 shares of Common Stock at $1.33 per share pursuant to the Stock Incentive Plan. This option vested on the date of grant and will expire on the third anniversary of the date of grant. On October 15, 1997, the Registrant granted John T. French an option, as partial consideration for his services as a director of the Registrant, to purchase 60,000 shares of Common Stock at $10.50 per share. Twenty-five percent of the option vested on the date of grant, and 25% will vest on the first three anniversaries of the date of grant. The option expires on the tenth anniversary of the date of grant. Concurrently with the sale of the shares of Common Stock offered hereby, the Registrant will grant Luis Maizel an option, as partial consideration for his services as a director of the Registrant, to purchase 20,000 shares of Common Stock at $10.50 per share. This option will become exercisable in four equal annual installments commencing on the first anniversary of the date of grant and will expire on the tenth anniversary of the date of grant. II-2 Concurrently with the sale of the shares of Common Stock offered hereby, the Registrant will grant Lawrence J. Grill an option, as partial consideration for his services as a director of the Registrant, to purchase 60,000 shares of Common Stock at an exercise price equal to the initial offering price. This option will become exercisable in four equal annual installments commencing on the first anniversary of the date of grant and will expire on the tenth anniversary of the date of grant. Concurrently with the sale of the shares of Common Stock offered hereby, the Registrant will grant Carol Bucci an option, as partial consideration for her services as an officer of the Registrant, to purchase 30,000 shares of Common Stock at an exercise price equal to the initial offering price. This option will become exercisable in four equal annual installments commencing on the first anniversary of the date of grant and will expire on the tenth anniversary of the date of grant. Concurrently with the sale of the shares of Common Stock offered hereby, the Registrant will grant Guillermo Bron an option, as partial consideration for his services as a director of the Registrant, to purchase 60,000 shares of Common Stock at an exercise price equal to 110% of the initial offering price. This option will become exercisable in four equal annual installments commencing on the first anniversary of the date of grant and will expire on the tenth anniversary of the date of grant. On October 15, 1997, the Registrant granted Carol Bucci an option, as partial consideration for her services as an officer of the Registrant, to purchase 10,000 shares of Common Stock at $10.50 per share. This option will become exercisable in four equal annual installments commencing on the first anniversary of the date of grant and will expire on the tenth anniversary of the date of grant. On October 15, 1997, the Registrant granted Stephen W. Haley an option, as partial consideration for his services as an officer of the Registrant, to purchase 60,000 shares of Common Stock at $10.50 per share. Twenty-five percent of the option vested on the date of grant, and 25% will vest on the first three anniversaries of the date of grant. The option will expire on the tenth anniversary of the date of the grant. On October 15, 1997, the Registrant granted 20 current employees options, as partial consideration for their employment with the Registrant, to purchase up to an aggregate of 475,000 shares of Common Stock at $10.50 per share. These options will become exercisable in installments before October 15, 2001 and will expire on the tenth anniversary of the date of grant. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES a. Exhibits.
EXHIBIT NO. DESCRIPTION --------- ----------- 1.1* Form of Underwriting Agreement. 3.1* Amended and Restated Certificate of Incorporation of United PanAm Financial Corp, a Delaware corporation (the "Predecessor"). 3.1.1*** Form of Articles of Incorporation of the Registrant. 3.1.2 Articles of Incorporation of the Registrant, as amended. 3.2* Bylaws of the Predecessor. 3.2.1*** Form of Bylaws of the Registrant. 3.2.2 Bylaws of the Registrant 4.1 Form of stock certificate. 4.2*** Form of Agreement of Merger of the Predecessor into the Registrant. 5.1 Opinion of Manatt, Phelps & Phillips, LLP. 10.1* Insurance Premium Financing Management Agreement dated May 17, 1995, between Pan American Bank, FSB and BPN Corporation. 10.2* First Amendment to Insurance Premium Financing Management Agreement and Guaranties dated October , 1995, between Pan American Bank, FSB and BPN Corporation. 10.3* Second Amendment to Insurance Premium Financing Management Agreement and Guaranties dated February 28, 1996, among Pan American Bank, FSB, BPN Corporation, Cornelius J. O'Shea, Peter Walski and Barbara Walski. 10.4* Guaranty dated May 17, 1995 by Peter Walski and Barbara Walski to Pan American Bank, FSB. 10.5* Guaranty dated May 17, 1995 by Cornelius J. O'Shea to Pan American Bank, FSB. 10.6* Stock Option Agreement dated May 17, 1995, among BPN Corporation, Pan American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J. O'Shea and The Walski Family Trust. 10.7* First Amendment to Stock Option Agreement dated October 1, 1997, among BPN Corporation, Pan American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J. O'Shea and The Walski Family Trust. 10.8* Interim Capital Assistance Agreement dated September 9, 1994, among Pan American Financial, Inc., Pan American Bank, FSB and the Resolution Trust Corporation. 10.9* Amendment No. 1 to Interim Capital Assistance Agreement dated May 1, 1997, among Pan American Financial, Inc., Pan American Bank, FSB and the Federal Deposit Insurance Corporation. 10.10* Interim Capital Assistance Agreement dated April 29, 1994, among Pan American Financial, Inc., Pan American Bank, FSB and the Resolution Trust Corporation. 10.10.1 Standard Purchase and Assumption Terms and Conditions, Theta Version, dated July 26, 1993. 10.11* Letter agreement dated March 2, 1995, between Pan American Bank, FSB and the Resolution Trust Corporation. 10.12* Promissory Note dated September 9, 1994 in the amount of $4 million by Pan American Financial, Inc. to the Resolution Trust Corporation. 10.13* Stock Pledge Agreement dated September 9, 1994, between Pan American Financial, Inc. and the Resolution Trust Corporation. 10.14** Limited Branch Purchase and Assumption Agreement dated September 9, 1994, between the Resolution Trust Corporation as receiver of Western Federal Savings Bank and Pan American Bank, FSB. 10.15** Lead Acquiror Waiver and Reimbursement Agreement dated September 9, 1994, between Home Savings of America, FSB and Pan American Bank, FSB.
II-4
EXHIBIT NO. DESCRIPTION ---------- ----------- 10.16** Indemnity Agreement dated September 9, 1994, between the Resolution Trust Corporation and Pan American Bank, FSB. 10.17** Whole Purchase and Assumption Agreement dated April 29, 1994, between the Resolution Trust Corporation and Pan American Bank, FSB. 10.18** Indemnity Agreement dated April 29, 1994, between the Resolution Trust Corporation and Pan American Bank, FSB. 10.19* Promissory Note dated April 29, 1994 in the amount of $6,930,000 by Pan American Financial, Inc. to the Resolution Trust Corporation. 10.20* Stock Pledge Agreement dated April 29, 1994, between Pan American Financial, Inc. and the Resolution Trust Corporation. 10.21** Advances and Security Agreement dated January 29, 1996, between the Federal Home Loan Bank of San Francisco and Pan American Bank, FSB. 10.22** Retail CD Brokerage Agreement dated April 30, 1996, between Pan American Bank, FSB and Merrill Lynch, Pierce, Fenner & Smith, Incorporated. 10.23** Fixed Rate Interest bearing--3 Months and Longer Retail Certificate of Deposit of Pan American, FSB, Master Certificate No. 2 dated May 12, 1997. 10.24** Fixed Rate Interest bearing--3 Months and Longer Retail Certificate of Deposit of Pan American Bank, FSB, Master Certificate No. 3 dated May 12, 1997. 10.25** License, Services, and Purchase Agreement dated December 1996, between Associated Software Consultants, Inc. and Pan American, FSB and all addendums thereto. 10.26** Agreement for Remote Computing Services dated April 4, 1995, between Pan American Bank, FSB and Fiserv Fresno, Inc. 10.27** Amendment to Computer Operating Agreement between Pan American Bank, FSB and Fiserv Fresno, Inc. 10.28** Addendum No. 2 to Agreement for Remote Computing Services effective as of April 1, 1996, between Pan American Bank, FSB and Fiserv Fresno, Inc. 10.29** Item Processing Agreement dated April 26, 1993, between Systematics Financial Services, Inc. and Pan American Savings Bank, FSB. 10.30** Support Services Agreement dated October 31, 1995, between Alan King and Company, Inc. and Pan American Savings Bank, FSB. 10.31** Technical Support Services Agreement dated May 1, 1995, between Alan King and Company, Inc. and Pan American Savings Bank, FSB. 10.32** License Agreement dated May 1, 1995, between Alan King and Company, Inc. and Pan American Savings Bank, FSB. 10.33** Subservicing Agreement dated March 2, 1995, between Pan American Bank, FSB and Dovenmuehle Mortgage, Inc. 10.34* Interim Operating Agreement dated July 1, 1997, between United PanAm Mortgage Corporation and Pan American Bank, FSB. 10.34.1*** Amended and Restated Interim Operating Agreement dated as of December 31, 1997, between United PanAm Mortgage Corporation and Pan American Bank, FSB. 10.35** Inter-Company Agreement dated May 1, 1994, between Pan American Financial, Inc. and Pan American Bank, FSB. 10.36** Inter-Company Agreement dated August 1, 1994, between Pan American Group, Inc. and Pan American Bank, FSB.
II-5
EXHIBIT NO. DESCRIPTION ---------- ----------- 10.37* Employment Agreement dated May 7, 1996, between Pan American Bank, FSB and Ray C. Thousand. 10.38** Employment Agreement dated May 1, 1994, between Pan American Bank, FSB and Lawrence J. Grill. 10.39* Employment Agreement dated October 1, 1997, among the Predecessor, Pan American Bank, FSB and Lawrence J. Grill. 10.39.1 Amendment No. 1 to Employment Agreement dated November 1, 1997, among the Predecessor, Pan American Bank, FSB and Lawrence J. Grill. 10.40* Employment Agreement dated October 1, 1997, between the Predecessor and Guillermo Bron. 10.40.1 Amendment No. 1 to Employment Agreement dated November 1, 1997, between the Predecessor and Guillermo Bron. 10.41* Employment Agreement dated October 1, 1997, between United PanAm Mortgage Corporation and John T. French. 10.41.1** First Amendment to Employment Agreement dated November 14, 1997 between United PanAm Mortgage Corporation and John T. French. 10.42* Salary Continuation Agreement dated October 1, 1997, between Pan American Bank, FSB and Lawrence J. Grill. 10.43* Salary Continuation Agreement dated October 1, 1997, between Pan American Bank, FSB and Guillermo Bron. 10.44* Form of Indemnification Agreement between the Predecessor and Ms. Bucci and each of Messrs. Bron, French, Grill, Haley, Kaufman, Maizel, Thousand and Villanueva. 10.45** Agreement and Mutual General Release dated March 5, 1997, between Pan American Bank, FSB and Robert Wilson. 10.46**** Pan American Group, Inc. 1994 Stock Option Plan, together with forms of incentive stock option and non-qualified stock option agreements. 10.47* Pan American Group, Inc. 1997 Stock Incentive Plan, together with forms of incentive stock option, non-qualified stock option and restricted stock agreements. 10.48** Pan American Bank, FSB Management Incentive Plan. 10.48.1*** Pan American Bank, FSB Retail Bank Management Incentive Plan. 10.48.2*** Pan American Bank, FSB Corporate Management Incentive Plan. 10.49*** Pan American Bank, FSB 401(k) Profit Sharing Plan, as amended. 10.50** Income Tax Allocation Agreement dated October 19, 1994, between Pan American Bank, FSB, Pan American Financial, Inc. and the Predecessor. 10.51** Lease Agreement dated September 26, 1994, between the Resolution Trust Corporation and Old Stone Bank of California and Pan American Bank, FSB. 10.52** First Amendment to Lease Agreement dated November 19, 1995, between the Resolution Trust Corporation and Old Stone Bank of California and Pan American Bank, FSB. 10.53** Office Lease dated March 4, 1997, between Spieker Properties, L.P. and Pan American Bank, FSB. 10.54** Office Space Lease dated January 18, 1996, between The Irvine Company and Pan American Bank, FSB. 10.55** First Amendment to Office Space Lease dated July 2, 1996, between The Irvine Company and Pan American Bank, FSB. 10.56** Standard Office Lease dated April 25, 1997, between CAL Portfolio VI, L.L.C. and Pan American Bank, FSB.
II-6
EXHIBIT NO. DESCRIPTION ---------- ----------- 10.57** Office Lease Agreement dated February 28, 1997, between P.R.A. Biltmore Investments, L.L.C. and Pan American Bank, FSB. 10.58** Office Lease dated December 9, 1996, between Bernal Corporate Park and Pan American Bank, FSB. 10.59** Bernal Corporate Park Lease First Amendment to Lease dated January 27, 1997. 10.60** Shopping Center Sublease dated September 22, 1995, between Panorama Towne Center, L.P. and Pan American Bank, FSB. 10.61** Promissory Note in the principal amount of $225,000 dated October 15, 1997 by Lawrence J. Grill to the Predecessor. 10.62** Loan and Stock Pledge Agreement dated October 15, 1997, between Lawrence J. Grill and the Predecessor. 10.63* Promissory Note in the principal amount of $1,628,000 dated July 1, 1997 by the Predecessor to Pan American Financial, L.P. 10.63.1*** Amended and Restated Promissory Note in the principal amount of $1,628,000 dated January 15, 1998 by the Predecessor to Pan American Financial, L.P. 10.64* Promissory Note in the principal amount of $258,000 dated July 1, 1997 by the Predecessor to BVG West Corporation. 10.64.1*** Amended and Restated Promissory Note in the principal amount of $258,000 dated January 15, 1998 by the Predecessor to BVG West Corporation. 10.65* Promissory Note in the principal amount of $52,500 dated July 1, 1997 by the Predecessor to Lawrence J. Grill. 10.65.1*** Amended and Restated Promissory Note in the principal amount of $52,500 dated January 15, 1998 by the Registant to Lawrence J. Grill. 10.66* Promissory Note in the principal amount of $33,000 dated July 1, 1997 by the Predecessor to Robert Wilson. 10.66.1*** Amended and Restated Promissory Note in the principal amount of $33,000 dated January 15, 1998 by the Predecessor to Robert Wilson. 10.67* Promissory Note in the principal amount of $28,500 dated July 1, 1997 by the Predecessor to Villanueva Management, Inc. 10.67.1*** Amended and Restated Promissory Note in the principal amount of $28,500 dated January 15, 1998 by the Predecessor to Villanueva Management, Inc. 10.68*+ Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of October 31, 1997, between Lehman Commercial Paper Inc. and Pan American Bank, FSB. 10.69* Custodial Agreement dated November 6, 1997, among Lehman Commercial Paper Inc., Pan American Bank, FSB and Bankers Trust Company of California, N.A. 10.70* Loan Purchase and Sale Agreement dated April 1, 1997, among Aames Capital Corporation, Aames Funding Corporation and Pan American Bank, FSB. 10.71* Continuing Loan Purchase Agreement dated February 27, 1997, between AMRESCO Residential Capital Markets, Inc. and Pan American Bank, FSB. 10.72* Mortgage Loan Purchase Agreement dated May 28, 1997, between Saxon Mortgage, Inc. and Pan American Bank, FSB. 10.73*** Letter Agreement dated as of January 6, 1998, by and among the Predecessor, NIPF Holding Company and Providian National Bank.
II-7
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.74*** Master Assignment Agreement dated as of January 21, 1998 by and between Pan American Bank, FSB d/b/a "Classic Plan" and Providian National Bank d/b/a "Commonwealth," and National IPF Company. 10.75*** Pooling and Servicing Agreement dated as of December 1, 1997, by and among United PanAm Mortgage Corporation, Lehman ABS Corporation, Pan American Bank, FSB and Bankers Trust Company of California, N.A. 10.76*** Mortgage Loan Purchase and Sale Agreement dated as of December 1, 1997, by and among United PanAm Mortgage Corporation, Pan American Bank, FSB and Lehman ABS Corporation. 10.77*** Insurance and Indemnity Agreement dated as of December 1, 1997, by and among United PanAm Mortgage Corporation, Lehman ABS Corporation, Pan American Bank, FSB and Financial Security Assurance Inc. 10.78*** Indemnification Agreement dated as of December 22, 1997, by and among United PanAm Mortgage Corporation, Financial Security Assurance Inc., Pan American Bank, FSB, Lehman ABS Corporation and Lehman Brothers Inc. 10.79***+ Subservicing Agreement dated as of December 1, 1997, by and between Pan American Bank, FSB and Ocwen Federal Bank, FSB. 10.80*** Premium Letter by and among United PanAm Mortgage Corporation, Lehman ABS Corporation and Financial Security Assurance Inc. 10.81*** Indemnification Agreement dated as of December 30, 1997 among United PanAm Mortgage Corporation, Pan American Bank, FSB and Lehman Brothers Inc. 10.82*** Certificate and Prepayment Fee Purchase Agreement dated March 25, 1998 between Pan American Bank, FSB and Ocwen Partnership, L.P. 10.83*** Residential Flow Servicing Agreement dated effective as of the November 10, 1997, by and between Ocwen Federal Bank FSB, Servicer, and Pan American Bank, FSB and United PanAm Mortgage Corporation. 10.84*** United PanAm Mortgage Corporation 1998 Management Incentive Plan. 10.85*** United Auto Credit Corporation 1998 Management Incentive Plan. 10.85.1**** Forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement. 21.1* Subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1). 27.1*** Financial Data Schedule.
- -------- * Filed as an exhibit to the Predecessor's Registration Statement on Form S- 1 (File No. 333-39941) filed with the Commission on November 12, 1997 (the "Registration Statement"). ** Filed as an exhibit to Amendment No. 1 to the Registration Statement filed with the Commission on December 22, 1997. *** Filed as an exhibit to Amendment No. 2 to the Registration Statement filed with the Commission on March 31, 1998. **** Filed as an exhibit to Amendment No. 3 to the Registration Statement filed with the Commission on April 14, 1998. + Confidential treatment requested. b. Financial Statement Schedules. The schedules are omitted because they are not applicable or the required information is shown in the Registrant's financial statements or the related notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit II-8 or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (i) That for the purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (ii) That for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified n the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-9 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN MATEO, STATE OF CALIFORNIA, ON APRIL 22, 1998. United PanAm Financial Corp. /s/ Lawrence J. Grill By __________________________________ LAWRENCE J. GRILL, PRESIDENT, CHIEF EXECUTIVE OFFICER AND SECRETARY PURSUANT TO THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ Guillermo Bron Chairman of the - ------------------------------------- Board April 22, 1998 GUILLERMO BRON /s/ Lawrence J. Grill President, Chief - ------------------------------------- Executive Officer, April 22, 1998 LAWRENCE J. GRILL Secretary and Director (Principal Executive Officer) /s/ Carol Bucci Senior Vice - ------------------------------------- President, April 22, 1998 CAROL BUCCI Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Stephen W. Haley Senior Vice - ------------------------------------- President-- April 22, 1998 STEPHEN W. HALEY Compliance and Risk Management * Director - ------------------------------------- April 22, 1998 JOHN T. FRENCH * Director - ------------------------------------- April 22, 1998 EDMUND M. KAUFMAN * Director - ------------------------------------- April 22, 1998 DANIEL L. VILLANUEVA * Director - ------------------------------------- April 22, 1998 LUIS MAIZEL *By: /s/ Lawrence J. Grill --------------------------------- Lawrence J. Grill, Attorney-in-fact II-10 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1* Form of Underwriting Agreement. 3.1* Amended and Restated Certificate of Incorporation of United PanAm Financial Corp., a Delaware corporation (the "Predecessor"). 3.1.1*** Form of Articles of Incorporation of the Registrant. 3.1.2 Articles of Incorporation of the Registrant, as amended. 3.2* Bylaws of the Predecessor. 3.2.1*** Form of Bylaws of the Registrant. 3.2.2 Bylaws of the Registrant 4.1 Form of stock certificate. 4.2*** Form of Agreement of Merger of the Predecessor into the Registrant. 5.1 Opinion of Manatt, Phelps & Phillips, LLP. 10.1* Insurance Premium Financing Management Agreement dated May 17, 1995, between Pan American Bank, FSB and BPN Corporation. 10.2* First Amendment to Insurance Premium Financing Management Agreement and Guaranties dated October , 1995, between Pan American Bank, FSB and BPN Corporation. 10.3* Second Amendment to Insurance Premium Financing Management Agreement and Guaranties dated February 28, 1996, among Pan American Bank, FSB, BPN Corporation, Cornelius J. O'Shea, Peter Walski and Barbara Walski. 10.4* Guaranty dated May 17, 1995 by Peter Walski and Barbara Walski to Pan American Bank, FSB. 10.5* Guaranty dated May 17, 1995 by Cornelius J. O'Shea to Pan American Bank, FSB. 10.6* Stock Option Agreement dated May 17, 1995, among BPN Corporation, Pan American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J. O'Shea and The Walski Family Trust. 10.7* First Amendment to Stock Option Agreement dated October 1, 1997, among BPN Corporation, Pan American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J. O'Shea and The Walski Family Trust. 10.8* Interim Capital Assistance Agreement dated September 9, 1994, among Pan American Financial, Inc., Pan American Bank, FSB and the Resolution Trust Corporation. 10.9* Amendment No. 1 to Interim Capital Assistance Agreement dated May 1, 1997, among Pan American Financial, Inc., Pan American Bank, FSB and the Federal Deposit Insurance Corporation. 10.10* Interim Capital Assistance Agreement dated April 29, 1994, among Pan American Financial, Inc., Pan American Bank, FSB and the Resolution Trust Corporation. 10.10.1 Standard Purchase and Assumption Terms and Conditions, Theta Version, dated July 26, 1993. 10.11* Letter agreement dated March 2, 1995, between Pan American Bank, FSB and the Resolution Trust Corporation. 10.12* Promissory Note dated September 9, 1994 in the amount of $4 million by Pan American Financial, Inc. to the Resolution Trust Corporation. 10.13* Stock Pledge Agreement dated September 9, 1994, between Pan American Financial, Inc. and the Resolution Trust Corporation. 10.14** Limited Branch Purchase and Assumption Agreement dated September 9, 1994, between the Resolution Trust Corporation as receiver of Western Federal Savings Bank and Pan American Bank, FSB. 10.15** Lead Acquiror Waiver and Reimbursement Agreement dated September 9, 1994, between Home Savings of America, FSB and Pan American Bank, FSB. 10.16** Indemnity Agreement dated September 9, 1994, between the Resolution Trust Corporation and Pan American Bank, FSB.
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.17** Whole Purchase and Assumption Agreement dated April 29, 1994, between the Resolution Trust Corporation and Pan American Bank, FSB. 10.18** Indemnity Agreement dated April 29, 1994, between the Resolution Trust Corporation and Pan American Bank, FSB. 10.19* Promissory Note dated April 29, 1994 in the amount of $6,930,000 by Pan American Financial, Inc. to the Resolution Trust Corporation. 10.20* Stock Pledge Agreement dated April 29, 1994, between Pan American Financial, Inc. and the Resolution Trust Corporation. 10.21** Advances and Security Agreement dated January 29, 1996, between the Federal Home Loan Bank of San Francisco and Pan American Bank, FSB. 10.22** Retail CD Brokerage Agreement dated April 30, 1996, between Pan American Bank, FSB and Merrill Lynch, Pierce, Fenner & Smith, Incorporated. 10.23** Fixed Rate Interest bearing--3 Months and Longer Retail Certificate of Deposit of Pan American, FSB, Master Certificate No. 2 dated May 12, 1997. 10.24** Fixed Rate Interest bearing--3 Months and Longer Retail Certificate of Deposit of Pan American Bank, FSB, Master Certificate No. 3 dated May 12, 1997. 10.25** License, Services, and Purchase Agreement dated December 1996, between Associated Software Consultants, Inc. and Pan American, FSB and all addendums thereto. 10.26** Agreement for Remote Computing Services dated April 4, 1995, between Pan American Bank, FSB and Fiserv Fresno, Inc. 10.27** Amendment to Computer Operating Agreement between Pan American Bank, FSB and Fiserv Fresno, Inc. 10.28** Addendum No. 2 to Agreement for Remote Computing Services effective as of April 1, 1996, between Pan American Bank, FSB and Fiserv Fresno, Inc. 10.29** Item Processing Agreement dated April 26, 1993, between Systematics Financial Services, Inc. and Pan American Savings Bank, FSB. 10.30** Support Services Agreement dated October 31, 1995, between Alan King and Company, Inc. and Pan American Savings Bank, FSB. 10.31** Technical Support Services Agreement dated May 1, 1995, between Alan King and Company, Inc. and Pan American Savings Bank, FSB. 10.32** License Agreement dated May 1, 1995, between Alan King and Company, Inc. and Pan American Savings Bank, FSB. 10.33** Subservicing Agreement dated March 2, 1995, between Pan American Bank, FSB and Dovenmuehle Mortgage, Inc. 10.34*** Interim Operating Agreement dated July 1, 1997, between United PanAm Mortgage Corporation and Pan American Bank, FSB. 10.34.1*** Amended and Restated Interim Operating Agreement dated as of December 31, 1997, between United PanAm Mortgage Corporation and Pan American Bank, FSB. 10.35** Inter-Company Agreement dated May 1, 1994, between Pan American Financial, Inc. and Pan American Bank, FSB. 10.36** Inter-Company Agreement dated August 1, 1994, between Pan American Group, Inc. and Pan American Bank, FSB. 10.37* Employment Agreement dated May 7, 1996, between Pan American Bank, FSB and Ray C. Thousand.
EXHIBIT NO. DESCRIPTION ---------- ----------- 10.38** Employment Agreement dated May 1, 1994, between Pan American Bank, FSB and Lawrence J. Grill. 10.39* Employment Agreement dated October 1, 1997, among the Predecessor, Pan American Bank, FSB and Lawrence J. Grill. 10.39.1 Amendment No. 1 to Employment Agreement dated November 1, 1997, among the Predecessor, Pan American Bank, FSB and Lawrence J. Grill. 10.40* Employment Agreement dated October 1, 1997, between the Predecessor and Guillermo Bron. 10.40.1 Amendment No. 1 to Employment Agreement dated November 1, 1997, between the Predecessor and Guillermo Bron. 10.41* Employment Agreement dated October 1, 1997, between United PanAm Mortgage Corporation and John T. French. 10.41.1** First Amendment to Employment Agreement dated November 14, 1997 between United PanAm Mortgage Corporation and John T. French. 10.42* Salary Continuation Agreement dated October 1, 1997, between Pan American Bank, FSB and Lawrence J. Grill. 10.43* Salary Continuation Agreement dated October 1, 1997, between Pan American Bank, FSB and Guillermo Bron. 10.44* Form of Indemnification Agreement between the Predecessor and Ms. Bucci and each of Messrs. Bron, French, Grill, Haley, Kaufman, Maizel, Thousand and Villanueva. 10.45** Agreement and Mutual General Release dated March 5, 1997, between Pan American Bank, FSB and Robert Wilson. 10.46**** Pan American Group, Inc. 1994 Stock Option Plan, together with forms of incentive stock option and non-qualified stock option agreements. 10.47* Pan American Group, Inc. 1997 Stock Incentive Plan, together with forms of incentive stock option, non-qualified stock option and restricted stock agreements. 10.48** Pan American Bank, FSB Management Incentive Plan. 10.48.1*** Pan American Bank, FSB Retail Bank Management Incentive Plan. 10.48.2*** Pan American Bank, FSB Corporate Management Incentive Plan. 10.49*** Pan American Bank, FSB 401(k) Profit Sharing Plan, as amended. 10.50** Income Tax Allocation Agreement dated October 19, 1994, between Pan American Bank, FSB, Pan American Financial, Inc. and the Predecessor. 10.51** Lease Agreement dated September 26, 1994, between the Resolution Trust Corporation and Old Stone Bank of California and Pan American Bank, FSB. 10.52** First Amendment to Lease Agreement dated November 19, 1995, between the Resolution Trust Corporation and Old Stone Bank of California and Pan American Bank, FSB. 10.53** Office Lease dated March 4, 1997, between Spieker Properties, L.P. and Pan American Bank, FSB. 10.54** Office Space Lease dated January 18, 1996, between The Irvine Company and Pan American Bank, FSB. 10.55** First Amendment to Office Space Lease dated July 2, 1996, between The Irvine Company and Pan American Bank, FSB. 10.56** Standard Office Lease dated April 25, 1997, between CAL Portfolio VI, L.L.C. and Pan American Bank, FSB. 10.57** Office Lease Agreement dated February 28, 1997, between P.R.A. Biltmore Investments, L.L.C. and Pan American Bank, FSB. 10.58** Office Lease dated December 9, 1996, between Bernal Corporate Park and Pan American Bank, FSB. 10.59** Bernal Corporate Park Lease First Amendment to Lease dated January 27, 1997. 10.60** Shopping Center Sublease dated September 22, 1995, between Panorama Towne Center, L.P. and Pan American Bank, FSB.
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.61** Promissory Note in the principal amount of $225,000 dated October 15, 1997 by Lawrence J. Grill to the Predecessor. 10.62** Loan and Stock Pledge Agreement dated October 15, 1997, between Lawrence J. Grill and the Predecessor. 10.63* Promissory Note in the principal amount of $1,628,000 dated July 1, 1997 by the Predecessor to Pan American Financial, L.P. 10.63.1*** Amended and Restated Promissory Note in the principal amount of $1,628,000 dated January 15, 1998 by the Predecessor to Pan American Financial, L.P. 10.64* Promissory Note in the principal amount of $258,000 dated July 1, 1997 by the Predecessor to BVG West Corporation. 10.64.1*** Amended and Restated Promissory Note in the principal amount of $258,000 dated January 15, 1998 by the Predecessor to BVG West Corporation. 10.65* Promissory Note in the principal amount of $52,500 dated July 1, 1997 by the Predecessor to Lawrence J. Grill. 10.65.1*** Amended and Restated Promissory Note in the principal amount of $52,500 dated January 15, 1998 by the Predecessor to Lawrence J. Grill. 10.66* Promissory Note in the principal amount of $33,000 dated July 1, 1997 by the Predecessor to Robert Wilson. 10.66.1*** Amended and Restated Promissory Note in the principal amount of $33,000 dated January 15, 1998 by the Predecessor to Robert Wilson. 10.67* Promissory Note in the principal amount of $28,500 dated July 1, 1997 by the Predecessor to Villanueva Management, Inc. 10.67.1*** Amended and Restated Promissory Note in the principal amount of $28,500 dated January 15, 1998 by the Predecessor to Villanueva Management, Inc. 10.68*+ Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of October 31, 1997, between Lehman Commercial Paper Inc. and Pan American Bank, FSB. 10.69* Custodial Agreement dated November 6, 1997, among Lehman Commercial Paper Inc., Pan American Bank, FSB and Bankers Trust Company of California, N.A. 10.70* Loan Purchase and Sale Agreement dated April 1, 1997, among Aames Capital Corporation, Aames Funding Corporation and Pan American Bank, FSB. 10.71* Continuing Loan Purchase Agreement dated February 27, 1997, between AMRESCO Residential Capital Markets, Inc. and Pan American Bank, FSB. 10.72* Mortgage Loan Purchase Agreement dated May 28, 1997, between Saxon Mortgage, Inc. and Pan American Bank, FSB. 10.73*** Letter Agreement dated as of January 6, 1998, by and among the Predecessor, NIPF Holding Company and Providian National Bank. 10.74*** Master Assignment Agreement dated as of January 21, 1998 by and between Pan American Bank, FSB d/b/a "Classic Plan" and Providian National Bank d/b/a "Commonwealth," and National IPF Company. 10.75*** Pooling and Servicing Agreement dated as of December 1, 1997, by and among United PanAm Mortgage Corporation, Lehman ABS Corporation, Pan American Bank, FSB and Bankers Trust Company of California, N.A. 10.76*** Mortgage Loan Purchase and Sale Agreement dated as of December 1, 1997, by and among United PanAm Mortgage Corporation, Pan American Bank, FSB and Lehman ABS Corporation. 10.77*** Insurance and Indemnity Agreement dated as of December 1, 1997, by and among United PanAm Mortgage Corporation, Lehman ABS Corporation, Pan American Bank, FSB and Financial Security Assurance Inc.
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.78*** Indemnification Agreement dated as of December 22, 1997, by and among United PanAm Mortgage Corporation, Financial Security Assurance Inc., Pan American Bank, FSB, Lehman ABS Corporation and Lehman Brothers Inc. 10.79***+ Subservicing Agreement dated as of December 1, 1997, by and between Pan American Bank, FSB and Ocwen Federal Bank, FSB. 10.80*** Premium Letter by and among United PanAm Mortgage Corporation, Lehman ABS Corporation and Financial Security Assurance Inc. 10.81*** Indemnification Agreement dated as of December 30, 1997 among United PanAm Mortgage Corporation, Pan American Bank, FSB and Lehman Brothers Inc. 10.82*** Certificate and Prepayment Fee Purchase Agreement dated March 25, 1998 between Pan American Bank, FSB and Ocwen Partnership, L.P. 10.83*** Residential Flow Servicing Agreement dated effective as of November 10, 1997, by and between Ocwen Federal Bank FSB, Servicer, and Pan American Bank, FSB and United PanAm Mortgage Corporation. 10.84*** United PanAm Mortgage Corporation 1998 Management Incentive Plan. 10.85*** United Auto Credit Corporation 1998 Management Incentive Plan. 10.85.1**** Forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement. 21.1* Subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1). 27.1*** Financial Data Schedule.
- -------- * Filed as an exhibit to the Predecessor's Registration Statement on Form S-1 (File No. 333-39941) filed with the Commission on November 12, 1997 (the "Registration Statement"). ** Filed as an exhibit to Amendment No. 1 to the Registration Statement filed with the Commission on December 22, 1997. *** Filed as an exhibit to Amendment No. 2 to the Registration Statement filed with the Commission on March 31, 1998. **** Filed as an exhibit to Amendment No. 3 to the Registration Statement filed with the Commission on April 14, 1998. + Confidential treatment requested. EX-3.1.2 2 ARTICLES OF INCORP OF THE REGISTRANT, AS AMENDED EXHIBIT 3.1.2 ARTICLES OF INCORPORATION OF UNITED PANAM FINANCIAL CORP. ONE: The name of this corporation is United PanAm Financial Corp. --- TWO: The purpose of this corporation is to engage in any lawful act or --- activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. THREE: The name in the State of California of this corporation's initial ----- agent of service of process in accordance with subdivision (b) of Section 1502 of the California General Corporation Law (the "California Law") is AmeriSearch, Inc. FOUR: This corporation is authorized to issue two classes of shares of ---- stock designated "Common Stock" and "Preferred Stock," respectively. The total number of shares of stock which this corporation shall have authority to issue is 22,000,000 shares, consisting of 20,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock. A description of the different classes and series (if any) of this corporation's capital stock and a statement of the designations, and the relative rights, preferences, privileges and restrictions of the shares of each class of and series (if any) of stock are as follows: A. Common Stock ------------ 1. Except where otherwise provided by law, by these Articles of Incorporation, or by resolution of the Board of Directors pursuant to this Article FOUR, the holders of the Common Stock issued and outstanding shall have and possess the exclusive right to notice of shareholders' meetings and the exclusive voting rights and powers. 2. Subject to all of the rights of the Preferred Stock, dividends may be paid on the Common Stock, as and when declared by the Board of Directors, out of any funds of the corporation legally available for the payment of such dividends. B. Preferred Stock --------------- The Preferred Stock may be divided into such number of series as the Board of Directors may determine. The Board of Directors is authorized to determine and alter the rights, preferences, privileges and restrictions, or any of them, granted to or imposed upon any wholly unissued series of Preferred Stock and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. FIVE: The following provisions are inserted for the management of the ---- business and for the conduct of the affairs of the corporation and for defining and regulating the powers of the corporation and its directors and shareholders and are in furtherance and not in limitation of the powers conferred upon the corporation by statute: (a) Unless otherwise expressly provided in the California Law, approval by the holders of at least two-thirds of the outstanding shares of the capital stock of this corporation entitled to vote (including the affirmative vote of at least two-thirds of the outstanding shares of any class or series of the capital stock entitled to vote separately) shall be required with respect to each of the following actions: A. Any amendment to or the elimination of Articles FIVE, SIX, ---- ---- or SEVEN of these Articles of Incorporation. ----- B. Any amendment to or the elimination of any provision of the Bylaws of this corporation which requires approval by the shareholders to become effective. (b) Unless otherwise expressly provided in the California Law, notwithstanding anything to the contrary in these Articles of Incorporation or the Bylaws of this corporation, vacancies in the Board of Directors, except for a vacancy created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of shareholders. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board of Directors (or the shareholders) may elect a successor to take office when the resignation becomes effective. (c) Unless otherwise expressly provided in the California Law, notwithstanding anything to the contrary in these Articles of Incorporation or the Bylaws of this corporation, the shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Except for an election to fill a vacancy created by the removal of a director, any such election by written consent shall require the consent of holders of a majority of the outstanding shares entitled to vote for the election of directors. A vacancy in the Board of Directors created by the removal of a director may only be filled by the vote of a majority of the shares entitled to vote for the election of directors represented at a duly held meeting at which a quorum is present, or by the unanimous written consent of the holders of all of the outstanding shares entitled to vote for the election of directors. SIX: Except as set forth in Section 603(d) of the California Law, no action --- required to be taken or which may be taken at any annual or special meeting of shareholders of the corporation may be taken by written consent of shareholders, unless a consent or consents in writing, setting forth the 2 action so taken, is or are signed by the holders of at least two-thirds of the outstanding shares of the capital stock of the corporation entitled to vote thereon. SEVEN: The liability of the directors of this corporation for monetary ----- damages shall be eliminated to the fullest extent permissible under California law. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Law) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Law, subject only to the applicable limits set forth in Section 204 of the California Law with respect to actions for breach of duty to the corporation and its shareholders. This corporation is authorized to purchase and maintain insurance on behalf of its agents against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such from a company, the shares of which are owned in whole or in part by this corporation, provided that any policy issued by such company is limited to the extent required by applicable law. Any repeal or modification of the foregoing provisions of this Article SEVEN by the shareholders of this corporation shall not adversely affect any right or protection of an agent of this corporation existing at the time of that repeal or modification. IN WITNESS WHEREOF, the undersigned Incorporator has executed the foregoing Articles of Incorporation on April 8, 1998. /s/ Kevin F. Donnelly __________________________________ Kevin F. Donnelly, Incorporator 3 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION Lawrence J. Grill certifies that: 1. He is the President and Secretary, respectively, of UNITED PANAM FINANCIAL CORP., a California corporation. 2. Paragraph (a) A. of Article FIVE of the articles of incorporation of this corporation is amended to read as follows: "A. Any amendment to or the elimination of Articles FIVE, SIX, SEVEN, ---- --- ----- or EIGHT of these Articles of Incorporation." ----- 3. Article EIGHT is added to the articles of incorporation of this corporation to read as follows: "EIGHT A. This Article EIGHT shall become effective only when ----- this corporation becomes a listed corporation within the meaning of Section 301.5 of the California Law, which section provides that a listed corporation means a corporation with outstanding shares listed on the New York Stock Exchange or the American Stock Exchange, or a corporation with outstanding securities designated as qualified for trading as a national market system security on the National Association of Securities Dealers Automatic Quotation System (or any successor national market system) if the corporation has at least 800 holders of its equity securities as of the record date of the corporation's most recent annual meeting of shareholders. B. Upon the effectiveness of this Article EIGHT, the Board of Directors shall be classified into two classes, as nearly equal in numbers as the then total number of directors constituting the entire Board of Directors permits, the members of each class to serve for a term of two years. If the number of directors is not divisible by two, the extra director shall be assigned to the first class of directors. C. Upon the effectiveness of this Article EIGHT, the election of directors by the shareholders shall not be by cumulative voting. At each election of directors, each shareholder entitled to vote may vote all the shares held by that shareholder for each of several nominees for director up to the number of directors to be elected. The shareholder may not cast more votes for any single nominee than the number of shares held by the shareholder. 4 D. At the first annual meeting of shareholders held after the effectiveness of this Article EIGHT, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting of shareholders and directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting of shareholders. At each subsequent annual meeting of shareholders, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the second succeeding annual meeting of shareholders. E. If at any time this corporation ceases to be a listed corporation as defined in Section 301.5 of the California Law, at each succeeding annual meeting of shareholders where the existing term of a class of directors is expiring, the directors of each such class shall then be elected for a term expiring in one year until all directors are elected for one year terms. The election of all directors at the annual meeting of shareholders for a term of one year shall continue until the corporation once again qualifies as a listed corporation within the meaning of Section 301.5 of the California Law, and the foregoing provisions of this Article EIGHT shall be reinstated. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the Board of Directors. 5. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation is 100. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. DATE: April 14, 1998. /s/ Lawrence J. Grill _______________________________________ Lawrence J. Grill, President and Secretary 5 EX-3.2.2 3 BYLAWS OF THE REGISTRANT EXHIBIT 3.2.2 BYLAWS OF UNITED PANAM FINANCIAL CORP., a California corporation ARTICLE I OFFICES Section 1.1 PRINCIPAL EXECUTIVE OFFICE. The principal executive -------------------------- office of the corporation is hereby fixed and located at 1300 South El Camino Real, San Mateo, California 94402. The Board of Directors is hereby granted full power and authority to change said principal executive office from one location to another. Section 1.2 OTHER OFFICES. Other business offices may at any time be ------------- established by the Board of Directors at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.1 PLACE OF MEETINGS. All meetings of shareholders shall be ----------------- held at the principal executive office of the corporation or at any other place within or outside the State of California as may be designated by the Board of Directors. Section 2.2 ANNUAL MEETINGS. --------------- (a) Time and Place. The annual meeting of shareholders shall be held -------------- each year on a date and at a time designated by the Board of Directors. The date so designated for the initial meeting shall be within fifteen (15) months after the organization of the corporation, and the date so designated for each subsequent meeting shall be within fifteen (15) months after the last annual meeting. (b) Business to be Transacted. At the annual meetings, directors ------------------------- shall be elected, reports of the affairs of the corporation shall be considered, and any other business may be transacted which is within the powers of the shareholders. (c) Notice, Means. Written notice of each annual meeting shall be ------------- given to each shareholder entitled to vote, either personally or by mail or other means of written 1 communication, charges prepaid, addressed to such shareholder at his address appearing on the books of the corporation or given by him to the corporation for the purpose of notice. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. If a shareholder gives no address, notice shall be deemed to have been given him if sent by mail or other means of written communication addressed to the place where the principal executive office of the corporation is situated, or if published at least once in some newspaper of general circulation in the county in which said principal executive office is located. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the Secretary, any Assistant Secretary or any transfer agent of the corporation giving the notice, and shall be filed and maintained in the minute book of the corporation. Such affidavit shall be prima facie evidence of the giving of such notice. (d) Notice, Time and Content. All such notices shall be given to each ------------------------ shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each annual meeting. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. Such notices shall specify: (i) the place, the date, and the hour of such meeting; (ii) those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders; (iii) if directors are to be elected, the names of nominees intended at the time of the notice to be presented by management for election; (iv) the general nature of a proposal, if any, to take action with respect to approval of, (a) a contract or other transaction with an interested director, (b) amendment of the articles of incorporation, (c) a reorganization of the corporation as defined in Section 181 of the General Corporation Law of California, (d) voluntary dissolution of the corporation, or (e) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and, (v) such other matters, if any, as may be expressly required by statute. 2 Section 2.3 SPECIAL MEETINGS. ---------------- (a) Calling of. Special meetings of the shareholders, for the purpose ---------- of taking any action permitted by the shareholders under the General Corporation Law of California and the Articles of Incorporation of this corporation, may be called at any time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or by one or more shareholders holding not less than ten percent (10%) of the votes at the meeting. A shareholder entitled to call a special meeting of shareholders for any proper purpose shall submit a request therefor in writing either personally or by first class mail, postage prepaid, or other means of written communication to the Chairman of the Board, the Chief Executive Officer, any Vice President or the Secretary. (b) Time and Notice of. Upon receipt of such request, the corporation ------------------ forthwith shall cause notice to be given to shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, which time shall be not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. If such notice is not given within twenty (20) days after receipt of such request, the persons calling for the meeting may give notice thereof in the manner provided by these Bylaws. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner as for annual meetings of shareholders. In addition to the matters required by items (i) and, if applicable (iii) of Section 2.2(d), notice of any special meeting shall specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Section 2.4 QUORUM. A majority of the shares entitled to vote, ------ represented in person or by proxy, shall constitute a quorum for the transaction of business at a meeting of share holders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 2.5 ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' ------------------------------------ meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat. When any meeting of shareholders is adjourned to another time or place, written notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty- five (45) days in which case the Board of Directors shall set a new record date. For any adjourned meeting requiring notice, such notice shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.2 and 2.3. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 3 Section 2.6 VOTING. ------ (a) Record Date. Unless a record date for voting purposes be fixed as ----------- provided in Section 5.1 of Article V of these Bylaws then, subject to the provisions of Sections 702 and 704 of the General Corporation Law of California (relating to voting of shares held by a fiduciary, in the name of a corporation, or in joint ownership), only persons in whose names shares entitled to vote standing on the stock records of the corporation at the close of business on the business day next preceding the day on which notice of the meeting is given or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held, shall be entitled to vote at such meeting, and such day shall be the record date for such meeting. (b) Ballot. The shareholders' vote may be oral or by ballot; ------ provided, however, all elections for directors must be by ballot if demand for election by ballot is made by a shareholder at the meeting and before the voting begins. If a quorum is present, except with respect to election of directors, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the General Corporation Law of California or the Articles of Incorporation or Bylaws of the corporation. (c) Voting. Except as otherwise provided in the Articles of ------ Incorporation or as set forth in this paragraph (c), each outstanding share of the capital stock of the corporation, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. Except as otherwise provided in Article EIGHT of the Articles of Incorporation and Article III, Section 3.4, below, at any election of directors, every shareholder complying with this paragraph (c) and entitled to vote may cumulate his or her votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or distribute the shareholder's votes on the same principal among as many candidates as the shareholder thinks fit. No shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number ---- of votes greater than the number of the shareholder's shares) unless the candidates' names have been properly placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 2.7 VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. ----------------------------------- ---------------- The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice or consent need not specify either 4 the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in Section 2.2(d)(iv) of Article II, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the General Corporation Law of California to be included in the notice but not so included, if such objection is expressly made at the meeting. Section 2.8 ACTION WITHOUT MEETING. ---------------------- (a) Action by Written Consent and Notice Thereof. Any action which -------------------------------------------- may be taken at any annual or special meeting of shareholders, including the election of directors, may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, is signed by the holders of at least two-thirds of the outstanding shares entitled to vote on that action. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consents of all shareholders have not been obtained, notice shall be given as provided herein. (i) Notice shall be given of any proposed shareholder approval of, (a) a contract or other transaction with an interested director, (b) indemnification of an agent of the corporation as authorized by Section 3.16 of Article III of these Bylaws, (c) a reorganization of the corporation as defined in Section 181 of the General Corporation Law of California, or (d) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any. The notice referred to herein shall be given at least ten (10) days before the consummation of the action authorized by such approval. (ii) Prompt notice of the taking of any other corporate action shall be given to those shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner and shall be deemed to have been given as provided in Section 2.2 of Article II of these Bylaws. (b) Election to Fill Vacancy. In the case of an election to fill a ------------------------ vacancy on the Board of Directors which vacancy (1) was not created by removal or (2) has not been filled by the Board of Directors in accordance with Section 3.5(b) of Article III of these Bylaws, a director may be elected to fill such vacancy by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. An election by the written consent of the shareholders to fill a vacancy created by removal may be made only by the unanimous written consent of the holders of all outstanding shares entitled to vote for the election of directors. 5 (c) Filing of Consents; Record Date. All written consents of the ------------------------------- shareholders shall be filed with the Secretary of the corporation. Unless, as provided in Sec tion 5.1 of Article V of these Bylaws, the Board of Directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be the day on which the first written consent is given. (d) Revocation of Consent. Any shareholder giving a written consent, --------------------- or the shareholder's proxyholders, or a transferee of the shares of a personal representative of the shareholder or his respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation shall be effective upon its receipt by the Secretary of the corporation. Any action by the shareholders with respect to any amendment to or the elimination of this Article II, Section 2.8, shall require approval by the holders of two-thirds of the outstanding shares of the corporation. Section 2.9 PROXIES. Every person entitled to vote or execute ------- consents shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by such person or his duly authorized agent and filed with the Secretary of the corporation. Any proxy duly executed is not revoked and continues in full force and effect until (i) an instrument revoking it or a duly executed proxy bearing a later date is filed with the Secretary of the corporation prior to the vote pursuant thereto, (ii) the person executing the proxy attends the meeting and votes in person, or (iii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before said proxy is voted and counted. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. Unless otherwise provided in the proxy, no proxy shall be valid after the expiration of eleven (11) months from the date of such proxy. Section 2.10 INSPECTORS OF ELECTION. ---------------------- (a) Appointment and Number. In advance of any meeting of ---------------------- shareholders, the Board of Directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, or if any person so appointed fails to appear or refuses to act, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) or three (3) inspectors are to be appointed. (b) Duties. The duties of such inspectors shall be as prescribed by ------ Section 707 of the General Corporation Law of California and shall include: determining the 6 number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three (3) inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. Section 2.11 NOMINATIONS FOR DIRECTOR; SHAREHOLDER PROPOSALS. ----------------------------------------------- (a) Nomination of Directors. Nominations for election of members of ----------------------- the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of voting stock of the corporation entitled to vote for the election of directors in accordance with this Section 2.11. (b) Other Proposals. Any shareholder of the corporation entitled to --------------- vote at any annual or special meeting of shareholders may make nominations for the election of directors and other proposals for inclusion on the agenda of any such meeting provided such shareholder complies with the timely notice provisions set forth in this Section 2.11 (as well as any additional requirements under any applicable law or regulation). (c) Timely Notice by Shareholders. A shareholder's notice shall be ----------------------------- delivered to or mailed and received at the principal executive offices of the corporation (i) in the case of any special meeting and of the first annual meeting held after the effective date of these Bylaws, not less than thirty (30) days nor more than sixty (60) days prior to the meeting date specified in the notice of such meeting; provided, however, that if less than forty (40) days' -------- notice or prior public disclosure of the date of such meeting is given or made to shareholders, notice by shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of such meeting was mailed or such public disclosure was made, and (ii) in the case of any subsequent annual meeting, not less than one hundred twenty (120) days prior to the day and month on which, in the immediately preceding year, the corporation's proxy statement was released to shareholders or if the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, no later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed. Such shareholder's notice shall set forth (A) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person and (ii) the principal occupation or employment of such person and the class and number of shares of the corporation which are beneficially owned by such person that are required to be disclosed in solicitations of the proxies with respect to nominees for election 7 as directors, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a directors, if elected); (B) as to each action item required to be included on the agenda, a description, in sufficient detail, of the purpose and effect of the proposal to the extent necessary to properly inform all shareholders entitled to vote thereon prior to any such vote; and (C) as to the shareholder giving the notice, (i) the name and address, as they appear on the corporation's books, of such shareholder and the class and (ii) number of shares of the corporation which are beneficially owned by such shareholder. (d) Failure to Provide Timely Notice, Etc. No person nominated by a -------------------------------------- shareholder shall be elected as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.11. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination or other proposal by a shareholder was not properly brought before the meeting, and, if the chairman shall so determine, he shall so declare to the meeting and such nomination or other proposal shall be disregarded. ARTICLE III DIRECTORS Section 3.1 POWERS. Subject to any limitations of the Articles of ------ Incorporation and of these Bylaws and of the General Corporation Law of California requiring shareholder authorization or approval for a particular action, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person, provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exer cised, under the ultimate direction of the Board of Directors. Section 3.2 COMMITTEES. By resolution adopted by a majority of the ---------- authorized number of directors, the Board of Directors may designate an executive and other committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board of Directors. The provisions of this Article apply to committees of the Board of Directors and action by such committees, with such changes in the language of those provisions as are necessary to substitute the committee and its members for the Board of Directors and its members. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee shall be made by the vote of a majority of the authorized number of directors. Unless the Board of Directors shall otherwise prescribe the manner of proceedings of any such committee, meetings of such committee may be regularly scheduled in advance and may be called at any time by any two (2) members thereof; otherwise, the provisions of these Bylaws with respect to notice and conduct of meetings of the Board of Directors shall govern. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have all of the authority of the Board of Directors, except with respect to: 8 (i) the approval of any action for which the General Corporation Law of California or the Articles of Incorporation also require shareholder approval; (ii) the filling of vacancies on the Board of Directors or in any committee; (iii) the fixing of compensation of the directors for serving on the Board of Directors or on any committee; (iv) amendment or repeal of these Bylaws or the adoption of new bylaws; (v) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (vi) any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; and (vii) the appointment of other committees of the Board of Directors or the members thereof. Section 3.3 NUMBER OF DIRECTORS. ------------------- (a) The authorized number of directors shall be not less than five (5) nor more than nine (9). The exact number of directors shall be fixed from time to time, within the limits specified in this subsection, by an amendment of subsection (b) of this section adopted by the Board of Directors. (b) The exact number of directors shall be six (6) until changed as provided in subsection (a) of this section. (c) The maximum or minimum authorized number of directors may only be changed by an amendment of this section approved by the vote or written consent of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the minimum number to a number less than five (5) shall not be adopted if the votes cast against its adoption at a meeting (or the shares not consenting in the case of action by written consent) exceed 16-2/3% of such outstanding shares; and provided further, that in no case shall the stated maximum authorized number of directors exceed two times the stated minimum number of authorized directors minus one. Section 3.4 ELECTION AND TERM OF OFFICE. --------------------------- (a) Except as expressly set forth in this Section 3.4, (i) the directors shall be elected at each annual meeting of shareholders but, if any such annual meeting is not held 9 or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose and (ii) each director, including a director elected to fill a vacancy, shall hold office until the next annual meeting of the shareholders and until his successor is elected and qualified. (b) Upon the effectiveness of Article EIGHT of the corporation's Articles of Incorporation, the Board of Directors shall be classified into two classes as nearly equal in numbers as the then total number of directors constituting the entire Board of Directors permits, the members of each class to serve for a term of two years. If the number of directors is not divisible by two, the extra director shall be assigned to the first class of directors. (c) Upon the effectiveness of Article EIGHT of the Articles of Incorporation, the election of directors by the shareholders shall not be by cumulative voting. At each election of directors, each shareholder entitled to vote may vote all the shares held by that shareholder for each of several nominees for director up to the number of directors to be elected. The shareholder may not cast more votes for any single nominee than the number of shares held by that shareholder. (d) At the first annual meeting of shareholders held after the effectiveness of Article EIGHT of the Articles of Incorporation, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting of shareholders and directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting of shareholders. At each subsequent annual meeting of shareholders, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the second succeeding annual meeting of shareholders. (e) If at any time the corporation ceases to be a listed corporation as defined in Section 301.5 of the General Corporation Law of California, at each succeeding annual meeting of shareholders where the existing term of a class of directors is expiring, the directors of each such class shall then be elected for a term expiring in one year until all directors are elected for one year terms. The election of all directors at the annual meeting of shareholders for a term of one year shall continue until the corporation once again qualifies as a listed corporation within the meaning of Section 301.5 of the General Corporation Law of California, and the foregoing provisions of Article EIGHT of the Articles of Incorporation can be reinstated. (f) Any action by the shareholders with respect to any amendment to or the elimination of all or any part of this Article III, Section 3.4, shall require approval by the holders of at least two-thirds of the outstanding shares of the corporation. 10 Section 3.5 VACANCIES. --------- (a) When a Vacancy Exists. A vacancy in the Board of Directors exists --------------------- whenever any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number of directors or otherwise. (b) Filling of Vacancies by Directors. Vacancies in the Board of --------------------------------- Directors, except for a vacancy created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of shareholders. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board of Directors (or the shareholders) may elect a successor to take office when the resignation becomes effective. (c) Filling of Vacancies by Shareholders. The shareholders may elect ------------------------------------ a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Except for an election to fill a vacancy created by the removal of a director, any such election by written consent shall require the consent of holders of a majority of the outstanding shares entitled to vote for the election of directors. A vacancy in the Board of Directors created by the removal of a director may only be filled by the vote of a majority of the shares entitled to vote for the election of directors represented at a duly held meeting at which a quorum is present, or by the unanimous written consent of the holders of all of the outstanding shares entitled to vote for the election of directors. (d) Removal for Cause. The Board of Directors may declare vacant the ----------------- office of a director who has been declared of unsound mind by an order of court or convicted of a felony. (e) Removal without Cause. Any or all of the directors may be removed --------------------- without cause if such removal is approved by a majority of the outstanding shares entitled to vote; provided, however, that no director may be removed (unless the entire Board of Directors is removed) whenever the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of his most recent election were then being elected. (f) Resignation. Any director may resign effective upon giving ----------- written notice to the Chairman of the Board, the Chief Executive Officer, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. 11 (g) When Reduction in Number Effective. No reduction of the ---------------------------------- authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office. Any action by the shareholders with respect to any amendment to or the elimination of this Article III, Section 3.5 shall require approval by the holders of at least two-thirds of the outstanding shares of the corporation. Section 3.6 PLACE OF MEETING. Regular meetings of the Board of ---------------- Directors shall be held at any place within or without the State of California which has been designated from time to time by resolution of the Board of Directors. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the Board of Directors may be held either at a place so designated or at the principal executive office. Section 3.7 ORGANIZATION MEETING. Immediately following each annual -------------------- meeting of shareholders the Board of Directors shall hold a regular meeting at the place of said annual meeting or at such other place as shall be fixed by the Board of Directors, for the purpose of organization, election of officers, and the transaction of other business. Call and notice of such meetings are hereby dispensed with. Section 3.8 OTHER REGULAR MEETINGS. Other regular meetings of the ---------------------- Board of Directors shall be held at such day and hour as shall be fixed from time to time by the Board of Directors by resolution or in the Bylaws. If such day falls upon a legal holiday, then said meeting shall be held at the same time on the next day thereafter ensuing which is a full business day. Notice of all such regular meetings of the Board of Directors is hereby dispensed with. Section 3.9 SPECIAL MEETINGS. Special meetings of the Board of ---------------- Directors for any purpose or purposes shall be called at any time by the Chairman of the Board, the Chief Executive Officer, any Vice President, the Secretary or by any two directors. Written notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director by telephone, or by telegraph or mail or facsimile transmission, charges prepaid, addressed to him at his address as it is shown upon the records of the corporation or, if it is not so shown on such records or if not readily ascertainable, at the place at which the meetings of the directors are regularly held. In case such notice is mailed or telegraphed, it shall be deposited in the United States mail or delivered to the telegraph company in the place in which the principal executive offices of the corporation are located at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered, personally or by telephone, as above provided, it shall be so delivered at least forty-eight (48) hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to such director. Any notice shall state the date, place and hour of the meeting. 12 Section 3.10 ACTION WITHOUT MEETING. Any action by the Board of ---------------------- Directors may be taken without a meeting if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors and shall have the same force and effect as a unanimous vote of such directors. Section 3.11 ACTION AT A MEETING; QUORUM AND REQUIRED VOTE. Presence --------------------------------------------- of a majority of the authorized number of directors at a meeting of the Board of Directors constitutes a quorum for the transaction of business. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting as permitted in the preceding sentence constitutes presence in person at such meeting. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, unless a greater number, or the same number after disqualifying one or more directors from voting, is required by law, by the Articles of Incorporation, or by these Bylaws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of a director, provided that any action taken is approved by at least a majority of the required quorum for such meeting. Section 3.12 VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. -------------------------------- ------------------- The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present and if, either before or after the meeting, each of the directors who was not present signs a written waiver of notice or a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 3.13 WAIVER OF NOTICE BY ATTENDANCE. Attendance of a ------------------------------ director at any meeting shall constitute a waiver of notice of such meeting, unless a director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called, noticed, or convened. Section 3.14 ADJOURNMENT. A majority of the directors present, ----------- whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, written notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 3.15 FEES AND COMPENSATION. Directors and members of --------------------- committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors. No such payments shall preclude any director from serving the corporation in any other capacity and receiving compensation in any manner therefor. 13 Section 3.16 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND ------------------------------------------------------ OTHER AGENTS. - ------------ (a) The corporation shall, to the maximum extent and in the manner permitted by the California Corporations Code ("Code"), indemnify each of its directors against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 3.16, a "director" of the corporation includes any person (i) who is or was a director of the corporation, (ii) who is or was serving at the request of the corporation as a director of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (b) The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its officers, employees and agents against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an officer, employee or agent of the corporation. For purposes of this Section 3.16, an "officer," "employee" or "agent" of the corporation includes any person (i) who is or was an officer, employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an officer, employee or agent of the corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (c) Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 3.16(a) shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Section 3.16. Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is permitted pursuant to Section 3.16(b) may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Section 3.16. (d) The indemnification provided by this Section 3.16 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. 14 (e) The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 3.16. (f) No indemnification or advance shall be made under this Section 3.16, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these Bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. Section 3.17 TRANSACTIONS BETWEEN CORPORATIONS AND DIRECTORS. ----------------------------------------------- (a) No contract or other transaction between the corporation and one or more of its directors, or between the corporation and any corporation, firm or association in which one or more of its directors has a material financial interest, is either void or voidable because such director or directors or such other corporation, firm or association are parties or because such director or directors are present at the meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies the contract or transaction, if: (1) the material facts as to the transaction and as to such director's interest are fully disclosed or known to the shareholders and such contract or transaction is approved in good faith by the affirmative vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of shareholders, with the shares owned by the interested director or directors not being entitled to vote thereon; (2) the material facts as to the transaction and as to such director's interest are fully disclosed or known to the Board of Directors or committee, and the Board of Directors or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified; or 15 (3) as to contracts or transactions not approved as provided in paragraph (1) or (2) of this subdivision, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified. (b) No contract or other transaction between a corporation and any corporation or association of which one or more of its directors are directors is either void or voidable because such director or directors are present at the meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies the contract or transaction, if: (1) The material facts as to the transaction and as to such director's other directorship are fully disclosed or known to the Board of Directors or committee, and the Board of Directors or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the common director or directors or the contract or transaction is approved by the shareholders (Section 153) of the General Corpo ration Law of California in good faith; or (2) As to contracts or other transactions not approved as provided in paragraph (1) of this subdivision, the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified. This subsection (b) does not apply to contracts or transactions covered by subsection (a). (c) A mere common directorship does not constitute a material financial interest within the meaning of subsection (a) of this Section 3.17. A director is not interested within the meaning of subsection (a) of this Section 3.17 in a resolution fixing the compensation of another director as a director, officer or employee of the corporation, notwithstanding the fact that the first director is also receiving compensation from the corporation. (d) Interested or common directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies a contract or transaction. ARTICLE IV OFFICERS Section 4.1 OFFICERS. The officers of the corporation shall be a -------- Chief Executive Officer, a Secretary and a Chief Financial Officer. The corporation may also have, at the discre tion of the Board of Directors, a Chairman of the Board, a President, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers and such other officers as may be appointed in accordance with the provisions of Section 4.3 of this article. Any number of offices may be held by the same person. 16 Section 4.2 ELECTION. The officers of the corporation, except such -------- officers as may be appointed in accordance with the provisions of Section 4.3 or Section 4.5 of this article, shall be chosen annually by the Board of Directors, and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 4.3 SUBORDINATE OFFICERS, ETC. The Board of Directors may -------------------------- appoint, and may empower the Chairman of the Board, if there be such an officer, or the Chief Executive Officer, to appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine by resolution. Any appointment of an officer shall be evidenced by a written instrument filed with the Secretary of the corporation and maintained with the corporate records. Section 4.4 REMOVAL AND RESIGNATION. Subject, in each case, to the ----------------------- rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors at any regular or special meeting thereof, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Board of Directors or to the Chairman of the Board or to the Chief Executive Officer or to the Secretary of the corporation, without prejudice, however, to the rights, if any, of the corporation under any contract to which such officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.5 VACANCIES. A vacancy in any office because of death, --------- resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws. Section 4.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if --------------------- there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws. Section 4.7 CHIEF EXECUTIVE OFFICER. Subject to such supervisory ----------------------- powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the Chief Executive Officer shall be the Chief Executive Officer and chief operating officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the officers and business of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the offices of the Chief Executive Officer and chief operating 17 officer of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. Section 4.8 VICE PRESIDENT. In the absence or disability of the -------------- Chief Executive Officer, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the Chief Executive Officer, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Chief Executive Officer. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or these Bylaws, or as the Chief Executive Officer may from time to time delegate. Section 4.9 SECRETARY. --------- (a) Corporate Records. The Secretary shall keep or cause to be kept, ----------------- at the principal executive office and such other place as the Board of Directors may direct, the seal of the corporation, copies of the Articles of Incorporation and Bylaws of the corporation, a book of minutes of actions taken at all meetings of shareholders, the Board of Directors and committees of the Board of Directors with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. (b) Share Register. The Secretary shall keep, or cause to be kept, at -------------- the principal executive office or at the office of the corporation's transfer agent, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. (c) Other Duties. The Secretary shall give, or cause to be given, ------------ notice of all the meetings of the shareholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws. Section 4.10 CHIEF FINANCIAL OFFICER. ----------------------- (a) Books of Account. The Chief Financial Officer of the corporation ---------------- shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, and shall send or cause to be sent to the shareholders of the corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. The books of account shall at all reasonable times be open to inspection by any director. 18 (b) Other Duties. The Chief Financial Officer shall deposit all ------------ monies and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the Chief Executive Officer and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. ARTICLE V GENERAL CORPORATE MATTERS Section 5.1 RECORD DATE. ----------- (a) When Fixed by Board of Directors. The Board of Directors -------------------------------- may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of any meeting, nor more than sixty (60) days prior to any other event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to receive a dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or these Bylaws. (b) When Not Fixed by Board of Directors. In the event no record ------------------------------------ date is fixed by the Board of Directors: (1) The record date for determining the shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the date on which the Board of Directors adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. 19 Section 5.2 INSPECTION OF CORPORATE RECORDS. ------------------------------- (a) By Shareholders. The accounting books and records, the record of --------------- shareholders, and minutes of proceedings of the shareholders and the Board of Directors and committees of the Board of Directors of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. (b) By Directors. Every director shall have the absolute right at any ------------ reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 5.3 MAINTENANCE AND INSPECTION OF BYLAWS. The corporation ------------------------------------ shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the Secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the Bylaws as amended to date. Section 5.4 ANNUAL AND OTHER REPORTS. The Board of Directors of the ------------------------ corporation shall cause an annual report to be sent to the shareholders at least fifteen (15) days prior to the annual meeting of shareholders but not later than one hundred twenty (120) days after the close of the fiscal year in accordance with the provisions of the General Corporation Law of California. Section 5.5 CHECKS, DRAFTS, ETC. All checks, drafts or other orders -------------------- for payment of money, notes or other evidences of indebtedness, and any assignment or endorsement thereof, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 5.6 CONTRACTS, ETC., HOW EXECUTED. The Board of Directors, ----------------------------- except as in the Bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 5.7 CERTIFICATE FOR SHARES. Every holder of shares in the ---------------------- corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman of the Board or the Chief Executive Officer or a Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Section 5.8 LOST, STOLEN OR DESTROYED CERTIFICATES. No new -------------------------------------- certificates for shares shall be issued to replace an old certificate unless the latter is surrendered and canceled at the same time; provided, however, that the Board of Directors or the Chief Executive Officer and any Vice President may, however, in case any certificate for shares is lost, stolen, mutilated or destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions, including reasonable indemnification of the corporation, as the Board of Directors or the Chief Executive Officer or any Vice President shall determine. In the event of the issuance of a new certificate, the rights and liabilities of the corporation, and of the holders of the old and new certificates, shall be governed by the relevant provisions of the California Commercial Code. Section 5.9 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The ---------------------------------------------- Chairman of the Board, the Chief Executive Officer or any Vice President, or any other person authorized by resolution of the Board of Directors or by any of the foregoing designated officers, are authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by these officers. Section 5.10 CONSTRUCTION AND DEFINITIONS. Unless the context ---------------------------- otherwise requires, the general provisions, rules of construction and definitions contained in the General Corporation Law of California shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. 20 ARTICLE VI AMENDMENTS Section 6.1 POWER OF SHAREHOLDERS. New bylaws may be adopted or --------------------- these Bylaws may be amended or repealed by the affirmative vote or written consent of at least two-thirds of the outstanding shares entitled to vote thereon, except as otherwise provided by law or by the Articles of Incorporation. Section 6.2 POWER OF DIRECTORS. Subject to the right of shareholders ------------------ as provided in Section 6.1 of this Article VI to adopt, amend or repeal bylaws, bylaws may be adopted, amended or repealed by the Board of Directors; provided, however, that any alteration, amendment, supplement or repeal of the bylaws contained in Sections 2.3, 2.8, 2.11, 3.3, 6.1 or 6.2 shall require the affirmative vote of at least two-thirds of the outstanding shares of the capital stock of the corporation entitled to vote (including the affirmative vote of at least two-thirds of the outstanding shares of any class or series of capital stock of the corporation entitled to vote separately). 21 EX-4.1 4 FORM OF STOCK CERTIFICATE EXHIBIT 4.1 [Form of face] [Logo] COMMON STOCK United PanAm Financial Corp. COMMON STOCK NUMBER UPFC- SHARES INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 911301 10 9 THIS CERTIFIES THAT is the Owner of: FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE, OF United PanAm Financial Corp. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [signature image] Chairman [Seal image] [signature image] Secretary COUNTERSIGNED AND REGISTERED: U.S. STOCK TRANSFER CORPORATION TRANSFER AGENT AND REGISTRAR BY AUTHORIZED OFFICER [Form of back] The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with the right of survivorship and not as tenants in common UNIF GIFT MIN ACT________Custodian________ (Cust) (Minor) under Uniform Gifts to Minors Act_________ (State) UNIF TRF MIN ACT- ________ Custodian________ (until age_______) (Cust) __________under Uniform Transfers (Minors) to Minors Act________________ (State) Additional abbreviations may also be used though not in the above list. For Value Received, ______hereby sell, assign, and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE_____________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) Shares of Common Stock represented by the within Certificate and do hereby irrevocably constitute and appoint_____________Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated___________________________ SIGNATURE(S) GUARANTEED X________________________________ X________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. By_______________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbroker, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15. EX-5.1 5 OPINION OF MANATT, PHELPS & PHILLIPS, LLP [LETTERHEAD OF MANATT, PHELPS & PHILLIPS LLP] EXHIBIT 5.1 File No: 14988-030 April 22, 1998 United PanAm Financial Corp. 1300 South El Camino Real San Mateo, California 94402 RE: REGISTRATION STATEMENT ON FORM S-1 Gentlemen: We have acted as special counsel for United PanAm Financial Corp., a California corporation (the "Company"), in connection with the proposed underwritten public offering (the "Offering") by the Company of 6,325,000 shares (the "Shares") of the Company's Common Stock, of which 825,000 shares may be issued pursuant to an option granted to the underwriters to cover over- allotments, if any, pursuant to that certain proposed form of Underwriting Agreement (the "Underwriting Agreement") by and among the Company and NationsBanc Montgomery Securities LLC and Piper Jaffray Inc., the representatives of the several underwriters (the "Representatives"). In rendering the opinions contained herein, we have examined and relied upon the originals or copies, certified or otherwise identified to our satisfaction to be complete and accurate, of the following: 1. Articles of Incorporation of the Company, as amended to date; 2. Bylaws of the Company, as amended to date; 3. Registration Statement on Form S-1 (File No. 333-39941) of the Company and Amendments No. 1, 2, 3 and 4 thereto (collectively, the "Registration Statement"); 4. Records of proceedings of the Board of Directors and the shareholders of the Company pertaining to the issuance of the Shares; and 5. The proposed form of Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement. United PanAm Financial Corp. April 22, 1998 Page 2 With respect to the foregoing documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. In rendering the opinions expressed below, we have relied as to certain factual matters on certificates executed by officers of the Company. While we have no reason to believe that the officers executing such certificates did not have personal knowledge of the matters contained therein or did not accurately set out such knowledge in such certificates, we did not independently verify the matters set forth in such certificates. We also have obtained and relied on certificates and other communications from governmental authorities as to matters concerning the due incorporation, valid existence and good standing of the Company. Based upon the foregoing and subject to receipt of the following documents or satisfaction of the following conditions: (a) The order to be issued by the Securities and Exchange Commission declaring the Registration Statement to be effective; (b) As required, exemptive orders, permits, licenses or no action letters issued by the appropriate regulatory or governmental agencies in the states where the offer and sale of the Shares is to be made; (c) All other conditions and legal requirements necessary to consummate the transactions contemplated by the Underwriting Agreement; and (d) The due execution and delivery of the Underwriting Agreement; upon which our opinions are expressly conditioned, we are of the opinion that: 1. The Company has been duly incorporated and is validly existing under the laws of the State of California. 2. The issuance and sale of the Shares have been duly authorized and, when issued and delivered against payment therefor as provided in the Underwriting Agreement, will be validly issued by the Company, fully paid and nonassessable. We are members of the Bar of the State of California. This opinion is limited to the current laws of the State of California and the United States of America, to present judicial interpretations thereof and to facts as they presently exist. In rendering this opinion, we have no United PanAm Financial Corp. April 22, 1998 Page 3 obligations to revise or supplement it should the current laws of the State of California or United States of America be changed by legislative action, judicial decision or otherwise. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in the Prospectus constituting a part of the Registration Statement. Respectfully submitted, /s/ Manatt, Phelps & Phillips, LLP Manatt, Phelps & Phillips, LLP EX-10.10.1 6 STANDARD PURCHASE & ASSUMPTION TERMS & CONDITIONS EXHIBIT 10.10.1 [LOGO] STANDARD PURCHASE AND ASSUMPTION TERMS AND CONDITIONS THETA VERSION JULY 26, 1993 STANDARD PURCHASE AND ASSUMPTION TERMS AND CONDITIONS THESE STANDARD PURCHASE AND ASSUMPTION TERMS AND CONDITIONS (Theta Version July 26, 1993) are the standard terms and conditions under which the Resolution Trust Corporation, in its capacity as receiver of a failed savings association (in such capacity, the "Receiver") shall enter into a purchase and assumption transaction with a depository institution (the "Assuming Institution") that wishes to purchase and assume certain assets and liabilities of such failed savings association. Upon acceptance of the Assuming Institution's bid, the Receiver and the Assuming Institution shall enter into a Purchase and Assumption Agreement in substantially the form attached as Exhibit A, B or C hereto, as appropriate. Except as expressly set forth therein, such Purchase and Assumption Agreement shall incorporate by reference all of the terms and conditions set forth herein. ARTICLE I DEFINITIONS Certain Defined Terms. As used herein, the following capitalized --------------------- terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): 1.1 "Affiliate" shall have the meaning set forth (i) in Section 2(k) of --------- the Bank Holding Company Act of 1956, as amended, 12 U.S.C. Section 1841(k); or (ii) in subsection (a)(1)(H) of Section 10 of the HOLA, 12 U.S.C. Section1467a(a)(1)(H), whichever is applicable. 1.2 "Agreement" shall mean the Purchase and Assumption Agreement between --------- the Receiver and the Assuming Institution in substantially the form attached as Exhibit A, Exhibit B or Exhibit C hereto, as such Agreement may be amended or supplemented from time to time. 1.3 "Asset" shall have the meaning set forth in Section 9.1. ----- 1.4 "Association Closing" shall have the meaning set forth in the ------------------- Agreement. 1.5 "Book Value" shall mean the dollar amount of any asset or liability ---------- stated on the Books of the Failed Association as of Association Closing on an unconsolidated basis, after adjustment by the Receiver for any differences in accounts, suspense items, unposted debits and credits and other similar adjustments and corrections. With respect to any asset, "Book Value" shall be ---------- determined exclusive of any loss reserves, and shall be reduced by any unearned discount on add-on interest installment loans or loans in process, all as reflected on the Books of the Failed Association as of the Association Closing, but shall not otherwise be adjusted for unearned income. 1 1.6 "Book Value Purchase Price" shall mean (a) for any asset transferred ------------------------- at the Book Value Purchase Price under Section 3.1(h) (other than any Delinquent asset), the sum of (i) the Book Value thereof multiplied by the applicable percentage set forth in Schedule A, plus (ii) one hundred percent (100%) of the ---- accrued but unpaid interest thereon (at the rate borne by such asset) as of Association Closing; (b) for any Delinquent asset transferred at the Book Value Purchase Price under Section 3.1(h), the sum of the Book Value thereof plus all ---- accrued but unpaid interest thereon (at the rate borne by such asset) as of Association Closing multiplied by the applicable percentage set forth in Schedule A, and (c) for any other asset transferred at the Book Value Purchase Price, the sum of (i) the Book Value thereof, plus (ii) one hundred percent ---- (100%) of the accrued but unpaid interest thereon (at the rate borne by such asset) as of Association Closing. 1.7 "Books" shall mean, with respect to any Person, the general ledger of ----- such Person and any related subsidiary ledger. 1.8 "Brokered Deposit" shall mean a Deposit obtained, directly or ---------------- indirectly, by or through any Person acting as a Deposit Broker, as defined in Section 29(g) of the FCI Act, as amended, 12 U.S.C. 1831f(g). 1.9 "Business Day" shall mean a day on which the Assuming Institution is ------------ open for business and which is not a Saturday, Sunday or Federal holiday. 1.10 "Cash Collateralized Loan" shall mean any Loan which is fully secured ------------------------ by a pledge of one or more Deposits assumed by the Assuming Institution pursuant to Section 2.1. 1.11 "Corporation" shall mean the Resolution Trust Corporation in its ----------- corporate capacity. 1.12 "Cut-Off Date" shall mean (a) for any asset or asset portfolio put ------------ back to the Receiver pursuant to the Assuming Institution's putback rights under the Agreement, the date specified in the Assuming Institution's notice of its intent to put back such asset or asset portfolio, which shall be nor more than five (5) Business Days prior to the Option Exercise Date for such asset or asset portfolio, and (b) for any asset repurchased by the Receiver pursuant to its repurchase rights under the Agreement, the Option Exercise Date for such asset. 1.13 "Data Processing Equipment" shall mean the central computer system ------------------------- owned or leased by the Failed Association, if any, and all related hardware and software, and shall include all peripheral equipment related thereto, including, without limitation, remote terminals and networked personal computers. 1.14 "Dedicated Personnel" shall have the meaning set forth in Section ------------------- 9.3(a). 2 1.15 "Delinquent" shall mean (a) with respect to any Loan, a Loan whose ---------- outstanding principal or interest is sixty (60) days or more past due under the terms of the relevant loan agreement, and (b) with respect to any Other Loan Interest, any Other Loan Interest as to which, as of Association Closing, the aggregate principal balance of all loans in the related group or pool which are sixty (60) days or more past due under the terms of the relevant loan agreement exceeds ten percent (10%) of the aggregate principal balance of all loans in such group or pool; for purposes of this definition, one or more loans subject to the same participation agreement shall be deemed to be a "related group" of loans. 1.16 "Deposit" shall mean a deposit as defined in Section 3(l) of the FDI ------- Act, as amended, 12 U.S.C. Section 1813(l), including without limitation all uncollected items included in the depositors' balances and credited on the Books of the Failed Association. 1.17 "Derivative Mortgage Security" shall mean any other Loan Interest ---------------------------- which was created by dividing or reallocating the cash flows from a pool of mortgage loans into various parts and which is part of a series of instruments related to such pool, at least one of which has performance characteristics substantially different from the underlying mortgage loans, including, by way of example but without limitation, Interest Only securities ("IOs"), Principal Only securities ("POs"), sequential tranches, residuals and other like instruments. 1.18 "Disqualifying Event" shall mean, with respect to any Loan or Other ------------------- Loan Interest, any of the following actions taken by the Assuming Institution without the written consent of the Receiver with respect to such Loan or Other Loan Interest: (i) Any advance of funds or credit (including additional indebtedness drawn as part of a line of credit or created by means of an overdraft) to any borrower or other obligor on such Loan or Other Loan Interest, and any commitment to advance any funds or credit to any such borrower or other obligor; or (ii) Any modification, extension, forgiveness, or other material change in the terms and conditions of such Loan or Other Loan Interest, including, but not limited to, any change in the term, interest rate, or method of computation of interest (other than interest adjustments required under the Loan or Other Loan Interest terms); or (iii) Any release of collateral (other than a release of collateral made in connection with the substitution of new collateral of equivalent value or a release of collateral in connection with a reduction by cash payment in the outstanding principal balance of a Loan or Other Loan Interest, provided that after such release such balance is fully -------- secured by a valid first Lien), foreclosure or other change 3 in the collateral position which the Failed Association held at Association Closing with respect to such Loan or Other Loan Interest; provided, however, that the term "Disqualifying Event" shall not include: - -------- ------- (a) Any advance of funds or credit with respect to any Loan if such advance (i) is made in accordance with prudent banking standards and practices, and (ii) is used to remove a prior Lien on any collateral securing such Loan or Other Loan Interest for taxes due but not yet paid, or for the payment of premiums on insurance obtained in respect of any such collateral, including, without limitation, title insurance, public liability insurance, and fire insurance; or (b) Any advance of funds or credit with respect to any Loan or Other Loan Interest identified on Schedule A as a Loan or Other Loan Interest as to which further advances are permissible if such advance (i) is made in accordance with prudent banking standards and practices, and (ii) together with all other advances made by the Assuming Institution in respect of such Loan or Other Loan Interest, does not exceed the unfunded portion (as of Association Closing) of any commitment of the Failed Association to provide additional funding to or on behalf of the borrower (which unfunded commitment is not assumed by the Assuming Institution under the Agreement). 1.19 "FDI Act" shall mean the Federal Deposit Insurance Act, as amended, 12 ------- U.S.C. Section 1811 et seq. -- --- 1.20 "FHLMC" shall mean the Federal Home Loan Mortgage Corporation. ----- 1.21 "FNMA" shall mean the Federal National Mortgage Association. ---- 1.22 "Failed Association" shall mean the failed savings association more ------------------ specifically described in the Agreement. 1.23 "Final Pro Forma Adjustment Settlement Date" shall mean the first ------------------------------------------ Business Day following the expiration of one hundred eighty (180) calendar days after Association Closing, subject to extension by written agreement of the Parties. 1.24 "First Mortgage Loan" shall mean any Loan secured by a mortgage, deed ------------------- of trust or similar instrument creating a First Lien on real property containing from one to four family residential units; as used herein, "First Lien" shall mean a Lien which has priority over any other Lien on the real property covered thereby, other than (a) Liens for real estate taxes and special a 4 ssessments not yet due and payable, (b) covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording such mortgage, deed of trust, or similar instrument, such exceptions appearing of record being acceptable to mortgage lending institutions generally or specifically reflected in the appraisal made in connection with the origination of the Loan, and (c) other matters to which like properties are commonly subject which do not, individually or in the aggregate, materially interfere with the benefits of the security intended to be provided by such mortgage, deed of trust, or similar instrument. 1.25 "Fixtures" shall mean those improvements, additions, alterations and -------- installations constituting a part of the Owned Association Premises which were acquired, added, built, installed or purchased at the expense of the Failed Association, regardless of the holder of legal title thereto as of Association Closing. 1.26 "Furniture and Equipment" shall mean furniture and equipment that is ----------------------- owned or leased by the Failed Association as of Association Closing, and shall include, without limitation, furniture, office machinery, automated teller machines, shelving, office supplies and artwork; provided, that "Furniture and -------- Equipment" shall not include (a) any Data Processing Equipment, or (b) any repossessed assets. 1.27 "GNMA" shall mean the Government National Mortgage Association. ---- 1.28 "Government-Backed Mortgage Security" shall mean any Other Loan ----------------------------------- Interest which represents an interest in or is secured by a pool of one or more mortgage loans or interests therein and which is issued or guaranteed by the United States government or by any Person controlled or supervised by, and acting as an instrumentality of, the United States government pursuant to authority granted by the Congress of the United States, including, without limitation, FNMA, GNMA and FHLMC. 1.29 "hereof," herein," "hereto," "hereunder and the like shall mean and ------ ------ ------ --------- refer to the Agreement as a whole (including these Standard Terms, incorporated in the Agreement by reference), and not merely to the specific section, paragraph or clause in which the respective word appears. 1.30 "HOLA" shall mean the Home Owners' Loan Act, as amended, 12 U.S.C. ---- 1461 et seq. -- --- 1.31 "Holding Company" shall mean any Person that is subject to the Bank --------------- Holding Company Act of 1956, as amended, or Section 10 of the HOLA, as the case may be, as a result of its ownership or control of all or any portion of the outstanding capital stock of the Assuming Institution. 5 1.32 "Indemnity Agreement" shall mean the Indemnity Agreement of even date ------------------- with the Agreement by and between the Corporation and the Assuming Institution, entered into in connection with the Agreement. [Note: The following section shall be included in the Agreement if the Assuming Institution is acquiring only the Insured Deposits of the Failed Association (rather than all Deposits). The Agreement will specify if this section is excluded.] [1.33 "Insured Deposit" shall mean any Deposit which is an insured deposit --------------- as that term is defined in Section 3(m)(1) of the FDI Act, 12 U.S.C. Section 1813(m)(l), and related regulations, 12 C.F.R. Part 330, and as determined in the sole discretion of the Corporation. In the event that a depositor's Deposits with the Failed Association are in excess of the amount insured pursuant to 12 U.S.C. 1813(m)(l), for purposes of determining which Deposits transfer under Section 2.1(a), Deposits shall be ranked, as to each depositor, in order of priority from Deposit accounts of the Failed Association which pay the least interest to Deposit accounts of the Failed Association which pay the highest interest, until the aggregate of all such accounts with respect to each such depositor equals the amount of each such depositor's Insured Deposit.] 1.34 "Interim Adjustment Settlement Dates" shall mean the interim ----------------------------------- adjustment settlement dates designated by the Receiver; provided, that the -------- Interim Adjustment Settlement Dates shall occur at least monthly commencing in the first full calendar month after Association Closing and ending in the last such month prior to the Final Pro Forma Adjustment Settlement Date; and provided, further, that the Receiver shall notify the Assuming Institution in - -------- ------- writing within five (5) Business Days of Association Closing of each designated Interim Adjustment Settlement Date. 1.35 "Investment Grade Security" shall mean any obligation of the United ------------------------- States or any agency of the United States; or any publicly traded debt security which is rated in one of the four highest rating categories established by Moody's Investors Service or Standard & Poor's Corporation; or any commercial paper rated in one of the three highest rating categories established by Moody's Investors Service or Standard & Poor's Corporation for commercial paper; provided, that "Investment Grade Security" shall not include any Government- - -------- Backed Mortgage Security. 1.36 "Leased Association Premises" shall mean the banking houses, drive-in --------------------------- banking facilities, teller facilities, and administrative offices, together with appurtenant parking, storage and service facilities, if any, leased by the Failed Association as of Association Closing; provided, however, that "Leased -------- ------- Association Premises" shall not include (a) any land leased under a ground lease underlying any Owned Association Premises, (b) any Furniture and Equipment, or (c) any Data Processing Equipment. 1.37 "Leasehold Improvements" shall mean those improvements, additions, ---------------------- alterations and installations constituting any part of the Leased Association Premises which were acquired, 6 added, built, installed, leased or purchased at the expense of the Failed Association, regardless of the holder of legal title thereto as of Association Closing. 1.38 "Lender Of Record" shall mean, with respect to any loan, the Person ---------------- identified as the lender under the original documentation for such loan; provided, that if any Person has acquired, by assignment, endorsement or - -------- otherwise, all of the original lender's right, title and interest in and to such loan "Lender Of Record" shall mean the last such Person to acquire such right, title and interest. 1.39 "Liability" shall have the meaning set forth in Section 9.1. --------- 1.40 "Lien" shall mean, with respect to any asset of any Person, any ---- mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, charge, encumbrance, lien (statutory or other), priority or other security agreement or preferential arrangement of any kind or nature whatsoever with respect to such asset (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction. 1.41 "Loans" shall mean all loans, advances and other extensions of credit ----- as to which the Failed Association is the Lender Of Record and which are reflected on the Books and Records of the Failed Association as of Association Closing, including, without limitation, any such loans which were purchased, remaining interests in such loans sold, overdrafts (including overdrafts made pursuant to any overdraft protection plan of the Failed Association), extensions of credit made by the Failed Association pursuant to its credit card business, if any, lease-financing contracts, and loans that have been wholly or partially charged off the Books of the Failed Association, and shall include any and all guarantees, collateral or similar security for such loans, advances and other extensions of credit; provided, however, that "Loans" shall not include (i) the -------- ------- unfunded portion of any loan commitment of the Failed Association to provide additional funding to or on behalf of the borrower, or (ii) any Other Loan Interest. 1.42 "Market Value" shall mean, as of Association Closing (or such other ------------ date as is contemplated by the Agreement) (the "Valuation Date"), (i) for Owned Association Premises, Furniture and Equipment, Fixtures and Leasehold Improvements, Data Processing Equipment and for rent payable in respect of Owned Association Premises and owned Furniture and Equipment, the market value thereof as specified in the appraisal report provided or obtained in accordance with Section 4.9; provided, that if an appraisal report is provided to the Assuming -------- Institution pursuant to Section 4.9(a)(i) and a second appraisal report is subsequently obtained pursuant to Section 4.9(a)(ii), "Market Value" shall be the market value specified in the latter report; (ii) for securities, other than the Investment Grade Securities and Government-Backed Mortgage Securities listed on Schedule A-1 for which the RTC has specified the purchase price on Schedule A-1, the average of the closing quotations for asked and bid prices for such securities for the Valuation Date, determined by reference to The Wall Street --------------- Journal containing - ------- 7 the quotations effective for the Valuation Date, or for the latest day preceding the Valuation Date for which such quotations were published; provided, however, that if the prices for any securities are not - -------- ------- reported effective as of the Valuation Date in The Wall Street Journal, the ----------------------- value of such securities shall be determined by using the average of the valuations thereof as of the Valuation Date (exclusive of any brokerage commissions) provided by three independent brokers mutually acceptable to the Receiver and the Assuming Institution; (iii) for stock in Subsidiaries of the Failed Association, the market value thereof as specified in the appraisal report provided or obtained in accordance with Section 4.9; provided, that if an -------- appraisal report is provided to the Assuming Institution pursuant to Section 4.9(a)(i) and a second appraisal report is subsequently obtained pursuant to Section 4.9(a)(ii), "Market Value" shall be the market value specified in the latter report; and (iv) for any other assets, and for any securities for which Market Value cannot reasonably be determined by any of the methods set forth in subsection (ii), Market Value shall be the market value thereof, determined in a manner agreed to in writing by the Receiver and the Assuming Institution; provided, however, notwithstanding anything to the contrary contained herein, - -------- ------- Market Value shall never be less than zero dollars ($0.00). 1.43 "Mortgage Purchase Price" shall mean, for any fixed rate Loan and any ----------------------- Other Loan Interest representing an interest in one or more fixed rate loans, the sum of (a) the percentage of the Book Value thereof as of Association Closing necessary to yield to the Assuming Institution the FNMA posted yield on 30-year mortgage commitments for delivery within thirty (30) days from Association Closing (as quoted by The Wall Street Journal for the date of ----------------------- Association Closing or, if no quotations were published therein for the date of Association Closing, for the latest day preceding Association Closing for which such quotations were published) plus the applicable additional yield requirement ---- set forth on Schedule A, based on the payment stream of any such Loan or Other Loan Interest after allowance for any Servicing fees payable to third parties under Servicing arrangements of the Failed Association transferred to the Assuming Institution pursuant to Section 3.1, plus (b) all accrued but unpaid ---- interest thereon (at the rate borne by such asset) as of Association Closing; provided, however, that the Mortgage Purchase Price for all fixed rate Loans in - -------- ------- each asset portfolio transferred under Section 3.1(h) shall be calculated using prepayment assumptions based on the weighted average contract rate of interest and weighted average maturity of all fixed rate Loans in such asset portfolio and the Public Securities Association ("PSA") expected prepayment rate set forth in Schedule C for the weighted average contract rate of interest of such Loans; and provided, further, that the Mortgage Purchase Price for any Other Loan -------- ------- Interest shall be calculated using prepayment assumptions based on the weighted average maturity and weighted average contract rate of interest for the loans underlying such Other Loan Interest (or, if such weighted average contract rate of interest is not available, the certificate or participation agreement rate of interest for such Other Loan Interest) and the PSA expected prepayment rates set forth in Schedule C. The Assuming Institution hereby acknowledges receipt of the RTC Resolutions Fixed Rate Mortgage Loan Pricing Model (Regional RTC Pricer) and the related instructions dated June 15, 1993 which set forth in greater detail the manner in which the Mortgage Purchase Price shall be calculated. 8 1.44 "Option Closing Dates" shall mean the last Thursday of each calendar -------------------- monthly (or, if such day is not a Business Day, the next succeeding Business Day), commencing in the first full calendar month after Association Closing and ending in the fourth full calendar month after Association Closing; provided, -------- however, that the Option Closing Date for assets acquired pursuant to the - ------- options granted in Section 4.1(b) and Section 4.4 and for assets put back to or repurchased by the Receiver pursuant to Section 3.3(b) or Section 3.5 shall be the date specified by the Receiver, which shall be no less than five (5) nor more than thirty (30) Business Days after the relevant Option Exercise Date. 1.45 "Option Exercise Date" shall mean, (a) with respect to any asset or -------------------- asset portfolio subject to a purchase option or put back right, the date of receipt by the Receiver of the written notice whereby the Assuming Institution exercises its option to purchase the asset or asset portfolio pursuant to its purchase options under the Agreement or to put back the asset or asset portfolio pursuant to its putback rights, if any, under the Agreement, (b) with respect to any asset or asset portfolio subject to a repurchase right, the date of receipt by the Assuming Institution of the written notice whereby the Receiver exercises its option to repurchase the asset or asset portfolio pursuant to its repurchase rights under the Agreement, and (c) with respect to any lease subject to an assignment option, the date of receipt by the Receiver of the written notice whereby the Assuming Institution exercises its option to accept an assignment of the lease pursuant to its lease assignment options under the Agreement. 1.46 "Other Loan Interest" shall mean any of the following which are ------------------- reflected on the Books and Records of the Failed Association as of Association Closing: (a) any ownership interest (up to and including a one hundred percent (100%) ownership interest) in one or more loans as to which the Failed Association is not the Lender Of Record, including, without limitation, any loan participation and any security or participation certificate which represents an interest in one or more such loans, or (b) any debt security which is secured directly or indirectly by all or any portion of one or more loans as to which the Failed Association is not the Lender Of Record and which, by its terms, provides for payments of principal in relation to payments, or reasonable projections of payments, on such loans. 1.47 "Owned Association Premises" shall mean the banking houses, drive-in- -------------------------- banking facilities, teller facilities, and administrative offices, together with appurtenant parking, storage, administrative and service facilities, if any, owned by the Failed Association as of Association Closing, and shall include any buildings owned by the Failed Association located on land leased by the Failed Association under a ground lease; provided, however, that "Owned Association -------- ------- Premises" shall not include (a) any Furniture and Equipment, or (b) any Data Processing Equipment. 1.48 "Party" shall mean either the Receiver or the Assuming Institution and ----- "Parties" shall mean the Receiver and the Assuming Institution. ------- 9 1.49 "Person" shall mean any individual, corporation, partnership, joint ------ venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. 1.50 "Predecessor Thrift" shall mean any savings association or similar ------------------ institution which, prior to Association Closing and in accordance with applicable law, directly or indirectly, was merged into, consolidated with, or transferred all or substantially all of its assets and liabilities to, the Failed Association. 1.51 "Premium" shall have the meaning set forth in the Agreement. ------- [Note: Two alternative provisions are set forth below. Alternative A will be used in all transactions other than branch transactions. Alternative B will be used only in branch transactions. The Agreement will specify which alternative is applicable.] [ALTERNATIVE A; 1.52 "Pro Rata Share" shall mean, with respect to any month for each Party, -------------- the fraction obtained by dividing the sum of (a) the average number of Deposit Accounts Processed (as defined in Section 4.6) for such party during such month plus (b) five (5) times the average number of loan accounts processed for such - ---- Party during such month, by the sum of (a) the average number of Deposit Accounts Processed for both parties during such month plus (b) five (5) times ---- the average number of loan accounts processed for both Parties during such month; provided, that loan accounts Serviced by third parties (that is, by any -------- Person other than the Dedicated Personnel, the Transition Personnel and the Assuming Institution employees pursuant to Article IX) shall not be included in the foregoing calculation; and provided, further, that in each case, the average -------- ------- number of Deposit Accounts Processed or loan accounts processed (as the case may be) during any month means one half of the sum of (x) the total number of Deposit Accounts Processed or loan accounts processed as of the last day of such month plus (y) the total number of Deposit Accounts Processed or loan accounts ---- processed as of the last day of the immediately preceding month.] [ALTERNATIVE B: 1.52 "Pro Rata Share" shall mean, with respect to any month (a) for the -------------- Assuming Institution, the fraction obtained by dividing the sum of (i) the average number of Deposit Accounts Processed (as defined in Section 4.6) for the Assuming Institution during such month, plus (ii) five (5) times the average ---- number of loan accounts processed for the Assuming Institution during such month, by the sum of (x) the total number of Deposit Accounts Processed for the Failed Association as of Association Closing, plus (y) five (5) times the total ---- number of loan accounts processed for the Failed Association as of Association Closing, and (b) for the Receiver, that fraction which when added to the sum of the Assuming Institution's Pro Rata Share plus the Pro Rata Share (as defined in ---- the Other Branch Agreements) of each Other 10 Acquiror equals one; provided that loan accounts Serviced by third parties (that -------- is, by any Person other than the Dedicated Personnel, the Transition Personnel and the Assuming Institution employees pursuant to Article IX) shall not be included in the foregoing calculations; provided, further, that a Brokered -------- ------- Deposit which is paid out by the RTC during any month shall be included in the foregoing calculations for all months prior to, and including, the month in which it is paid out, but shall be excluded from the calculations for all months thereafter; and provided, further, that in each case, the average number of -------- ------- Deposit Accounts Processed or loan accounts processed (as the case may be) during any month means one half of the sum of (x) the total number of Deposit Accounts Processed or loan accounts processed as of the last day of such month plus (y) the total number of Deposit Accounts Processed or loan accounts - ---- processed as of (I) Association Closing (for the first month's calculations), or (II) the last day of the immediately preceding month (for the second and each subsequent month).] 1.53 "OFC" shall mean any Qualified Financial Contract, as such term is --- defined in Section 11 of the FDI Act, 12 U.S.C. Section 1821(e)(B)(D)(i), together with any related claims arising from such contract and any property securing such claims. 1.54 "Record" or "Records" shall mean any and all records of the Failed ------ ------- Association, including without limitation, all papers, microfiche, microfilm and computer records (including, but not limited to, magnetic tape, disc storage, card forms and printed copy) of the Failed Association generated or maintained by the Failed Association that are owned by or in the possession of the Receiver as of Association Closing. 1.55 "Reimbursement Dates" shall mean the reimbursement dates designated by ------------------- the Receiver; provided, that (a) the Reimbursement Dates shall occur at least -------- monthly commencing in the first full calendar month after Association Closing, (b) the final Reimbursement Date shall be thirty (30) days after the last day of the Transition Period (provided, that if such date is not a Business Day, the -------- final Reimbursement Date shall be the next succeeding Business Day), and (c) the Receiver shall notify the Assuming Institution in writing within five (5) Business Days of Association Closing of each designated Reimbursement Date (other than the final Reimbursement Date). 1.56 "Related Agreements" shall have the meaning set forth in the ------------------ Agreement. 1.57 "Repurchase Price" shall mean, with respect to any asset, the sum of ---------------- (a) the purchase price at which such asset was transferred to the Assuming Institution pursuant to Section 3.1 (for assets put back to or repurchased by the Receiver after the adjustment contemplated by Section 3.2(a)), or the initial transfer price used in calculating the initial cash payment for such asset (for any asset put back to or repurchased by the Receiver prior to such adjustment) minus (b) any monies received in respect of such asset between ----- Association Closing and the applicable Cut-Off Date, plus (c) the amount of any ---- increase in book value since Association Closing resulting from any advances, restructurings or other modifications approved by the Receiver or made in accordance with the terms of the Agreement, plus (d) interest on such ---- 11 purchase price from the day after Association Closing to the date of payment at the Settlement Interest Rate calculated on the average monthly balance after taking into account the adjustments contemplated by subsections (b) and (c). As used in this definition, the phrase "any monies received" shall include, without limitation, all principal payments, interest payments, fees, net proceeds realized from sales of collateral, dividends, and any and all other monies received in respect of the relevant asset. 1.58 "Safe Deposit Boxes" shall mean all safe deposit boxes owned or leased ------------------ by the Failed Association, if any, including, without limitation, the removable safe deposit boxes and safe deposit stacks in the Failed Association's vault and all keys and combinations thereto. 1.59 "Service" and "Servicing" shall mean, with respect to any loan, the ------- --------- right and obligation to administer, collect the payment for the reduction of principal and application of interest, pay taxes and insurance, remit collected payments, provide foreclosure services, provide full escrow administration and generally service such loan. 1.60 "Servicing Contract" shall mean any arrangement, whether or not in ------------------ writing, pursuant to which the Failed Association provides Servicing for any loan owned as of Association Closing in whole or in part by any Person other than the Failed Association. 1.61 "Settlement Interest Rate" shall mean (i) for the calendar quarter in ------------------------ which Association Closing occurs, the one-year U.S. Treasury Bill discount rate in effect as of Association Closing (as established by the auction held on the date closest preceding Association Closing and posted in Federal Reserve statistical release "H.15 Selected Interest Rates") plus one hundred (100) basis ---- points, and (ii) for each calendar quarter thereafter, the one-year U.S. Treasury Bill discount rate in effect as of the first day of such quarter (as established by auction held on the date closest preceding such date and posted in "H.15 Selected Interest Rates") plus one hundred (100) basis points. ---- 1.62 "Standard Terms" shall mean these Standard Purchase and Assumption -------------- Terms and Conditions. References to Articles, Sections, Exhibits and the like refer to the Articles, Sections, Exhibits and the like of these Standard Terms unless otherwise indicated; provided, however, that the Schedules contemplated -------- ------- by these Standard Terms shall be attached to the Agreement and incorporated therein by reference. 1.63 "Subsidiary" shall have the meaning set forth (i) in Section 2 of the ---------- Bank Holding Company Act of 1956, as amended, 12 U.S.C. Section 1841(d), or (ii) in Section 3 of the FDI Act, as amended, 12 U.S.C. Section 1813(w)(4), whichever is applicable. 1.64 "Transition Period" shall mean the period beginning on Association ----------------- Closing and ending on the date specified by the Receiver; provided, that (a) the -------- Transition Period shall not in any event end later than one hundred eighty (180) days from Association Closing, (b) subject to such one hundred eighty (180) days limitation, the Transition Period shall not end so long as 12 either Party requires data processing or other services in accordance with Article IX, and (c) the Receiver shall notify the Assuming Institution in writing at least ten (10) Business Days in advance of the last day in the Transition Period. 1.65 "Transition Personnel" shall have the meaning set forth in Section -------------------- 9.3. 1.66 "Uninsured Deposit" shall have the meaning set forth in Section ----------------- 3(m)(3) of the FDI Act, as amended, 12 U.S.C. Section 1813(m)(3). [Note: Clause (f) below shall be included in the Agreement if the Assuming Institution is acquiring only the Insured Deposits of the Failed Association (rather than all Deposits). The Agreement will specify if clause (f) is excluded.] 1.67 "Withheld Deposit" shall mean all or any portion of any Deposit which ---------------- the Receiver or the Corporation, as the case may be, in its discretion elects to withhold pursuant to Section 2.3, (a) that may be required to satisfy it for any liquidated or contingent liability of a depositor arising from an unauthorized or unlawful transaction, (b) of any Person obligated on any Loan of the Failed Association that (i) has been charged off, in whole or in part, the Books of the Failed Association as of Association Closing, or (ii) is required to be charged off, in whole or in part, the Books of the Failed Association on or before Association Closing in accordance with written instructions of the appropriate regulatory authority, whether or not any such assets have been charged off the Books of the Failed Association as of Association Closing, or (iii) is Delinquent as of Association Closing, (c) that is needed to provide payment of any liability of any depositor to the Failed Association, the Receiver or the Corporation, including without limitation, the liability of any depositor as a director or officer of the Failed Association, whether or not the amount of the liability is, or can be, determined as of Association Closing, (d) that is pledged to secure any Loan retained by, repurchased by, or put back to the Receiver under the Agreement, (e) that is listed on Schedule I, if any [, or (f) that is not an Insured Deposit or a Deposit of public money lawfully secured and perfected by a pledge of securities and/or other assets of the Failed Association]. [Note: Two alternative provisions are set forth below. The Agreement shall specify which alternative applies: Alternative A (all Deposits) or Alternative B (only Insured Deposits and public money secured Deposits).] 13 ARTICLE II ASSUMPTION OF LIABILITIES 2.1 Liability Assumed. The Assuming Institution hereby assumes, and ----------------- agrees to pay, perform and discharge, all of the following liabilities appearing on the Books and Records of the Failed Association as of Association Closing, and, except as expressly set forth elsewhere in the Agreement, none other: (a) [Alternative A: All Deposits (other than Withheld Deposits)] ------------- [Alternative B: All Insured Deposits (other than Withheld Deposits)], at -------------- Book Value as of Association Closing plus any accrued but unpaid interest ---- thereon; provided, that consistent with the provisions of Section 3(l) of -------- the FDI Act, 12 U.S.C. Section 1813(l), the Assuming Institution is not assuming any agreement between the Failed Association and any depositor relating to such Deposits, including, without limitation, any agreement with respect to the term of or rate of interest on such Deposits; and (b) All liabilities (other than liabilities to the Corporation or any Federal Home Loan Bank) that are fully secured by Liens on assets purchased by the Assuming Institution pursuant to the Agreement, [Alternative B: ------------- including, without limitation, all Deposits which are not Insured Deposits but which the Receiver has determined constitute, as of Association Closing, Deposits of public money lawfully secured and perfected by a pledge of securities or other assets of the Failed Association but excluding any other Deposits that are not Insured Deposits,] at Book Value as of Association Closing plus any accrued but unpaid interest thereon. ---- 2.2 Additional Liabilities. The Assuming Institution shall assume, and ---------------------- shall pay, perform and discharge, such other liabilities of the Failed Association for operating expenses incurred in the ordinary course of business or any portion thereof (including, without limitation, liabilities of the Failed Association for unpaid employment taxes and ad valorem real property taxes, if any, with respect to assets purchased under the Agreement) as are certified by the Receiver to the Assuming Institution on or prior to the Final Pro Forma Adjustment Settlement Date for payment whether or not such liabilities are reflected on the Books and Records of the Failed Association. The Receiver shall reimburse the Assuming Institution for such liabilities pursuant to Section 6.3(d), which reimbursement shall include interest at the Settlement Interest Rate from the date such liability is paid by the Assuming Institution to the date of such reimbursement. 2.3 Withheld Deposits. As set forth in Section 1.1, the Assuming ----------------- Institution shall not assume, and shall not pay, perform or discharge, any Withheld Deposit. The Parties understand that, notwithstanding the foregoing, the Receiver or the Corporation may not be able to specify 14 which Deposits are Withheld Deposits prior to Association Closing, and may elect to transfer funds in respect of all or a portion of any Withheld Deposit to the Assuming Institution, and to otherwise treat one or more Withheld Deposits as if such Deposits were assumed by the Assuming Institution. At any time and from time to time the Receiver or the Corporation, in its discretion, may notify the Assuming Institution in writing that all or any portion of any Deposit held by the Assuming Institution is a Withheld Deposit and may direct the Assuming Institution to withhold payment of all or any portion of such Deposit; provided, -------- however, that to the extent such Withheld Deposit is collateral for any Loan - ------- purchased by the Assuming Institution under the Agreement, the Receiver or the Corporation, in its discretion, shall either offer to substitute cash for such collateral or to repurchase such Loan at the Repurchase Price. Upon such direction, the Assuming Institution shall not make any payment in respect of such Deposit (or the specified portion thereof) to or on behalf of the depositor, or to itself, whether by way of transfer, set-off or otherwise, and shall maintain the "withheld payment" status of such Deposit (or the specified portion thereof) until otherwise instructed in writing by the Receiver or the Corporation. At the written direction of the Receiver or the Corporation, the Assuming Institution shall return such Deposit (or the portion thereof specified by the Receiver or the Corporation) to the Receiver or the Corporation, as the case may be, together with interest thereon at the Settlement Interest Rate from the day after Association Closing to the date of payment; provided, however, -------- ------- that the Assuming Institution shall not be obligated to return to the Receiver or the Corporation any Deposit (or any portion thereof) that has been paid to the depositor (a) prior to the receipt by the Assuming Institution of notice from the Receiver or the Corporation that such Deposit is a Withheld Deposit, or (b) after receipt by the Assuming Institution of written notice from the Receiver or the Corporation that a formerly Withheld Deposit is no longer a Withheld Deposit, or (c) pursuant to the order of a court of competent jurisdiction or other competent authority. At any time and from time to time, the Receiver or the Corporation, by written notice to the Assuming Institution, may release the "withheld payment" status of any Withheld Deposit (or a specified portion thereof); upon receipt of any such notice, the Assuming Institution shall assume, and shall pay, perform and discharge, such Deposit (or portion thereof) in a manner consistent with the intent of the Agreement. 2.4 Payment of Deposits by the Receiver or the Corporation. In the event ------------------------------------------------------ any depositor does not accept the obligation of the Assuming Institution to pay any Deposit assumed by the Assuming Institution pursuant to the Agreement and asserts a claim against the Receiver or the Corporation for all or any portion of any such Deposit, the Assuming Institution shall on demand provide to the Receiver or the Corporation funds sufficient to pay such claim in an amount not in excess of the sum of the Deposit liability and accrued but unpaid interest reflected on the Books of the Assuming Institution as of the date such claim is made. Upon payment by the Assuming Institution to the Receiver or the Corporation of such amount, the Assuming Institution shall be discharged from any further obligation under the Agreement to pay to any such depositor the amount of the Deposit paid to the Receiver or the Corporation. 15 2.5 Unclaimed Deposits. ------------------ (a) On the date fourteen (14) months after Association Closing (or, if such date is not a Business Day, on the next succeeding Business Day) the Assuming Institution shall deliver to the Receiver and to the Corporation a schedule, which shall be on a computer disc and in a format which is compatible with the Receiver's equipment, identifying all depositors whose Deposits were assumed by the Assuming Institution pursuant to the Agreement but who, as of the date fourteen (14) months after Association Closing, have not claimed or arranged to continue such Deposits with the Assuming Institution. Such schedule shall set forth the Deposit balances of each such depositor as of the date of such schedule and shall include the last address shown on the Failed Association's records for each such depositor and any other information reasonably requested by the Receiver. The Assuming Institution shall deliver to the Receiver, along with such schedule, mailing labels for each such depositor or a machine readable list of such address for each such depositor which can be read by equipment available to the Receiver. (b) If, after the Corporation shall have given at least three (3) months' notice to the depositor by mailing a copy thereof to the depositor's last known address appearing on the Records, any depositor of the Failed Association whose Deposit is assumed by the Assuming Institution pursuant to the Agreement shall fail within eighteen (18) months after Association Closing to claim or arrange to continue such Deposit with the Assuming Institution, all rights of the depositor against the Corporation and the Assuming Institution with respect to such Deposit shall be barred. The Assuming Institution shall refund to the Corporation, no later than fifteen (15) days after the expiration of such eighteen month period, an amount equal to the Book Value of each such Deposit plus accrued but unpaid interest thereon, as of Association Closing, together with interest on such sum at the Settlement Interest Rate from the day after Association Closing to the date refunded. Upon payment by the Assuming Institution to the Corporation of such amount, and the provision of an updated and current schedule to the Receiver and the Corporation in the form required by Subsection (a), the Assuming Institution shall be discharged from any further obligation under the Agreement to pay to any such depositor the amount of the Deposit paid to the Corporation. 2.6 State Claims to Transferred Deposits. In no event shall the Assuming ------------------------------------ Institution pay out or transfer to any State or local authority pursuant to any unclaimed property or escheat law, rule, or regulation any transferred deposit for which the State or local authority was not expressly identified as the account holder of record in the Books and Records at Association Closing without the prior written approval of the Corporation. Further, the Assuming Institution shall notify the Corporation in writing within 10 days of receipt of any claim, demand or assertion by any State or local authority to rightful ownership of any transferred deposit for which the State or local authority was not the account holder of record at Association Closing. 16 ARTICLE III PURCHASE OF ASSETS 3.1 Assets Purchased. The Assuming Institution hereby purchases and ---------------- accepts from the Receiver, and the Receiver hereby sells, assigns, transfers, conveys and delivers to the Assuming Institution, all right, title and interest of the Receiver in and to all of the assets described in this Section 3.1 and appearing on the Books and Records of the Failed Association as of Association Closing, at the respective purchase prices provided below (which purchase price shall be payable on the dates and in the manner set forth in Section 3.2 and Section 6.3 below): (a) All cash and receivables from depository institutions, including cash items in the process of collection, at the Book Value Purchase Price; (b) All Investment Grade Securities with remaining maturities of six months or less as of Association Closing at Market Value plus accrued interest; (c) All Investment Grade Securities (not passing under Section 3.1(b) above) and all Government-Backed Mortgage Securities, which are listed on Schedule A-1 at the purchase prices listed thereon, or if no purchase prices are listed, at Market Value plus accrued interest; (d) All federal funds sold, at the Book Value Purchase Price; (e) All assets securing Deposits assumed pursuant to Article II, at the respective purchase price set forth in this Article III or in Article IV, as the case may be, for each specific type of asset (or, if no such purchase price is specified, at the Book Value Purchase Price in the case of any Loan and at Market Value in the case of any other asset); (f) All Cash Collateralized Loans (subject to the provisions of Section 2.3), at the Book Value Purchase Price; (g) All Loans which are overdrafts, at Book Value (for any such Loans that have been on overdraft status for thirty (30) days or less as of Association Closing), and at zero dollars ($0.00) for any other such Loans; and (h) All assets listed on, or in each asset portfolio described in, Schedule A (other than any such assets transferred pursuant to subsections (a) through (g) above), at the Book Value Purchase Price or the Mortgage Purchase Price as set forth in Schedule A; provided, however, that the -------- ------- Assuming Institution shall have the right to put back to the Receiver, within the 17 applicable putback period specified in Schedule A (which in each case shall begin on Association Closing and shall not in any event exceed ninety (90) days from Association Closing), any asset transferred under this Section 3.1(h), provided, further, that for any asset portfolio in -------- ------- Schedule A that is subject to an "all or nothing" put, the Assuming Institution shall have the right to put back during such period all (but not less than all) assets in such asset portfolio. The Assuming Institution shall acquired each Loan and each Other Loan Interest transferred under the Agreement subject to any and all arrangements, whether or not in writing, pursuant to which any Person (other than the Failed Association) provides Servicing for such Loan or Other Loan Interest. The Receiver hereby assigns, transfers, conveys and delivers to the Assuming Institution, and the Assuming Institution hereby accepts, all right, title and interest of the Receiver in and to any such arrangement. 3.2 Purchase Price and Schedule A Adjustments. ----------------------------------------- (a) Initial Cash Payment. For purposes of the initial cash payment -------------------- contemplated by Section 6.3(a), all assets purchased by the Assuming Institution under Section 3.1 shall transfer at an initial transfer price of Book Value as of Association Closing plus accrued but unpaid interest thereon. On the Final ---- Pro Forma Adjustment Settlement Date, the Receiver shall pay to the Assuming Institution, or the Assuming Institution shall pay to the Receiver, as the case may be, an amount equal to the difference between (i) the actual purchase price as set forth in Section 3.1 and Section 3.2(b) for all assets transferred under Section 3.1 and not subsequently put back to or repurchased by the Receiver, and (ii) the initial transfer price used in calculating the initial cash payment for such assets, together with interest thereon at the Settlement Interest Rate from the day after Association Closing to the date of payment; provided, however, -------- ------- that the Receiver, in its sole discretion, may elect to make such purchase price adjustments for any asset portfolio on any of the Interim Adjustment Settlement Dates if the Assuming Institution waives its right (if any) under Section 3.1(h) or Section 4.2(a)(iv) to put back such asset portfolio to the Receiver. (b) Section 3.1(h) Purchase Prices. The purchase price for each asset ------------------------------ purchased by the Assuming Institution pursuant to Section 3.1(h) shall be either the applicable Book Value Purchase Price or the applicable Mortgage Purchase Price, in each case as specified in Schedule A. Schedule A sets forth two different purchase prices for certain asset portfolios: a "whole portfolio" purchase price and a "selected asset" purchase price. As set forth in Section 3.2(a), all such assets initially shall transfer at Book Value, subject to adjustment to the actual purchase price on the Final Pro Forma Adjustment Settlement Date. The actual purchase price for assets in each such asset portfolio shall be determined by the Receiver after the expiration of all Section 3.1(h) putback periods as follows: If the Assuming Institution does not put back to the Receiver any assets in such asset portfolio, the purchase price for all assets in such asset portfolio shall be the "whole portfolio" purchase price; if the Assuming Institution does put back 18 to the Receiver any asset in such asset portfolio, the purchase price for all assets in such asset portfolio that are not put back to the Receiver shall be the "selected asset" purchase price; provided, however, that any misclassified -------- ------- asset initially included in such asset portfolio that is reclassified and returned to the Receiver in accordance with Section 3.2(c) shall not by itself cause an asset portfolio to be subject to the "selected asset" purchase price. [Note: Two alternative Sections 3.2(c) are set forth below. The Agreement shall specify which alternative applies: Alternative A (referencing the Failed Association's ledger accounts) or Alternative B (for use in certain limited branch transactions only, referencing a list of specific assets).] [Alternative A: ------------- (c) Adjustments to Schedule A ------------------------- (i) As set forth in Section 3.1(h), the Assuming Institution shall purchase from the Receiver all assets of the Failed Association which, as of Association Closing, are actually in each asset portfolio as described in Schedule A and any footnotes thereon. Each such asset portfolio is described by reference to the ledger account titles or specific asset identification codes shown on the Failed Association's Books and Records as of the date specified in the Agreement. The asset portfolio titles in Column 1 of Schedule A are for convenience only and shall not affect the determination of which assets are transferred to the Assuming Institution. The Failed Association's ledger accounts and/or specific asset identification codes which comprise each asset portfolio, as of the date specified in the Agreement, are detailed on Schedule A under the column entitled "Description of Asset Portfolio." The Assuming Institution shall purchase all assets in each of the asset portfolios described in Schedule A, subject to adjustment and/or reclassification as set forth in this Section 3.2; provided, however, that notwithstanding anything to the -------- ------- contrary contained herein, these asset portfolios do not include any assets which are transferred under Sections 3.1(a) - 3.1(g) or which are excluded under Section 3.6. Unless otherwise expressly provided herein, the unfunded portion of any loans listed or described on Schedule A and wholly unfunded loans are not transferred to the Assuming Institution. The Parties understand that certain assets of the Failed Association may have been misclassified by the Failed Association and may not have been included in the correct ledger account, or may not reflect the correct specific asset identification code. For purposes of determining which assets transfer under Section 3.1(h) and the purchase price thereof, except as expressly set forth in this Section 3.2(c), each asset shall transfer as such asset was actually classified by the Failed Association as of the date specified in the Agreement, whether or not such classification was erroneous. (ii) The Assuming Institution, by written notice to the Receiver, may request that the Receiver reclassify any asset that was misclassified by the Failed Association. Any such notice must be received by the Receiver within the putback period (as set forth in Schedule A) for the asset portfolio in which the misclassified asset was originally transferred (or, 19 if no such putback period is specified, within the number of days of Association Closing specified in the Agreement). Such notice shall specify the asset or assets that were misclassified and the basis for reclassification. (iii) Upon receipt of any such notice the Receiver shall determine in its sole discretion the proper classification of such asset or assets (which may be the classification designated by the Failed Association, or the classification proposed by the Assuming Institution, or a third classification). (iv) Notwithstanding anything to the contrary contained in the Agreement, the Receiver shall not be obligated to identify or assist the Assuming Institution in identifying any asset which may have been misclassified by the Failed Association; nor shall any misclassified asset be reclassified unless the Receiver shall have received a timely written request for such reclassification from the Assuming Institution in accordance with Section 3.2(c)(ii). (v) Certain assets of the Failed Association may not have been included in the Failed Association's Books and Records, either because such assets were generated after the date of such Books and Records or because of errors and omissions in the Failed Association's record keeping, or for other reasons. The Receiver, in its discretion, may transfer any such asset to the Assuming Institution in accordance with Section 7.2. (vi) The estimated Book Value set forth on Schedule A is subject to adjustment in accordance with Article VII.] [Alternative B - certain Limited Branch transactions only: ------------- (c) Adjustments to Schedule A ------------------------- (i) As set forth in Section 3.1(h), the Assuming Institution shall purchase from the Receiver all assets of the Failed Association listed on Schedule A. Except as expressly set forth in subsection (ii) below, the Assuming Institution shall purchase under Section 3.1(h) only those assets specifically identified on Schedule A and no others. (ii) In addition to listing each asset that shall be transferred under Section 3.1(h), Schedule A shall set forth a brief description of the type of assets that are transferring under that section (either by reference to the Failed Association's ledger account titles or specific asset identification codes shown on the Failed Association's Books and Records as of Association Closing, or some other reasonably specific description). The Parties understand that certain assets of the Failed Association of the type described on Schedule A may not have been included on Schedule A either because such assets were generated after the date such schedule was prepared or because of errors and omissions in the Failed Association's record 20 keeping, or for other reasons. The Receiver, in its discretion, may transfer any such asset to the Assuming Institution in accordance with Section 7.2. (iii) Certain assets of the Failed Association may have been misclassified by the Failed Association. The Assuming Institution shall purchase all assets listed on Schedule A, as such assets are classified and at the price set forth on such schedule, whether or not such classification is erroneous. (iv) The estimated Book Value set forth on Schedule A is subject to adjustment in accordance with Article VII.] 3.3 Manner of Conveyance; No Warranty; Nonrecourse; Etc. ---------------------------------------------------- (a) "As Is," "Where Is." The conveyance of all assets purchased ------------------ pursuant to the Agreement (including, without limitation, all assets purchased under this Article III or pursuant to options granted under Article IV) shall be made, as necessary, by Receiver's deed or Receiver's bill of sale "as is," "where is," without recourse and, except as otherwise specifically provided in the Agreement, without any warranties whatsoever with respect to such assets, express or implied, including, without limitation, any warranties with respect to title, enforceability, collectibility, documentation or freedom from Liens or encumbrances (in whole or in part). The assets purchase pursuant to the Agreement are purchased subject to all liabilities for indebtedness collateralized by security interests or other Liens affecting such assets, to the extent such indebtedness is secured. With respect to any assets that are subject to putback rights under Section 3.1, the Assuming Institution acknowledges that the Corporation will not release its security interests or other Liens, if any, in such assets until the earlier of the expiration of the applicable putback period or the waiver by the Assuming Institution of its right to put back such assets to the Receiver. (b) Forged Documents. The Receiver warrants the genuineness of all ---------------- signatures to instruments evidencing assets transferred under Section 3.1 (but not assets transferred under Article IV). Such warranty shall expire on the date one hundred eighty (180) days from Association Closing. The Receiver hereby grants to the Assuming Institution, and the Assuming Institution's sole remedy in respect of warranty claims under this Section 3.3(b) shall be, the right to resell to the Receiver at a price equal to the Repurchase Price for a period of one hundred and eighty (180) days after Association Closing any and all assets transferred under Section 3.1 which shall be discovered to be evidenced by forged instruments. (c) Additional Title Documents. The Assuming Institution shall -------------------------- prepare and deliver to the Receiver, and the Receiver shall execute and deliver to the Assuming Institution, such further instruments and documents of conveyance (in form and substance satisfactory to the Receiver) as shall be reasonably necessary to vest in the Assuming Institution the full legal or equitable title of the Receiver in and to the assets transferred to the Assuming Institution under the Agreement; provided, however, that with respect to any -------- ------- assets that are subject to putback 21 under Section 3.1, the Receiver may, in its discretion, elect to delay the execution and delivery of any such instruments or documents of conveyance until the earlier of the expiration of the applicable putback period or the waiver by the Assuming Institution of its right to put back such assets to the Receiver. The Assuming Institution shall be solely responsible for recording any such instruments and documents of conveyance, as well as any intervening assignments, at its own expense. 3.4 Putback of Assets. ----------------- (a) The Assuming Institution's right to put certain assets back to the Receiver pursuant to any putback provision under the Agreement shall be exercised by the Assuming Institution giving written notice to the Receiver as provided below within the applicable putback period and shall terminate upon the expiration of the applicable putback period unless the Receiver shall have received such notice. On the first Thursday of each calendar month (or, if such day is not a Business Day, on the next succeeding Business Day) commencing in the first full calendar month after Association Closing and ending in the eighteenth calendar month after Association Closing, and on the last day of each putback period (but only for assets subject to such putback period), the Assuming Institution shall notify the Receiver in writing of all assets the Assuming Institution intends to put back to the Receiver. Such notice shall specify the asset or assets being put back and the basis for the putback, shall identify any liabilities associated with such asset or assets which were assumed by the Assuming Institution under Section 2.1(b) and shall state the Repurchase Price of the assets put back (specifying the calculation thereof), all in form and substance satisfactory to the Receiver. (b) As set forth in Section 3.4(a), the Assuming Institution's notice of its intent to put back any asset shall include a calculation of the Repurchase Price for such asset. Such Repurchase Price shall be determined as of the applicable Cut-Off Date for such asset. The Assuming Institution shall collect and hold any and all monies received in respect of such asset after the Cut-Off Date for the account of the Receiver, and on the next succeeding Reimbursement Date shall remit such monies to the Receiver together with interest thereon from the date of receipt by the Assuming Institution to the date of payment at the Settlement Interest Rate. (c) The closing of any repurchase of assets put back to or repurchased by the Receiver shall occur on the first Option Closing Date after the relevant Option Exercise Date; provided, that if such Option Closing Date is fewer than -------- fifteen (15) Business Days after such Option Exercise Date, the Receiver, in its sole discretion, may elect to postpone such closing to the next succeeding Option Closing Date. On the Option Closing Date, the Assuming Institution shall transfer such assets and any related liabilities to the Receiver and the Receiver shall pay to the Assuming Institution an amount equal to the Repurchase Price for each such asset less the amount (as of the applicable Cut-Off Date) of any reassumed related liability. The Assuming Institution shall prepare and deliver to the Receiver, and the Receiver shall accept from the Assuming Institution, all required instruments of transfer (in form and substance satisfactory to 22 the Receiver) and the documents and instruments evidencing such assets and all Records relating thereto, and the Assuming Institution shall take such other actions as shall be necessary to transfer such assets and any related liabilities and collateral from the Assuming Institution to the Receiver. The Receiver, in its sole discretion following receipt of a putback notice, may elect to accelerate the date for any such repurchase. (d) It shall be a condition to the Assuming Institution's right to put back any assets under the Agreement that (i) such assets be free and clear of any and all Liens created by or securing any indebtedness of the Assuming Institution or any of its Affiliates, including, without limitation, any indebtedness of the Assuming Institution for liabilities assumed pursuant to the Agreement which are not put back to the Receiver, (ii) such assets (other than assets which are serviced pursuant to Servicing arrangements assigned to the Assuming Institution pursuant to Section 3.1) shall have been serviced in accordance with prudent banking standards and practices until such assets are repurchased by the Receiver, and (iii) no Disqualifying Event shall have occurred with respect to such assets; provided, however, that in the case of any -------- ------- asset portfolio for which the Assuming Institution has the right to put back all, but not less than all, assets in such asset portfolio, the Assuming Institution shall not have the right to put back the specific asset or assets affected by the Disqualifying Event but shall still have the right to put back the remaining assets in such asset portfolio (in which case the Receiver, in its sole discretion, shall have the right to repurchase one or more of the specific assets affected by the Disqualifying Event). The Receiver, in its sole discretion, may elect to waive any conditions set forth in this subsection. (e) Notwithstanding anything to the contrary contained herein, if the Assuming Institution elects to put back to the Receiver any asset which is part of a related group or pool of assets, the Assuming Institution shall put back to the Receiver all assets which are part of the related group or pool. For purposes of this subsection, the phrase "related group or pool" shall include, without limitation, one or more assets subject to the same participation agreement. (f) If the Assuming Institution elects to put back to the Receiver any Loan which is subject to a Servicing arrangement transferred to the Assuming Institution pursuant to Section 3.1, the Receiver, in its sole discretion, may elect to require the Assuming Institution to put back to the Receiver any or all other Loans subject to the same Servicing arrangement. 3.5 Reconveyance of Certain Assets to Receiver. ------------------------------------------ (a) The Assuming Institution, upon the reasonable request of the Receiver in its discretion, shall promptly reassign, transfer, convey and deliver to the Receiver, at a price equal to the Repurchase Price, all of the Assuming Institution's right, title and interest in and to any of the following assets of the Failed Association purchased by the Assuming Institution pursuant to any provision of the Agreement, together with all Records evidencing or pertaining thereto: 23 (i) Loans made to an officer, director, or other Person engaging in the affairs of the Failed Association, or of any Predecessor Thrift or of any Affiliate of the Failed Association or any Predecessor Thrift or any related entities of any of the foregoing, as determined in the discretion of the Receiver; (ii) Loans or other assets which become the subject of legal proceedings involving the Receiver, the Corporation, the Failed Association, or any Predecessor Thrift, including Loans relating to claims under the Indemnity Agreement; (iii) Loans made by the Failed Association or any Predecessor Thrift to the same debtors as another loan owned by the Receiver or the Corporation or secured by collateral securing any loan made by the Failed Association or any Predecessor Thrift owned by the Receiver or the Corporation or secured by collateral which also secures any asset owned by the Receiver; and (iv) Loans or other assets of the Failed Association related to any asset of the Failed Association listed in Section 3.6, as determined in the discretion of the Receiver. [Note: The following clause (v) shall only be included in the Agreement if the Assuming Institution is acquiring only the Insured Deposits of the Failed Association (rather than all Deposits). The Agreement will specify if this clause is excluded.] (v) Loans made to depositors who, as of Association Closing, have Uninsured Deposits at the Failed Association.] (b) Within ten (10) Business Days of the applicable Option Exercise Date for any asset the Receiver elects to repurchase under this Section 3.5, the Assuming Institution shall notify the Receiver in writing of the Repurchase Price of such asset (describing the calculation thereof in form and substance satisfactory to the Receiver). Such Repurchase Price shall be determined as of the Cut-Off Date for such asset. The Assuming Institution shall collect and hold any and all monies received in respect of such asset after the Cut-Off Date for the account of the Receiver and shall remit such monies to the Receiver on the next succeeding Reimbursement Date (together with interest thereon at the Settlement Interest Rate from the date received by the Assuming Institution to the date remitted) in accordance with Section 9.7. (c) The Assuming Institution shall service all assets subject to repurchase under this Section 3.5 in accordance with prudent banking standards and practices until such assets are repurchased by the Receiver; provided, -------- however, that nothing herein shall require the - ------- 24 Assuming Institution to take any action with respect to any asset which would be a Disqualifying Event as to such asset. (d) Notwithstanding anything to the contrary contained herein, the Assuming Institution shall not be obligated to reassign, transfer, convey or deliver to the Receiver any asset if, as of the Option Exercise Date for such reconveyance, (i) such asset is part of a pool of assets which have been securitized by the Assuming Institution, and such reconveyance would be impermissible under the terms of such security, (ii) the Assuming Institution has sold one or more participation interests in such asset, and such reconveyance would be impermissible under the terms of such participation agreement, or (iii) the Assuming Institution has transferred all of its right, title and interest in and to such asset to any other Person (other than to an Affiliate of the Assuming Institution). 3.6 Assets Excluded. Notwithstanding anything to the contrary contained --------------- in the Agreement, the Assuming Institution shall neither acquire nor obtain an option to acquire under the Agreement any of the following: (a) Any action, judgment or claim against (i) any officer, director, employee, accountant, attorney, or any other Person employed or retained by the Failed Association or any Predecessor Thrift on or prior to Association Closing arising out of any act or omission of such Person in such capacity, (ii) any underwriter of financial institution bonds, bankers blanket bonds or any other insurance policy of the Failed Association or any Predecessor Thrift, (iii) any shareholder or Holding Company of the Failed Association or any Predecessor Thrift or (iv) any other Person whose action or inaction may be related to any loss (exclusive of any loss resulting from such Person's failure to pay on an extension of credit from the Failed Association or any Predecessor Thrift) incurred by the Failed Association or any Predecessor Thrift; provided, however, that for purposes hereof, the -------- ------- acts, omissions or other events giving rise to any such claim shall have occurred on or before Association Closing, regardless of when any such claim is discovered and regardless of whether any such claim is made with respect to a financial institution bond, bankers blanket bond or other insurance policy of the Failed Association or any Predecessor Thrift in force as of Association Closing; (b) Any legal or equitable interest in tax refunds or tax receivables of the Failed Association, if any, including any claims arising as a result of the Failed Association having entered into any agreement or otherwise being joined with another Person with respect to the filing of tax returns or payment of taxes; 25 (c) Any asset that secures any liability of the Failed Association which is not fully secured by assets purchased by the Assuming Institution pursuant to the Agreement (other than assets securing liabilities to the Corporation or any Federal Home Loan Bank); (d) Any asset subject to a contract of sale on Association Closing and which the Receiver, in its sole discretion, elects to exclude under this subsection, any such exclusion to be made as soon as practicable and in any event not later than the Final Pro Forma Adjustment Settlement Date; (e) Any QFCs; (f) Any remaining interests in loans sold to FNMA or FHLMC; (g) Any Derivative Mortgage Securities, other than any Derivative Mortgage Security identified on Schedule D; (h) Any asset which, as of Association Closing, is the subject of any legal proceeding or nonjudicial foreclosure involving the Receiver, the Corporation, the Failed Association, or any Predecessor Thrift; (i) Any right to receive payment in connection with any letter of credit issued and funded by the Failed Association; (j) Any Loan to any Affiliate of the Failed Association (other than any Loan to a Subsidiary of the Failed Association transferred to the Assuming Institution pursuant to Section 4.4); (k) Any asset that was wholly charged if the Books of the Failed Association as of Association Closing except as otherwise explicitly provided on Schedule A; (l) Any financial institution bond, bankers blanket bond, or public liability, fire or extended coverage insurance policy, or any other insurance policy maintained by the Failed Association (other than title insurance, private mortgage insurance or other similar insurance policies attributable solely to specific assets purchased by the Assuming Institution under Article III); or any premium refund, unearned premium derived from cancellation; or any proceeds payable with respect to any of the foregoing; (m) Any First Mortgage Loan identified on Schedule B; and (n) Any other asset listed on Schedule E. 26 ARTICLE IV CERTAIN RIGHTS AND OBLIGATIONS 4.1 Leased Association Premises, Owned Association Premises and Certain ------------------------------------------------------------------- Other Property. - -------------- (a) Leased Property. The Receiver hereby grants to the Assuming --------------- Institution an exclusive option for a period of ninety (90) days from Association Closing to accept an assignment from the Receiver of all right, title and interest of the Receiver in and to any lease agreement for any Leased Association Premises and any Furniture and Equipment and Data Processing Equipment leased by the Failed Association. The exercise of any option with respect to any such lease agreement must apply to all premises or property subject to such lease agreement. (b) Owned Property. The Receiver hereby grants to the Assuming -------------- Institution, for the periods set forth below, (i) the exclusive option to purchase all right, title and interest of the Receiver in and to any Owned Association Premises, at ninety-three percent (93%) of Market Value as of Association Closing, and (ii) the exclusive option to purchase all right, title and interest of the Receiver in and to any or all Furniture and Equipment and all Data Processing Equipment owned by the Failed Association, at Market Value as of Association Closing. The option for owned Association Premises shall expire on the date thirty (30) days from the date of receipt by the Assuming Institution of the applicable appraisal report to be provided or obtained in accordance with Section 4.9, and in any event no later than the date one hundred eighty (180) days from Association Closing. The option for Furniture and Equipment and Data Processing Equipment shall expire on the later of (i) the date five (5) Business Days from the date of receipt by the Assuming Institution of the applicable appraisal report for any such asset, and (ii) the date the option expires for the related premises, and in any event no later than the date one hundred eighty (180) days from Association Closing. (c) Purchase Price Adjustments. The Assuming Institution shall be -------------------------- permitted to offset against the payment of the purchase price for any asset purchased pursuant to Section 4.1(b) the amount of any rental payments in respect of such asset received by the receiver from the Assuming Institution between Association Closing and the relevant Option Closing Date pursuant to Section 9.2(b) or otherwise. The purchase price for any such asset shall bear interest at the Settlement Interest Rate from the day after Association Closing to the date of payment calculated on the average monthly balance after taking into account the adjustments contemplated by the preceding sentence. (d) Exercise and Closing of Options. The Assuming Institution shall ------------------------------- exercise the options granted under this Section 4.1 by giving timely written notice to the Receiver within the applicable option period. If the Assuming Institution elects to exercise any such option, it 27 shall purchase such assets or accept such an assignment on the next succeeding Option Closing Date following the applicable Option Exercise Date, and shall give written notification of its acceptance of such an assignment to the appropriate lessors, if any, on or before such Option Closing Date. (e) Obligation to Purchase Certain Property. If the Assuming --------------------------------------- Institution elects to exercise its option to purchase any Owned Association Premises, or to accept an assignment of any lease agreement with respect to any Leased Association Premises, or if the Assuming Institution does not so elect but subsequently obtains the right to occupy any such Owned Association Premises or Leased Association Premises (whether by purchase, lease, assignment or otherwise), the Assuming Institution shall purchase, at Market Value as of Association Closing, all right, title and interest of the Receiver in and to all Furniture and Equipment owned by the Failed Association and all Fixtures and Leasehold Improvements located on or associated with such Owned Association Premises or Leased Association Premises. (f) Ground Leases. If the Assuming Institution exercises its option ------------- to purchase any Owned Association Premises located on land leased under a ground lease, on the Option Closing Date for such Owned Association Premises the Assuming Institution shall accept an assignment of all right, title and interest of the Receiver in and to such ground lease. (g) Early Termination of Option. Notwithstanding anything to the --------------------------- contrary contained herein, unless the Assuming Institution shall have sooner exercised its option with respect to such premises, the options granted under this Section 4.1 shall automatically terminate, as to any Leased Association Premises or Owned Association Premises and the related Fixtures, Furniture and Equipment, Data Processing Equipment, and Leasehold Improvements under any of the following circumstances: (1) at 5:00 pm on the tenth (10th) Business Day after Association Closing, if the Assuming Institution has not, by that time, occupied and opened such premises for business, (2) upon delivery to the Receiver of a notice of waiver of such options, or (3) at such time as the Assuming Institution vacates such premises. (h) Taxes and Assessments. Taxes, assessments and other governmental --------------------- charges in respect of any personal or real property purchased by the Assuming Institution pursuant to this Section 4.1 shall be prorated as of Association Closing. [Note: Section 4.2(1)(iv) or Section 4.2(a)(v) or both will be included in the standard and core branch (but not limited branch) transactions if the bid that is accepted includes the credit card business or servicing or both. The Agreement will specify whether such Sections are included or omitted.] 4.2 Businesses That Transfer upon Association Closing. ------------------------------------------------- (a) Purchase and Sale. The Receiver hereby sells, assigns, transfers, ----------------- conveys and delivers to the Assuming Institution, and the Assuming Institution hereby purchases and 28 accepts from the Receiver, all right, title and interest of the Receiver in and to the following businesses of the Failed Association, at the respective purchase prices set forth below: (i) the safekeeping business of the Failed Association, if any, including, without limitation, all securities and other items held by the Failed Association in safekeeping as of Association Closing, for a total purchase price of One Dollar ($1); (ii) the Safe Deposit Box business, if any, including, without limitation, all Safe Deposit Boxes, for a total purchase price of One Dollar ($1); (iii) the custodial or trust business of the Failed Association related to custodial accounts or trusts that hold assets of individual retirement accounts and qualified self-employed retirement plans (i.e., retirement plans that cover one or more individuals considered an employee under Section 401(c)(1) of the Internal Revenue Code of 1986) under Section 408 and 401 of the Internal Revenue Code of 1986, respectively (the "IRA/Keogh Business"), if any, for a total purchase price of One Dollar ($1), and the Assuming Institution, without further transfer, substitution, act or deed to the fullest extent permitted by law, shall succeed to the rights, obligations, properties, assets, investments, deposits, agreements and trusts of the Failed Association under such custodial accounts and trusts, all to the same extent as though the Assuming Institution had originally assumed the same, and, to the full extent permitted by law, shall succeed to all trusteeships and other fiduciary or representative capacities to which the Failed Association is named or appointed by any instrument in connection with the IRA/Keogh Business; provided, -------- that the term "IRA/Keogh Business" shall not include the Deposit liability of the Failed Association for those assets, if any, of the IRA/Keogh Business invested in Deposit accounts of the Failed Association, which Deposits shall be assumed by the Assuming Institution in accordance with and pursuant to the terms of Section 2.1 and Article V; (iv) [the credit card business of the Failed Association, if any, including, without limitation, the credit card business related to the credit card Loans transferred to the Assuming Institution pursuant to Section 3.1(h), at the Book Value Purchase Price set forth in Schedule A (which purchase price is an aggregate purchase price for such credit card businesses and such credit card 29 Loans); provided, however, that the Assuming Institution shall have -------- ------- the right to put back to the Receiver such credit card business within the putback period specified in Schedule A for such credit card Loans; and provided further, that if the Assuming Institution elects to put -------- ------- back either such credit card business or such credit card Loans, it shall put back both the credit card business and all credit card Loans;] and (v) [the mortgage servicing business of the Failed Association, if any, including, without limitation, all Servicing Contracts, at the purchase price set forth on Schedule A (which purchase price is expressed as a percentage of the principal balance as of Association Closing of all loans serviced by the Failed Association pursuant to the Servicing Contracts).] [Note: If Section 4.2(a)(v) is omitted, the bracketed material in the following paragraph also will be omitted.] (b) Assumption of Obligations. The Assuming Institution hereby ------------------------- assumes and agrees to pay, perform and discharge on and after Association Closing the duties and obligations of the Failed Association with respect to each business transferred under Section 4.2(a), subject to its putback rights, if any, thereunder [(including, without limitation, any and all obligations arising out of or relating to any representations and warranties made in connection with the origination or servicing of the loans subject to the Servicing Contracts transferred under Section 4.2(a)(v)]; provided, however, -------- ------- that the Assuming Institution does not assume any liability arising out of or related to any act or omission of the Failed Association or any Predecessor Thrift prior to Association Closing in violation of law or in breach of contractual covenants. (c) Prorated Income and Expenses. Fees, all other income and all ---------------------------- expenses related to each business transferred under Section 4.2(a) shall be prorated as of Association Closing. [Note: If Section 4.2(a)(v) is omitted, the following paragraph (d) also will be omitted.] [(d) FHLMC Servicing. As set forth in Section 3.6(f), the Assuming --------------- Institution shall neither acquire, nor obtain an option to acquire, any Loans which represent remaining interests in loans sold to FHLMC (the "Retainages"). As set forth in Section 4.2(a)(v), the Assuming Institution is assuming all of the Failed Association's obligations under each Servicing Contract pursuant to which the Failed Association provides Servicing for that portion of any such loan that was sold to FHLMC. The Assuming Institution understands that the transfer of Servicing contemplated by Section 4.2(a)(v) is subject to the conditions set forth in FHLMC's Sellers' and Servicers' Guide (the "Guide"). The Assuming Institution further 30 understands that the Receiver intends to sell the Retainages to FHLMC, and agrees to cooperate and make good faith efforts to assist the Receiver in connection therewith. Notwithstanding anything to the contrary contained in the existing Servicing Contracts with FHLMC, the Assuming Institution understands and agrees that (i) prior to the sale of the Retainages to FHLMC, the Assuming Institution shall continue to service FHLMC's interest in each loan in accordance with the applicable existing Service Contract and shall also service the Receiver's Retainage in accordance therewith; provided, however, that after -------- ------- remitting FHLMC's required monthly yield and principal payments to FHLMC, the Assuming Institution shall retain as a servicing fee an amount per annum equal to 3/8 of 1% (0.375 percent) of the unpaid principal balance of each loan (including the Retainage) so serviced, and shall remit the balance of any and all loan proceeds to the Receiver, and (ii) after the sale of the Retainage to FHLMC, the Assuming Institution shall service the resulting whole loans on the terms and conditions set forth in the Guide, as supplemented and amended by FHLMC's letter dated January 15, 1992, "Accounting Requirements and Procedures for the Servicing of participation Loans," a copy of which is attached a Exhibit E. As set forth in Section 3.3(a), the transfer of the Servicing Contracts to the Assuming Institution is made without any representation or warranty, express or implied, by the Receiver (including without limitation, any representation or warranty as to any amendments or modifications with respect thereto that may result from such transfer or from the sale of the Retainages to FHLMC).] [Note: The option to acquire the Trust Business will not be included in the limited branch transactions. In such cases, the Agreement will specify that Section 4.3(a)(i) is omitted.] 4.3 Businesses Subject to Option. ---------------------------- (a) Option. The Receiver hereby grants to the Assuming Institution an ------ exclusive option to purchase all right, title and interest of the Receiver in and to any of the following businesses of the Failed Association, at the respective purchase prices and for the respective option periods set forth below: (i) the trust business (the "Trust Business") of the Failed Association (other than the IRA/Keogh Business), if any, including, without limitation, the rights, obligations, properties, assets, investments, deposits, agreements and trusts of the Failed Association under (A) trusts, executorship, administrations, guardianships, and agencies, and (B) other fiduciary or representative capacities, for an option period of five (5) Business Days from Association Closing, and for a total purchase price of One Dollar ($1); provided, that the term -------- "Trust Business" shall not include the Deposit liability of the Failed Association for those assets, if any, of the Trust Business that are invested in Deposit accounts of the Failed Association, which Deposits shall be 31 assumed by the Assuming Institution in accordance with, and pursuant to the terms of, Section 2.1(a) and Article V; and (ii) any other business of the Failed Association, including, without limitation, any business or contract identified on Schedule F hereto and any other contract which provides for the rendering of services by the Failed Association, other than (A) any business or contract that is subject to the provisions of Article II, Article III, or Section 4.1 through 4.2 and (B) any business related to any Loan or Other Loan Interest not purchased by the Assuming Institution pursuant to the Agreement or any Related Agreement, for an option period of ninety (90) days from Association Closing, and at the purchase price set forth in Schedule F (for any business identified in Schedule F) or Market value as of Association Closing (for any other business). (b) Exercise and Closing of Options. The Assuming Institution shall ------------------------------- exercise the options granted by this Section 4.3 by giving timely written notice to the Receiver within the applicable option period. If it elects to exercise any such option, the Assuming Institution shall purchase such business on the fifth (5th) Business Day after Association Closing (in the case of the Trust Business) or on the next succeeding Option Closing Date following the applicable Option Exercise Date (in the case of any other business). The purchase price for any such business shall bear interest at the Settlement Interest Rate from the day after Association Closing to the day of payment. (c) Assumption of Rights and Obligations. In the event the Assuming ------------------------------------ Institution exercises its option to purchase any business under this Section 4.3, (i) fees, all other income and all expenses related to such business shall be prorated as of Association Closing, (ii) the Assuming Institution shall assume and shall pay, perform and discharge as of Association Closing the duties and obligations of the Failed Association with respect to such business; provided, however, that the Assuming Institution shall not assume any liability - -------- ------- arising out of or related to any act or omission of the Failed Association or any Predecessor Thrift prior to Association Closing in violation of law or in breach of contractual covenants, and (iii) in the case of the Trust Business, the Assuming Institution without further transfer, substitution, act or deed, to the fullest extent permitted by law, shall succeed to the rights, obligations, properties, assets, investments, deposits, agreements and trusts of the Failed Association under (i) trusts, executorship, administrations, guardianships, and agencies, and (ii) other fiduciary or representative capacities, all to the same extent as though the Assuming Institution had originally assumed the same, and, to the full extent permitted by law, shall succeed to, and shall be entitled to take and execute, the appointment to all executorships, trusteeships, guardianships and other fiduciary or representative capacities to which the failed Association is or may be named in wills, whenever probated, or to which the Failed Association is or may be named or appointed by any other instrument; provided, that any liability based on the malfeasance or nonfeasance prior - -------- 32 to Association Closing of the Failed Association, its directors, officer, employees or agents with respect to the Trust Business shall not be assumed hereunder. (d) Obligation to Identify Other Businesses and Services. The ---------------------------------------------------- Assuming Institution shall use its best efforts to identify promptly all businesses and all contracts (other than those listed on Schedule F, if any) which provide for the rendering of services by the Failed Association. Within ninety (90) days of Association Closing the Assuming Institution shall notify the Receiver in writing of all such businesses and contracts the Assuming Institution has identified. Such notice shall briefly describe each such business and the principal terms of each such contract. [Note: Section 4.4 will not be included in limited branch transactions. In such cases, the Agreement will specify that Section 4.4 is omitted.] 4.4 Businesses Engaged in Through Certain Subsidiaries. The Receiver -------------------------------------------------- hereby grants to the Assuming Institution an exclusive option for the period set forth below to purchase all of the Receiver's right, title and interest in and to all (but not less than all) capital stock of any Subsidiary of the Failed Association listed on Schedule G, at the percentage of Market Value as of Association Closing set forth on Schedule G. The option period for each such Subsidiary shall be a period of thirty (30) days from Association Closing, unless the Assuming Institution shall have notified the Receiver in writing on or before such date that the Assuming Institution wishes to obtain an appraisal for such Subsidiary in accordance with Section 4.9, in which case such option period for such Subsidiary shall be extended and shall expire on the date thirty (30) days from the date of receipt of the required appraisal report for such Subsidiary but in any event not later than one hundred eighty (180) days from Association Closing. The Assuming Institution shall exercise such option by giving timely written notice to the Receiver within the applicable option period. If the Assuming Institution elects to exercise its option to purchase the capital stock of any such Subsidiary, it shall also purchase, at the Book Value Purchase Price, all Loans to such Subsidiary. The purchase price for any such capital stock and Loans, together with interest thereon at the Settlement Interest Rate from the day after Association Closing to the date of payment, less any monies received by the Receiver in respect of any such capital stock or any such Loan between Association Closing and the applicable Option Closing Date, shall be due and payable on the applicable Option Closing Date. 4.5 Contracts for Services to the Failed Association. ------------------------------------------------ (a) Option. The Receiver hereby grants to the Assuming Institution an ------ exclusive option for a period of ninety (90) days from Association Closing to accept an assignment from the Receiver of any and all right, title and interest of the Receiver in and to any contracts which provide for the rendering of services to the Failed Association, other than (i) contracts that are subject to the provisions of Article II, Article III, or Section 4.1 through Section 4.4 and (ii) contracts excluded under Section 4.5(b). 33 (b) Consulting, Management, Employment Agreements. The provisions of --------------------------------------------- Section 4.5(a) shall not apply to consulting, management, employment or other professional or personal service agreements between the Failed Association and any Person; provided, however, that the Assuming Institution shall have the -------- ------- exclusive option for a period of thirty (30) days from Association Closing to accept an assignment of any such consulting, management or other professional or personal service (but not employment) contracts. (c) Exercise of Option. The Assuming Institution shall exercise the ------------------ options granted under Section 4.5(a) and (b) by giving timely written notice to the Receiver within the applicable option period, provided, however, that the -------- ------- Assuming Institution shall be deemed to assume each contract listed on Schedule H unless the Assuming Institution notifies the Receiver in writing within the applicable option period that it does not intend to assume such contract; and provided, further, that notwithstanding anything to the contrary contained - -------- ------- herein, the Assuming Institution shall not assume any liability arising out of or related to any act or omission of the Failed Association or any Predecessor Thrift prior to Association Closing in violation of law or in breach of contractual covenants. (d) Operating Costs. The Assuming Institution, during any period it --------------- has the use or benefit of any contract for the rendering of services to the Failed Association, shall pay all operating costs with respect thereto and shall comply with all relevant terms thereof. Subject to the foregoing, all expenses associated with any contract assumed by the Assuming Institution pursuant to this Section 4.5 shall be prorated as of the Association Closing (and the Assuming Institution shall reimburse the Receiver for any such expenses that have been prepaid by the Failed Association). (e) Obligation to Identify Other Service Contracts. The Assuming ---------------------------------------------- Institution shall use its best efforts to identify promptly all contracts (other than those listed on Schedule H, if any) which provide for the rendering of services to the Failed Association. Within ninety (90) days of Association Closing the Assuming Institution shall notify the Receiver in writing of all such contracts the Assuming Institution has identified. Such notice shall briefly describe the principal terms of each such contract. 4.6 Informational Tax Reporting. The Assuming Institution shall perform --------------------------- all obligations of the Failed Association with respect to preparing, providing to pertinent recipients, and filing with the pertinent taxing authorities of Federal and state income tax informational reports (including, without limitation, obligations with respect to forms 1096, 1098, 1099 and W-2) (1) related to those assets and liabilities acquired and assumed, respectively, pursuant to the Agreement or any Related Agreement including, without limitation, assets acquired subject to putback rights and not repurchased by the Receiver prior to the end of the Assuming Institution's tax year and (2) related to all Deposit Accounts processed; provided; that for purposes of this Section -------- and Section 1.52 the term "Deposit Accounts Processed" shall mean all open deposit accounts (including all active, inactive and zero-balance accounts) as well as all closed deposit accounts for which there is an informational tax reporting requirement under 34 applicable Federal law; provided, however, that the Transition Personnel shall -------- ------- perform all such reporting obligations for a period of thirty (30) days from Association Closing, and the Assuming Institution assumes tax reporting obligations only for such informational reports due on dates which are more than thirty (30) days after Association Closing; and provided, further, that the -------- ------- Assuming Institution does not assume any liability arising out of the failure of the Failed Association or any Predecessor Thrift to perform such obligations with respect to reports due prior to the date thirty (30) days from Association Closing. 4.7 Insurance. The Assuming Institution shall obtain and maintain with --------- respect to each Owned Association Premises, Leased Association Premises, Leasehold Improvement, Fixture, Furniture and Equipment and Data Processing Equipment which it has an option to purchase, or for which it has an option to accept an assignment of a leasehold interest under the Agreement, insurance coverage effective for the period from and after Association Closing through the earlier of (i) the expiration of the applicable option period for each such asset under this Agreement, or (ii) the early termination of such option pursuant to Section 4.1(g), in such amounts, and with such coverages as are acceptable to the Receiver, including, without limitation, public liability, fire and extended coverage insurance. All such insurance shall name the Receiver as an additional insured. 4.8 Employee Benefit Plans. The Assuming Institution shall not assume any ---------------------- rights, duties, powers, responsibilities or obligations of the Failed Association under any of the Failed Association's employee benefit plans, including, without limitation, medical, insurance, vacation, pension, profit sharing or stock purchase plans, if any, unless the Receiver and the Assuming Institution otherwise agree in writing on or after Association Closing; provided, however, that during the Transaction Period, the Assuming Institution - -------- ------- shall provide such ministerial services with respect to any such employee benefit plan as the Receiver may direct, including, without limitation, such ministerial services as the Receiver may request in connection with the termination of any such plan. The Receiver shall reimburse the Assuming Institution for any such services in accordance with Section 9.8. 4.9 Appraisals and Certain Other Market Value Determinations. -------------------------------------------------------- (a) Obtaining Appraisals. -------------------- (i) If an appraisal of any asset or rental rate requiring an appraisal under the Agreement was performed within the one-year period immediately prior to Association Closing, or if any appraisal of any such asset or rental rate was in the process of being performed on Association Closing, the Receiver, in its sole discretion, may elect to provide the Assuming Institution with a copy of the report for such appraisal no later than thirty (30) days after Association Closing. (ii) If the Assuming Institution is not satisfied with any such report delivered pursuant to Section 4.9(a)(i), it shall so notify the Receiver within thirty (30) days from 35 the later of (A) the date of receipt by the Assuming Institution of such report, and (B) Association Closing. The Receiver and the Assuming Institution thereupon shall select a mutually satisfactory appraiser to produce a new appraisal report for such asset and the cost of such appraisal shall be borne by the Assuming Institution. (iii) If an appraisal is required for any asset under the Agreement but no appraisal report is delivered to the Assuming Institution pursuant to Section 4.9(a)(i), the Receiver and the Assuming Institution shall select a mutually satisfactory appraiser to produce an appraisal report for such asset and the cost of such appraisal shall be shared equally by the Receiver and the Assuming Institution. (b) Appraisal Procedures. Notwithstanding anything to the contrary, -------------------- each appraisal which is provided or produced under Section 4.9(a) shall take into account the economic effect on market value of the existence of any ground lease affecting the property appraised. In addition, all appraisals produced pursuant to Section 4.9(a)(ii) and (iii) shall be performed in accordance with the Corporation's Uniform Appraisal Instructions To Appraisers For RTC Real Estate Properties or the Corporation's Uniform Appraisal Instructions To Appraisers For RTC Personal Properties, as appropriate. In the case of Owned Association Premises, such appraisals shall be performed separately per premises. Notwithstanding anything to the contrary contained in the Agreement, the Assuming Institution shall be solely responsible for performing its own environmental due diligence, if any, in connection with any real property transferred under the Agreement, including, without limitation, obtaining any "Phase I" environmental report or similar environmental audit, and the cost of any such due diligence shall be borne solely by the Assuming Institution. The Receiver, in its sole discretion, may, but shall no be obligated to, provide to the Assuming Institution copies of any "Phase I" environmental reports or similar environmental audit reports in the possession of the Receiver that relate to real property which the Assuming Institution has an option to purchase under the Agreement. The Receiver does not warrant the accuracy of, and expressly disclaims responsibility for, any such report (including, without limitation, any such report prepared by employees or agents of the Receiver or the Corporation). (c) Certain Securities. Market Value of Investment Grade Securities ------------------ and Government-Backed Mortgage Securities shall be determined by the Receiver and any costs associated with such determination shall be borne by the Receiver. ARTICLE V DUTIES WITH RESPECT TO DEPOSITORS OF THE FAILED ASSOCIATION 5.1 Payment of Checks, Drafts and Orders. The Assuming Institution shall ------------------------------------ pay all properly drawn checks, drafts and withdrawal orders presented to it by mail, over its counters or through clearing by depositors of the Failed Association, whether drawn on the check, draft or 36 withdrawal forms provided by the Failed Association or by the Assuming Institution, to the extent that the Deposit balances o the credit of respective makers or drawers assumed by the Assuming Institution pursuant to Section 2.1 are sufficient to permit the payment thereof, and in all other respects shall discharge, in the usual course of conducting a banking or thrift business, the duties and obligations of the Failed Association with respect to the balances due and owing to the depositors of the Failed Association assumed by the Assuming Institution. Notwithstanding the foregoing, the Assuming Institution shall not be required to honor checks, drafts or withdrawal orders on the Failed Association's forms if such checks, drafts or orders are dated later than the date one hundred eighty (180) days after Association Closing. For any payment of ten thousand dollars ($10,000.00) or more in connection with the closing of an account following Association Closing, and to the extent the depositor's Deposit balance is sufficient to permit such payment, the Assuming Institution shall, at the request of the depositor, make such payment by wire transfer and shall not charge more than ten dollars ($10.00) per wire transfer for such service. 5.2 Deposits. The Assuming Institution shall pay interest on all Deposits -------- assumed by it pursuant to Section 2.1 in accordance with the terms of each written agreement between the Failed Association and the depositors of the Failed Association relating to each such Deposit, and shall honor all the other terms and conditions of such agreements (however, no early withdrawal penalty provision shall be enforced), through the later of (i) the date ten (10) days after the date of mailing by the Assuming Institution of the notice required by Section 5.3, or (ii) the date fourteen (14) days after Association Closing. Thereafter, until the depositor enters into a new deposit contract, the Assuming Institution shall pay interest on all: (i) savings deposits of the Failed Association, at a rate no less than the rate of interest currently paid by the Assuming Institution on its passbook savings account or statement savings account, and (ii) transaction deposits (including, without limitation, checking and N.O.W. accounts), at a rate no less than the then current rate paid by the Assuming Institution for similar types of transaction accounts. The Assuming Institution shall permit each depositor to withdraw all or any portion of such depositor's Deposit (including, without limitation, Deposits held by the depositor indirectly through a custodial or trust account transferred to the Assuming Institution pursuant to Section 4.2(a)(iii)), without penalty for early withdrawal, until such depositor enters into a new deposit contract with the Assuming Institution; provided, that if such Deposit has been pledged to secure -------- an obligation of the depositor to the Failed Association, any withdrawal thereof shall be subject to the terms of the agreement governing such pledge. For purposes of this Agreement, in no event will a depositor be deemed to have entered into a new deposit contract unless that depositor has signed a new deposit contract containing all material terms and conditions. 5.3 Notice to Depositors. The Assuming Institution shall give notice as -------------------- promptly as practicable after Association Closing, but in no event later than seven (7) days after Association Closing, to depositors of the Failed Association of its assumption of the Deposits of the Failed Association by each of the following methods: 37 (a) by posting at all Owned Association Premises and all Leased Association Premises subject to options granted under Section 4.1, and by advertising in a newspaper of general circulation in each county in which any such Owned Association Premises or Leased Association Premises is located, a notice which shall state that: (1) the Assuming Institution has assumed all of the Deposits or all of the Insured Deposits, as the case may be, of the Failed Association associated with such Owned Association Premises or Leased Association Premises, (2) each depositor has the right to withdraw the transferred Deposits, without paying any penalty to the Assuming Institution, until the depositor signs a new deposit agreement with the Assuming Institution, and (3) each depositor shall receive a letter from the Assuming Institution providing further details about the transferred Deposits. (b) by first class mail to each depositor at the last address shown on the Failed Association's records for such depositor a notice which shall state the following: (i) the interest rate the Assuming Institution will pay on the transferred Deposits commencing the later of (A) eleven (11) days after mailing of the notice, or (B) fifteen (15) days after Association Closing, if the depositor does not sign a new agreement with the Assuming Institution with respect to such deposit; (ii) that if there are sufficient funds available in the depositor's account, the Assuming Institution will wire transfer payments of ten thousand dollars ($10,000.00) or more for a fee of no more than ten dollars ($10.00) per wire transfer in connection with the closing of an account; and (iii) that the depositor has a right to withdraw the Deposit at any time without paying any penalty to the Assuming Institution until the depositor signs a new deposit contract with the Assuming Institution. In the event of a dispute with a depositor regarding the date of mailing, the date, for purposes of the Agreement, shall be considered to be the later of the date of the notice or the date of the postmark on the envelope containing the notice. The notice given by mail may include such other information as the Assuming Institution elects to include. The Assuming Institution shall include with each such notice a full- size copy of the letter to depositors from the Resolution Trust Corporation (which may be reproduced on both sides of a single page), a copy of which is attached as Exhibit D. The Assuming Institution shall submit its proposed form of notice to depositors to the Receiver's counsel for review, and shall not mail any such notice to any depositor without such counsel's prior approval. ARTICLE VI CONSIDERATION AND PAYMENTS [Note: Two alternative Sections 6.1 are outlined below. Alternative A will be used if, under the bid that is accepted, an initial payment is due to the Assuming Institution. Alternative B will be used if, under the bid that is accepted, an initial payment is due to the Receiver.] 38 [Alternative A: ------------- 6.1 Consideration. As consideration for the assets, putback rights and ------------- purchase options acquired by the Assuming Institution under the Agreement, and in order to provide to the Assuming Institution assets equal to the liabilities assumed under the Agreement and thereby induce the Assuming Institution to assume such liabilities, (a) the Assuming Institution shall assume the liabilities specified in Article II and certain other obligations, duties and liabilities as provided in Article IV and elsewhere in the Agreement, and (b) the Receiver shall pay to the Assuming Institution an amount equal to the sum of the following: (i) the aggregate absolute value as set forth in Section 2.1 of the liabilities assumed pursuant to Section 2.1; minus ----- (ii) the aggregate purchase price as set forth in Section 3.1 for the assets purchased pursuant to Section 3.1; minus ----- (iii) the aggregate purchase price as set forth in Section 4.2 for the businesses purchased pursuant to Section 4.2; minus ----- (iv) the Premium; together with interest on such sum at the Settlement Interest Rate from the day after Association Closing to the date of payment.] [Alternative B: ------------- 6.1 Consideration. As consideration for the assets, putback rights and ------------- purchase options acquired by the Assuming Institution under the Agreement, the Assuming Institution (a) shall assume the liabilities specified in Article II and certain other obligations, duties and liabilities as provided in Article IV and elsewhere in the Agreement, and (b) shall pay to the Receiver an amount equal to the sum of the following: (v) the Premium; plus ---- (vi) the aggregate purchase price as set forth in Section 3.1 for the assets purchased pursuant to Section 3.1; plus ---- (vii) the aggregate purchase price as set forth in Section 4.2 for the businesses purchased pursuant to Section 4.2; minus ----- (viii) the aggregate absolute value as set forth in Section 2.1 of the liabilities assumed pursuant to Section 2.1; 39 together with interest on such sum at the Settlement Interest Rate from the day after Association Closing to the date of payment.] 6.2 Additional Consideration for Assets Purchased or Put Back Pursuant to --------------------------------------------------------------------- Options. - ------- (a) As consideration for any assets transferred to the Assuming Institution pursuant to the exercise of purchase options granted under the Agreement, the Assuming Institution shall pay to the Receiver an amount equal to the aggregate purchase price as set forth in Article IV for such assets. (b) As consideration for any assets repurchased by the Receiver pursuant to the exercise of any putback or repurchase rights granted under the Agreement, the Receiver shall pay to the Assuming Institution an amount equal to the aggregate Repurchase Price for all such assets. 6.3 Payments. -------- (a) Initial Cash Payment. Subject to Section 3.2(a), the payment -------------------- required by Section 6.1(b) shall be made not later than the first Business Day after Association Closing. Such payment shall be based on the pro forma statement prepared by the Receiver and delivered to the Assuming Institution no later than the date of such payment, and shall be subject to adjustment as set forth in Section 3.2 and Article VII. (b) Option Payments. On each Option Closing Date, (i) the Assuming --------------- Institution shall pay to the Receiver an amount equal to the aggregate amount due to the Receiver for all assets which the Assuming Institution is purchasing on that date pursuant to the exercise of options granted under Article IV, and (ii) the Receiver shall pay to the Assuming Institution an amount equal to the aggregate Repurchase Price for all assets which the Receiver is repurchasing on that date pursuant to the exercise of putback or repurchase rights under Article III. Amounts due to either Party under this Section 6.3(b) (but not under Section 6.3(c) or Section 6.3(d)) shall be netted against one another and a single payment shall be made to the appropriate Party. (c) Section 3.2 and Article VII Adjustments; Rent. On each Interim --------------------------------------------- Adjustment Settlement Date and on the Final Pro Forma Adjustment Settlement Date, (i) the Assuming Institution shall pay to the Receiver an amount equal to the aggregate amount of any adjustments in favor of the Receiver under Section 3.2(a) and Article VII and the aggregate amount due to the Receiver under Section 9.2(b) and Section 9.2(c), and (ii) the Receiver shall pay to the Assuming Institution an amount equal to the aggregate amount of any adjustments in favor of the Assuming Institution under Section 3.2(a) and Article VII. Amounts due to either Party under this Section 6.3(c) (but not under Section 6.3(b) or Section 6.3(d)) shall be netted against one another and a single payment shall be made to the appropriate Party. 40 (d) Remittances and Reimbursements. On each Reimbursement Date (i) ------------------------------ the Assuming Institution shall pay to the Receiver an amount equal to the aggregate amount due to the Receiver under Section 3.4(b), Section 9.7(a) and Section 9.8, and (ii) the Receiver shall pay to the Assuming Institution an amount equal to the aggregate amount of any additional liabilities transferred to the Assuming Institution pursuant to Section 2.2 plus the aggregate amount ---- due to the Assuming Institution under Section __.8. 6.4 Manner of Payment. All payments due under the Agreement shall be in ----------------- lawful money of the United States of America in immediately available funds as each Party may specify to the other Party; provided, that in the event the -------- Receiver is obligated to make any payment under the Agreement in the amount of twenty-five thousand dollars ($25,000.00) or less, such payment may be made by check. 6.5 Computation of Interest. Unless otherwise specified herein, all ----------------------- computations of interest in respect of payments required under the Agreement shall be made on the basis of a year of 365 days for the actual number of days (including the first day and excluding the last day) occurring in the period for which such interest is payable; provided, however, that any computation of a -------- ------- Mortgage Purchase Price shall be made on the basis of a 360-day year. ARTICLE VII ADJUSTMENTS 7.1 In General. It is understood that the pro forma statement referred to ---------- in Section 6.3 and the Books and Records of the Failed Association may not be complete on Association Closing due to lack of complete information concerning the Failed Association's operations and that certain assets and liabilities of the type specified in Section 3.1 or Section 2.1, respectively, may not have been included therein because they are carried in the Failed Association's suspense accounts as of Association Closing, and for other reasons. As soon as practicable after Association Closing, subject to Section 3.2, and in accordance with the best information then available, the Receiver shall provide to the Assuming Institution a revised pro forma statement, in such format and reflecting such adjustments as the Receiver in its sole discretion deems necessary or appropriate. Such revised pro forma statement shall take into account, among other things and to the extent possible, assets and liabilities of the type specified in Section 3.1 or Section 2.1, respectively, which on Association Closing were carried in the Failed Association's suspense accounts, as well as accruals as of Association Closing for all income related to assets and operations of the Failed Association purchased or acquired by the Assuming Institution under the Agreement, whether or not such accruals were reflected on the Books and Records of the Failed Association in the normal course of its operations. In the event any omissions or errors are discovered in preparing the revised pro forma statement or in completing the transfers and assumptions contemplated hereby, the Parties shall make any appropriate adjustments therefore in accordance with Section 2.1 and Section 3.1, with all such adjustments to be made on the Interim Adjustment Settlement Date next succeeding the discovery thereof and, in all 41 events, on or before the Final Pro Forma Adjustment Settlement Date. Any such adjustment shall carry interest at the Settlement Interest Rate calculated from the day after Association Closing to the date of payment of such adjustment. 7.2 Additional Assets or Liabilities. [a] If the Receiver discovers prior -------------------------------- to the Final Pro Forma Adjustment Settlement Date that (i) any liability of the Failed Association exists which is of the type that would have been included in the liabilities assumed under Article II had the existence of such liability been known as of Association Closing, or (ii) any asset of the Failed Association exists which is of the type that would have been included in the assets transferred under Section 3.1 had the existence of such asset been known as of Association Closing, the Receiver, in its discretion, may require that such asset or liability be transferred to or assumed by the Assuming Institution in a manner consistent with the intent of the Agreement. On the Final Pro Forma Adjustment Settlement Date and, as appropriate, on each Interim Adjustment Settlement Date, the Receiver and the Assuming Institution shall take any actions necessary to effect any such transfer of assets to or assumption of liabilities by the Assuming Institution. [Note: The following paragraph will be included if the Agreement transfers only Insured Deposits and secured public money Deposits (Section 2.1, Alternative B). If the Agreement transfers all Deposits, the following paragraph will be omitted.] [(b) If the Corporation determines prior to the date that is eighteen (18) months from Association Closing that any other Deposit of the Failed Association (or any portion of any such Deposit) is an Insured Deposit, the Corporation, in its discretion, may require that such Insured Deposit be assumed by the Assuming Institution in a manner consistent with the intent of the Agreement. Upon receipt of notice from the Corporation, the Assuming Institution shall promptly take any actions necessary to effect the assumption by it of such Insured Deposit. On the date any such additional Deposit is assumed by the Assuming Institution, the Corporation shall pay to the Assuming Institution an amount equal to the sum of the Book Value of such Deposit plus all accrued but unpaid interest thereon as of Association Closing. The Corporation in its discretion may elect to pay to the Assuming Institution interest on such sum at the Settlement Interest Rate from the day after Association Closing to the date of such payment; provided that if it receives -------- any such interest, the Assuming Institution shall pay to the depositor on each Deposit assumed by it pursuant to this section interest for such period at a rate (not to exceed the Settlement Interest Rate) prescribed by the Corporation in its discretion.] ARTICLE VII RECORDS 8.1 Assignment of Records to Assuming Institution. --------------------------------------------- (a) The Receiver hereby assigns and transfers to the Assuming Institution all 42 of the Receiver's right, title and interest in and to (i) all Records pertaining to the Failed Association's deposit accounts, including both closed and open accounts, and all Records pertaining to all other liabilities assumed by the Assuming Institution pursuant to the Agreement, including, without limitation, all signature cards, orders, contracts between the Failed Association and its depositors, passbooks of depositors held by the Failed Association, deposit slips, canceled checks and withdrawal orders representing charges to accounts of depositors; (ii) all Records pertaining to assets transferred to the Assuming Institution pursuant to the Agreement, including, without limitation, Records of deposit balances carried with other banks, bankers or trust companies; securities, certificates, and title documents to personalty; Loan and collateral Records and credit files and all other instruments and documents evidencing or pertaining to Loans (including, without limitation, notes, Loan agreements and other Loan documentation); and instruments or Records of title pertaining to real estate or real estate mortgages (including, without limitation, deeds, mortgages, abstracts and surveys); and (iii) all Records pertaining to businesses transferred to the Assuming Institution pursuant to the Agreement, including, without limitation, signature cards, agreements and Records pertaining to the Safe Deposit Box business. (b) The Parties recognize that certain Records pertain both to assets and liabilities transferred to the Assuming Institution as well as assets and liabilities retained by the Receiver or transferred to a third party. If the Receiver in its sole discretion determines that it is feasible to separate such Records in a manner which would permit each party to take possession of Records which pertain only to the assets and liabilities transferred to such party, the Receiver shall separate such Records and shall assign such Records to the appropriate party. Each party shall pay its Share of the Receiver's out-of- pocket costs and expenses of separating such Records. If the Receiver in its sole discretion determines that it is not feasible to separate such Records, the Receiver may assign and transfer all such Records to the Assuming Institution, by a single blanket assignment or otherwise, and the Assuming Institution shall preserve and maintain such Records in accordance with Section 8.3 and shall provide access to and copies of such Records upon request in accordance with Section 8.4; provided, however, that each party shall pay its Share of the cost -------- ------- (which shall not exceed reasonable rates generally charged for such services in the relevant locality) of storing such records. As used in this Section, "Share" shall mean (i) for each party other than the Receiver, the fraction obtained by dividing (A) the total number of accounts associated with the Deposits transferred to such party on the date of Association Closing, by (B) the total number of accounts associated with the Deposits on the Books and Records of the Failed Association as of Association Closing, and (ii) for the Receiver, that fraction which when added to the sum of all of the other parties' Shares equals one. Notwithstanding anything to the contrary contained herein, the Receiver shall be solely responsible for the storage of, or arranging for the storage of, Records which pertain only to the assets and liabilities retained by, put back to or repurchased by the Receiver. 8.2 Custody of Assigned Records. --------------------------- (a) The Receiver shall deliver to the Assuming Institution, at a location or 43 locations designated by the Receiver, all Records assigned and transferred to the Assuming Institution (i) under Section 8.1(a) as soon as practicable on or after Association Closing, and (ii) pursuant to Section 8.1(b) as soon as practicable after making any assignment. (b) During the put period, if any, for each asset transferred to the Assuming Institution under the Agreement, the Assuming Institution (i) shall not permit any Person access to the original Records pertaining to any such asset, other than designated employees or agents of the Assuming Institution acceptable to the Receiver who shall be permitted access only to the extent necessary to service such asset or to complete the Assuming Institution's due diligence review of such asset, and (ii) shall not permit any Person to remove from Owned Association Premises or Leased Association Premises (as the case may be) original Records pertaining to any such asset without the Receiver's prior written consent. (c) From time to time the Receiver may deliver to the Assuming Institution a list of one or more officers, directors, employees, accountants or other Persons formerly employed or retained by or associated with the Failed Association that the Receiver has designated as restricted persons. The Assuming Institution shall take such precautions as the Receiver may reasonably request to ensure that none of the persons identified on such list are permitted access to any original Books or Records of the Failed Association that may be relevant to potential actions or claims by the Receiver at any time without the prior written consent of the Receiver. 8.3 Preservation of Records. The Assuming Institution and the Receiver ----------------------- each shall preserve and maintain for their joint benefit all Records of which each has or obtains custody. The Assuming Institution shall preserve and maintain, and shall require any successor or transferee of any such Records to preserve and maintain, each such Record for a period equal to the longest of the following: (i) six (6) years from Association Closing, (ii) ten (10) years from the date of the underlying transaction or the events documented by such Record, or (iii) for such period as may be required by applicable law; provided, that -------- the Assuming Institution shall preserve and maintain any and all such Records as may be specified by the Receiver for such longer period as the Receiver may reasonably request. 8.4 Access to Records; Copies. ------------------------- (a) The Receiver and the Assuming Institution each shall permit the other access to all Records of which it has custody, and to use, inspect, make extracts from or request copies of any such Records in the manner and to the extent provided in Section 11.8 except as provided in this Section 8.4. The Assuming Institution shall allow the Receiver the temporary possession, custody and use of original Records in the Assuming Institution's possession for any lawful purpose and upon reasonable terms and conditions. (b) The Receiver shall provide to the Assuming Institution, to the extent permitted by applicable law and contracts, duplicate copies of Records (or in its discretion, 44 original Records) pertaining to the operation of the Failed Association's electronic data processing operations. (c) The Receiver shall have the right to duplicate, in its discretion, any Record in the form of microfilm or microfiche pertaining to deposit account relationships; provided, that in the event that the Failed Association -------- maintained one or more duplicate copies of such microfilm or microfiche Records, the Assuming Institution hereby assigns and transfers to the Receiver one such duplicate copy of each such Record without cost to the Receiver and shall deliver to the Receiver all Records assigned and transferred to the Receiver under this Section 8.4(c) as soon as practicable on or after Association Closing. (d) Except as provided in Section 8.4(c), the party requesting a copy of any Record shall bear the cost of retrieval and duplication thereof; provided, that such costs shall not exceed reasonable rates generally charged - -------- for such services in the relevant locality. A copy of each Record requested shall be provided as soon as practicable by the Party having custody thereof. ARTICLE IX TRANSITION PERIOD 9.1 In General. Subject to the terms and conditions of this Article IX, ---------- the Assuming Institution and the Receiver each shall cooperate with one another and shall use reasonable efforts to ensure that during the Transition Period all of the assets and liabilities of the Failed Association (the "Assets" and "Liabilities"), including, without limitation, (i) the assets and liabilities purchased by, transferred to or assumed by the Assuming Institution and (ii) the assets and liabilities of the Failed Association that are not purchased by, transferred to or assumed by the Assuming Institution or are put back to or repurchased by the Receiver, are serviced in accordance with prudent banking standards and practices. As set forth below, the Assuming Institution and the Receiver each shall pay its Pro Rata Share of certain out-of-pocket costs and expenses of providing such servicing. 9.2 Premises, Furniture and Equipment. --------------------------------- (a) Premises, Furniture and Equipment Used by the Receiver. ------------------------------------------------------ (i) The Receiver shall be permitted to occupy and use such office space (including vault space), Furniture and Equipment and utilities (including telephone and facsimile service) at the Owned Association Premises and the Leased Association Premises occupied by the Assuming Institution as the Receiver may reasonably require for the Receiver's use in the discharge of its functions during the Transition Period. In the event that the Receiver determines that such space is inadequate or unsuitable, the Receiver may relocate to other quarters at its own expense. 45 (ii) The Receiver, in its sole discretion, may place temporary structures on any Owned Association Premises or Leased Association Premises occupied by the Assuming Institution adjacent to or near existing structures to the extent such structures do not materially interfere with the operations of the Assuming Institution or violate applicable laws, regulations, codes or ordinances or the terms of the insurance policies covering such premises. (iii) If the Assuming Institution exercises its option to purchase any Owned Association Premises or owned Furniture and Equipment or to accept an assignment of any lease for any Leased Association Premises or leased Furniture and Equipment, the Receiver, from and after the Option Closing Date for such purchase or assignment, shall pay to the Assuming institution (a) rent at Market Value (for any such Owned Association Premises and owned Furniture and Equipment) or the rate specified in the applicable lease agreement (for any such Leased Association Premises and leased Furniture and Equipment) for the portion of the premises and Furniture and Equipment occupied or used by the Receiver and the Dedicated Personnel; and (b) all operating costs with respect thereto accruing during such period, including without limitation, taxes, fees, charges, utilities, maintenance costs, insurance and assessments. (b) Premises, Furniture and Equipment Used by the Assuming ------------------------------------------------------ Institution. During the period in which it occupies or has the use or benefit of any Owned Association Premises, Leased Association Premises or Furniture and Equipment the Assuming Institution shall pay to the Receiver (i) rent at Market Value (for any such Owned Association Premises and owned Furniture and Equipment) or the rate specified in the applicable lease agreement (for any such Leased Association Premises and leased Furniture and Equipment); and (ii) all operating costs with respect thereto accruing during such period, including without limitation, taxes, fees, charges, utilities, maintenance costs, insurance and assessments; provided, however, that rent and operating costs for -------- ------- any such premises shall be prorated by the Receiver in its sole discretion based on the proportion of such premises occupied or used by the Assuming Institution. During such period, the Assuming Institution shall comply with all relevant terms of all applicable lease agreements. The Assuming Institution promptly (and in any event within thirty (30) days from the expiration of the applicable option period) shall vacate and relinquish all Leased Association Premises, Owned Association Premises, Fixtures, Furniture and Equipment, Leasehold Improvements, and Data Processing Equipment with respect to which it does not elect to exercise its option under Section 4.1. If the Assuming Institution occupies any Leased Association Premises or Owned Association Premises for more than fifteen (15) days, it shall provide to the Receiver at least thirty (30) days' prior written notice of its intention to vacate such premises. (c) Premises, Furniture and Equipment Used by the Transition -------------------------------------------------------- Personnel. During the period in which the Transition Personnel occupy or have the use or benefit of any Owned Association Premises, Leased Association Premises or Furniture and Equipment, the Assuming Institution shall pay to the Receiver its Pro Rata Share of (i) rent at Market Value (for any such Owned Association Premises and owned Furniture and Equipment) or the rate specified in the applicable lease agreement (for any such Leased Association Premises and leased 46 Furniture and Equipment); and (ii) all operating costs with respect thereto accruing during such period, including without limitation, taxes, fees, charges, utilities, maintenance costs, insurance and assessments; provided, however, that -------- ------- rent and operating costs for any such premises shall be prorated by the Receiver in its sole discretion based on the proportion of such premises occupied or used by the Transition Personnel. (d) Payments. Amounts due to the Receiver under Section 9.2(b) and -------- (c) shall be due and payable on each Interim Adjustment Settlement Date and on the Final Pro Forma Adjustment Settlement Date; provided, however, that (i) any -------- ------- such rent for Owned Association Premises and owned Furniture and Equipment shall be paid at an estimated rate specified by the Receiver, and shall be adjusted to Market Value upon receipt of the required appraisal report, and (ii) any such operating costs shall bear interest at the Settlement Interest Rate from the date such amounts are paid by the Receiver until the date the Receiver is reimbursed by the Assuming Institution. The Receiver shall be responsible for making any requisite payments to third parties related to Owned Association Premises, Leased Association Premises, or Furniture and Equipment; provided, -------- however, that at the written direction of the Receiver, the Assuming Institution - ------- shall make such payments to such third parties. The Receiver shall reimburse the Assuming Institution for any such payments made on behalf of the Receiver (other than the Assuming Institution's share of such expenses) on each Interim Adjustment Settlement Date and on the Final Pro Forma Adjustment Settlement Date. 9.3 Dedicated Personnel and Transition Personnel. -------------------------------------------- (a) The Assuming Institution shall hire directly or contract through a temporary employment agency acceptable to the Receiver and dedicate to the Receiver such employees ("Dedicated Personnel") (who may be either former employees of the Failed Association or other personnel) acceptable to the Receiver as the Receiver may require in the discharge of its functions during the Transition Period (including, without limitation, the servicing of all or any portion of the Assets and Liabilities not purchased or assumed by the Assuming Institution). All Dedicated Personnel shall report exclusively to and be managed exclusively by the Receiver. (b) It is recognized and understood that in order to provide a smooth transition and to efficiently service the Assets and Liabilities during the Transition Period, it will be necessary for certain former employees of the Failed Association or other personnel to perform services for both the Assuming Institution and the Receiver. Accordingly, in addition to the Dedicated Personnel, the Assuming Institution shall hire directly or contract through a temporary employment agency acceptable to the Receiver such employees ("Transition Personnel") (who may be either former employees of the Failed Association or other personnel) as are mutually acceptable to the Assuming Institution and the Receiver and as are required by both the Assuming Institution and the Receiver to service certain of their respective Assets and Liabilities during the Transition Period. All Transition Personnel shall report to and be managed by the Assuming Institution; provided, however, that the -------- ------- Transition Personnel shall not take any of the 47 following actions with respect to any Asset without the prior written consent of the Person who owns such Asset at the time such action is initiated: any advance of funds or credit, and any commitment to advance funds or credit; any modification, extension, forgiveness, renewal, or other material change in the terms and conditions of any agreement governing such Asset, including, without limitation, any release of collateral; any exercise of any default remedy (including, without limitation, the initiation of any foreclosure or enforcement proceedings); the retention of any outside professional assistance (including, without limitation, the advice of outside legal counsel or accountants); or any material expenditure to preserve the value of such Asset. (c) All Dedicated Personnel and all Transition Personnel shall be employed for a period not to exceed the Transition Period on an "at will" basis such that they may be terminated at any time, with or without cause. Except as expressly set forth herein, all Dedicated Personnel and all Transition Personnel shall be paid the same base salary or wage such personnel were paid by the Failed Association immediately prior to Association Closing (or, if such personnel were not employed by the Failed Association, the same base salary or wage personnel providing the same or similar services were paid by the Failed Association), and shall be provided (i) the same or substantially the same health care benefits provided by the Failed Association immediately prior to Association Closing, or (ii) the same health care benefits provided by the Assuming Institution to its full-time employees with similar responsibilities whose health care benefit rights are fully vested, provided, that the Dedicated -------- Personnel and the Transition Personnel shall be deemed to meet all of the Assuming Institution's minimum service and other eligibility requirements for receiving such benefits. In no event shall such personnel be treated as temporary, occasional, new, or probationary for purposes of complying with the requirements of this subsection regarding health care benefits. Notwithstanding the foregoing, (i) the Receiver in its sole discretion may direct the Assuming Institution to increase or decrease the compensation or benefits provided to any of the Dedicated Personnel, (ii) the Receiver and the Assuming Institution by mutual written agreement may elect to increase or decrease the compensation or benefits provided to any of the Transition Personnel, and (iii) the Assuming Institution may elect to provide additional compensation or benefits to any of the Dedicated Personnel or the Transition Personnel, provided that any such additional compensation or benefits paid without the prior written consent of the Receiver shall not be a reimbursable expense under Section 9.8. (d) The Assuming Institution shall notify all Dedicated Personnel and all Transition Personnel on Association Closing (or, if later, on the date such Dedicated Personnel and Transition Personnel are hired or contracted by the Assuming Institution), by written notice posted at all Owned Association Premises and all Leased Association Premises and by individual written notice to each employee, and shall obtain written acknowledgment of receipt of such notice from each such employee in form and substance satisfactory to the Receiver, that such employees are being employed on an "at will" basis for a specific project or undertaking and that their employment is limited to the duration of such project or undertaking, and shall take any and all other steps necessary or appropriate to ensure the availability of the "temporary employment" 48 exemption to the Worker Adjustment and Retraining Notification Act (the "WARN Act"), 29 U.S.C. Section 2103, 20 C.F.R. Section 639.5(c). If such written acknowledgment is not received from any individual, the Assuming Institution shall not be obligated to retain such individual as Dedicated Personnel or Transition Personnel. (e) The Receiver shall reimburse the Assuming Institution for out-of- pocket expenses directly attributable to the Dedicated Personnel incurred in accordance with this Section 9.3 as provided in Section 9.8. The Assuming Institution and the Receiver each shall pay its Pro Rata Share of the out-of- pocket expenses directly attributable to the Transition Personnel incurred in accordance with this Section 9.3 as provided in Section 9.8. In addition, for all Dedicated Personnel and all Transition Personnel hired directly by the Assuming Institution (but not Dedicated Personnel or Transition Personnel hired indirectly through a temporary employment agency), the Receiver shall pay to the Assuming Institution an administrative fee equal to twelve percent (12%) of the sum of the following amounts paid in accordance with Section 9.3(c) and Section 9.8(e): (1) the total base salary (exclusive of overtime, bonuses, incentives and severance pay) paid to such Dedicated Personnel, (2) the total reimbursable out-of-pocket costs and expenses of providing health care benefits (but not any other benefits) to such Dedicated Personnel, (3) the Receiver's Pro Rata Share of the total base salary (exclusive of overtime, bonuses, incentives and severance pay) paid to Transition Personnel, and (4) the Receiver's Pro Rata Share of the total reimbursable out-of-pocket costs and expenses of providing health care benefits (but not any other benefits) to such Transition Personnel. (f) The Assuming Institution shall make good faith efforts to ensure that all Assets and Liabilities (including, without limitation, Assets retained by, put back to or repurchased by the Receiver) which are serviced by the Transition Personnel are serviced in a manner substantially consistent with the practices and procedures employed by the Failed Association immediately prior to Association Closing or the practices and procedures employed by the Assuming Institution with respect to its own similar assets; provided, that the Receiver -------- hereby waives and agrees not to assert any claim it may now have or hereafter acquire against the Assuming Institution arising out of or relating to such servicing (other than any claim arising out of or relating to the Assuming Institution's failure to make good faith efforts to ensure that such servicing is conducted in accordance with such practices and procedures). (g) The Assuming Institution hereby waives and agrees not to assert any claim it may now have or hereafter acquire against the Receiver or the Corporation arising out of or relating to the servicing on or after Association Closing of the Assets and Liabilities purchased or assumed by the Assuming Institution, including, without limitation, any claim arising out of or relating to any act or omission on or after Association Closing of the Transition Personnel. 9.4 Other Personnel; Disclaimer. --------------------------- 49 (a) It is recognized and understood that certain employees of the Assuming Institution who are neither Dedicated Personnel nor Transition Personnel ("Assuming Institution Employees") may from time to time perform services on behalf of the Receiver (including, without limitation, the services contemplated by Section 9.6). The Assuming Institution shall be reimbursed for all out-of-pocket costs associated therewith in accordance with Section 9.8. (b) The Receiver or the Corporation, in their sole discretion, may hire directly or through a temporary employment agency any former employees of the Failed Association or any other personnel. (c) The Assuming Institution does not hereby assume any liability of the Failed Association to the Failed Association's former employees, including, without limitation, any liability of the Failed Association to any Dedicated Personnel, any Transition Personnel, or any other former employee of the Failed Association that may be hired by the Assuming Institution. 9.5 Data Processing Services. ------------------------ (a) If immediately prior to Association Closing the Failed Association operated its own data processing system, certain Transition Personnel shall continue to operate such system to provide data processing services for the Assets and Liabilities for such period as either Party may require (not to exceed the Transition Period). During the period in which it receives data processing services pursuant to this Section, each party shall comply with all of the terms and conditions of each agreement entered into by the Failed Association with respect to owned or leased Data Processing Equipment and shall pay its Pro Rata Share of all out-of-pocket costs and expenses of providing such services in accordance with Section 9.8. (b) If immediately prior to Association Closing the Failed Association was a party to any contract which provided for the rendering of data processing services to the Failed Association, the Receiver shall undertake to cause the service provider under each such contract to continue servicing the Assets and Liabilities for such period as either Party may require (not to exceed the Transition Period) on the terms and conditions set forth in such service contract; provided, however, that the Receiver shall not be liable to the -------- ------- Assuming Institution for the failure, if any, of any such service provider to provide such services. During the period in which it receives data processing services pursuant to this Section 9.5(b), each party shall comply with the terms and conditions of the relevant data processing service contracts as if it were a party thereto and shall pay its Pro Rata Share of the costs of such data processing service contracts. (c) Nothing contained in this Section 9.5 shall prohibit the Assuming Institution from converting its data processing activities from the Failed Association's data processing system to the Assuming Institution's data processing system; provided, however, that the Assuming Institution shall -------- ------- coordinate any such conversion with the Receiver. The Assuming Institution shall not be responsible for increases in the Receiver's cost due to elimination of 50 Assuming Institution's activities; provided that the Assuming Institution -------- shall continue to cooperate in providing data processing services to the Receiver in accordance with this Article IX; and provided, further, that the -------- ------- Assuming Institution shall pay any and all special programming costs and other incremental data processing costs associated with such conversion. (d) Subject to Section 9.8, the Receiver shall be responsible for making any requisite payments to third parties in connection with the provision of data processing services under this Section 9.5 (including, without limitation, rental payments under any lease agreements for leased Data Processing Equipment); provided, however, that at the written direction of the -------- ------- Receiver, the Assuming Institution shall make such payments to such third parties. 9.6 Additional Services. During the Transition Period the Assuming ------------------- Institution shall provide to the Receiver such additional services as the Receiver may reasonably request form time to time, including, without limitation, accounting services, payroll services, trust services and employee benefit services. The Receiver shall reimburse the Assuming Institution for any such additional services as set forth in Section 9.8 9.7 Remittances and Accounts Payable. -------------------------------- (a) On each Reimbursement Date, the Assuming Institution shall remit to the Receiver all payments (if any) collected by the Assuming Institution on Assets which are not purchased by the Assuming Institution (including, without limitation, Assets purchased by the Assuming Institution and subsequently put back to or repurchased by the Receiver), together with interest thereon from the date of receipt by the Assuming Institution until paid to the Receiver at the Settlement Interest Rate. After the final Reimbursement Date, the Assuming Institution shall remit all such payments (if any) collected by it to the Receiver on a monthly basis. (b) All such remittances shall be accompanied by a report of the collection activity. Such report shall be in such form and detail and shall include such supporting documentation as the Receiver in its sole discretion shall specify. (c) During the Transition Period, the Assuming Institution shall promptly notify the Receiver of any claims accruing prior to Association Closing for rent, taxes, fees, charges, utilities, maintenance costs, insurance, assessments and other costs with respect to Leased Association Premises, Owned Association Premises, Leasehold Improvements, Fixtures, Furniture and Equipment, owned or leased Data Processing Equipment, and any and all other accounts payable of the Failed Association. If the Assuming Institution fails to promptly notify the Receiver of any such claims of which the Assuming Institution had or should have had knowledge, the Assuming Institution, upon the written request of the Receiver, shall indemnify the Receiver against any late charges, penalties or forfeitures or other incremental costs resulting from the Assuming Institution's failure to provide such notice. 51 9.8 Payments. -------- (a) On each Reimbursement Date, the Receiver shall reimburse the Assuming Institution for any and all of the following costs and expenses incurred by the Assuming Institution: (i) all out-of-pocket costs and expenses directly attributable to the Dedicated Personnel, including salaries, employment-related taxes, and out-of-pocket costs and expenses for health care benefits; (ii) the Receiver's Pro Rata Share of all out-of-pocket costs and expenses directly attributable to the Transition Personnel, including salaries, employment-related taxes, and out-of-pocket costs and expenses for health care benefits; (iii) the Receiver's Pro Rata Share of all out-of-pocket costs and expenses directly attributable to the provision of data processing services pursuant to Section 9.5; (iv) all out-of-pocket costs and expenses directly attributable to providing services to the Receiver pursuant to Section 4.8, Section 9.4(a) and Section 9.6; and (v) such other out-of-pocket costs and expenses as may be incurred by the Assuming Institution at the Receiver's written direction. (b) On the final Reimbursement Date, the Receiver shall pay to the Assuming Institution the administrative fee attributable to the Dedicated Personnel and the Transition Personnel, as provided in Section 9.3(e). (c) On each Reimbursement Date, the Assuming Institution shall reimburse the Receiver for the Assuming Institution's Pro Rata Share of all out- of-pocket costs and expenses incurred by the Receiver in connection with this Article IX, including, without limitation, out-of-pocket costs and expenses directly attributable to the provision of data processing services pursuant to Section 9.5. (d) All reimbursable out-of-pocket costs and expenses incurred in connection with this Article IX (but not the administrative fee attributable to the Dedicated Personnel and Transition Personnel as provided in Section 9.3(e)) shall bear interest at the Settlement Interest Rate from the date such expenses were paid to the date of reimbursement. It shall be a condition to the reimbursement of any item under the Agreement that such cost or expense shall have been incurred in accordance with this Article IX. 52 (e) Notwithstanding anything to the contrary contained herein, except as expressly set forth in Section 9.2 and Section 9.3(e), the following shall not be reimbursable expenses: (i) any allocation of general overhead (including, without limitation, rent) or administrative expenses, (ii) any costs or expenses arising out of or relating to WARN Act requirements, or (iii) any costs or expenses arising out of or relating to continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), 26 U.S.C. Section 4980B, or for that portion of any other costs and expenses for which employee contributions may be collected. Out-of-pocket costs and expenses for health care benefits provided through insurance, an HMO or similar provider shall include and be limited to the premiums paid for benefit coverage; out-of- pocket costs and expenses for self-funded benefits (including benefits provided through a trust or association established under Section 501(c)(9) of the Internal Revenue Code of 1986 or other employer-sponsored trust) shall include and be limited to a premium equivalent amount that is reasonable in relation to premiums generally charged in the relevant area by third party providers for comparable coverage. (f) At least ten (10) Business Days prior to each Reimbursement Date, the Assuming Institution shall submit to the Receiver a reimbursement request (in such form and detail and with such additional supporting documentation as the Receiver in its sole discretion shall request) for all items for which reimbursement is sought under this Section 9.8. If the Receiver and the Assuming Institution disagree as to the allowance of any item of expense, the disputed item shall be reviewed by an independent certified public accountant satisfactory to the Receiver and the Assuming Institution to ascertain whether the item is reimbursable. The Receiver and the Assuming Institution shall select a mutually satisfactory certified public accountant and the cost of such work shall be shared equally by the Receiver and the Assuming Institution. The opinion of such certified public accountant with respect to the amount of reimbursable expenses shall be conclusive and binding on the Parties. ARTICLE X CONDITIONS PRECEDENT 10. Conditions Precedent to the Obligations of Both Parties. The ------------------------------------------------------- respective obligations of each of the Assuming Institution and the Receiver under the Agreement are subject to the satisfaction of each of the conditions precedent set forth in this Section 10.1. (a) Association Closing and Appointment of Receiver. The Receiver and ----------------------------------------------- the Assuming Institution shall have received evidence satisfactory to each of them that (i) the Failed Association has been closed in accordance with applicable law, including, without limitation, Section 5(d) of the HOLA, 12 U.S.C. Section 1464(d), and (ii) the Receiver has been tendered appointment as such pursuant to Section 5(d) (2) of the HOLA. 53 (b) Regulatory Approvals. The Receiver and the Assuming Institution -------------------- shall have received evidence satisfactory to each of them that (i) the Assuming Institution and its Holding Company (if any) each have received any and all authorizations, consents, approvals, licenses, charters and exemptions by any governmental authority or regulatory or administrative body required for the execution, delivery and performance of the Agreement and each Related Agreement to which each is a party and the consummation of the transactions contemplated by the Agreement or any such Related Agreement, and (ii) no other action by, or notice to or registration or filing with any such authority or body is required for the consummation of the transactions contemplated by the Agreement or any such Related Agreement. 10.2 Conditions Precedent to the Obligations of the Assuming Institution. ------------------------------------------------------------------- The obligations of the Assuming Institution under the Agreement are subject to the satisfaction of each of the further conditions precedent set forth in this Section 10.2, any one or more of which may be waived, in whole or in part, by the Assuming Institution. (a) Compliance. The Receiver shall have complied in all material ---------- respects with each of its covenants and agreements contained in the Agreement, if any, which are required to be performed or complied with by it on or prior to Association Closing. (b) Indemnity by Agreement. The Corporation shall have executed and ---------------------- delivered to the Assuming Institution the Indemnity Agreement. 10.3 Conditions Precedent to the Obligations of the Receiver. The ------------------------------------------------------- obligations of the Receiver under the Agreement are subject to the satisfaction of each of the further conditions precedent set forth in this Section 10.3, any one or more of which may be waived, in whole or in part, by the Receiver. (a) Compliance. The Assuming Institution shall have complied in all ---------- material respects with each of its covenants and agreements contained in the Agreement, if any, which are required to be performed or complied with by it on or prior to Association Closing (b) Accuracy of Representations. Each of the representations and --------------------------- warranties of the Assuming Institution contained in Article XI shall be true and correct in all material respects at and as of Association Closing as if made at and as of Association Closing. (c) Officer's Certificate. The Receiver shall have received a --------------------- certificate, dated the date of Association Closing, of the chief executive officer of the Assuming Institution certifying as to the matters specified in Sections 10.3(a) and 10.3(b), which shall constitute a representation of the Assuming Institution with respect thereto. The certificate shall be in substantially the form of Exhibit F. 54 (d) Related Agreements. The Assuming Institution and its Holding ------------------ Company (if any) each shall have executed and delivered to the Receiver all of the Related Agreements to which each is a party. (e) Legal Opinion. The Receiver shall have received an opinion from ------------- counsel for the Assuming Institution, in form and substance satisfactory to counsel for the Receiver and dated the date of Association Closing, confirming the legal conclusions contained in subsections (a) of Section 11.1 through 11.5 below; provided, however, that such counsel for Assuming Institution may give -------- ------- the opinion required by Section 11.3(a)(ii) and (iii) and Section 11.5(a) to the best of such counsel's knowledge after reasonable inquiry of the officers. In rendering such opinion, such counsel may rely, as to matters of fact and to the extent specified in such opinion, upon certificates of officers of the Assuming Institution and certificates of public officials. The opinion of counsel shall be in substantially the form of Exhibit G. [Note: The following section 10.3(f) shall only be included in the Agreement if the transaction involves the use of the Oakar provisions and a transfer of assets or liabilities from a de novo institution (the Assuming Institution) to an ultimate acquiror by any means other than a statutory merger] (f) Oakar Transactions. In the event the Assuming Institution is a de ------------------ novo institution organized in order to effect an "Oakar" transaction pursuant to Section 5(d)(3) of the FDI Act, as amended, 12 U.S.C. section 1815(d)(3), pursuant to which the assets and liabilities of the Failed Association acquired by the Assuming Institution under the Agreement are transferred to a bank Affiliate of the Assuming Institution (the "Ultimate Acquiror") in accordance with a merger, consolidation, purchase and assumption or similar agreement between the Assuming Institution and the Ultimate Acquiror (the "Oakar Agreement'), the Receiver shall have received , in addition to the conditions precedent otherwise specified in this Section 10.3, (i) an indemnity from the Assuming Institution's Holding Company regarding liabilities not assumed by the Ultimate Acquiror, in form and substance satisfactory to the Receiver, (ii) an opinion of counsel for the Holding Company, in form and substance satisfactory to the Receiver and dated the date of Association Closing, confirming the legal conclusions contained in subsections (b) of Sections 11.1 through 11.5, and (iii) an opinion of counsel for the Ultimate Acquiror, in form and substance satisfactory to the Receiver and dated the date of Association Closing, confirming the legal conclusions contained in subsections (a) of Sections 11.1 through 11.5, in each case as if such Sections related to the Ultimate Acquiror and the Oakar Agreement; provided, however, that such counsel for the Ultimate Acquiror and the Holding Company may give the opinions required by Sections 11.3(a)(ii) and (iii) and (b)(ii) and (iii) and Sections 11.5(a) and (b), respectively, to the best of such counsel's knowledge after reasonable inquiry of the officers, as provided in Section 10.3(e) above. The opinions of counsel shall be in substantially in the form of Exhibit G. 55 ARTICLE XI REPRESENTATIONS, WARRANTIES AND COVENANTS OF ASSUMING INSTITUTION The Assuming Institution represents and warrants to, and covenants and agreed with, the Receiver as follows: 11.1 Existence, Etc. -------------- (a) The Assuming Institution is a financial institution duly organized, validly existing and in good standing under the laws of the jurisdiction in which the Assuming Institution is chartered, and has full power and authority (i) to own and operate its properties and conduct its business as presently conducted by it in all material respects, and (ii) to execute and deliver the Agreement and the Related Agreements and perform its obligations under the Agreement and the Related Agreements; (b) Each Holding Company (if any) is a corporation duly organized, validly existing and in good standing under the laws of its respective state of incorporation and has all requisite corporate power and authority (i) to own and operate its respective properties and to conduct its business as presently conducted by it in all material respects, and (ii) to execute and deliver and perform its obligations under each Related Agreement, if any. 11.2 Authorization. ------------- (a) The execution and delivery by the Assuming Institution of the Agreement and the Related Agreements, the performance by the Assuming Institution of its obligations thereunder, and the consummation of the transactions contemplated thereby, have been duly authorized by all necessary corporate action on the part of the Assuming Institution. The Agreement and the Related Agreements have been duly executed and delivered by the Assuming Institution and constitute a legal, valid and binding obligation of the Assuming Institution; (b) The execution and delivery by the Holding Company of each Related Agreement, if any, the performance by the Holding Company of its obligations thereunder, and the consummation of the transactions contemplated thereby, have been duly authorized by all necessary corporate action on the part of the Holding Company. The Related Agreements have been duly executed and delivered by the Holding Company and constitute a legal, valid and binding obligation of the Holding Company; 11.3 No Conflict. ----------- (a) The execution, delivery and performance by the Assuming Institution of the Agreement and the Related Agreements and the consummation of the transactions contemplated thereby will not (i) violate or conflict with any provision of the charter or bylaws 56 of the Assuming Institution, or any law, rule, or regulation affecting the Assuming Institution, the violation of which could have a material adverse effect on the operations or financial condition of the Assuming Institution, (ii) violate or conflict with any order, judgment, award, administrative interpretation, injunction, writ, decree or the like affecting the Assuming Institution or by which the Assuming Institution is bound, the violation of which could have a material adverse effect on the operations or financial condition of the Assuming Institution, or (iii) result in a breach of or constitute a default under any indenture or other material agreement to which the Assuming Institution is a party or by which the Assuming Institution or any material portion of its properties is bound; (b) The execution, delivery and performance by the Holding Company of the Related Agreements and the consummation of the transactions contemplated thereby will not (i) violate or conflict with any provision of the charter or bylaws of the Holding Company, or any law, rule, regulation affecting the Holding Company, the violation of which could have a material adverse effect on the operations or financial condition of the Holding Company, (ii) violate or conflict with any order, judgment, award, administrative interpretation, injunction, writ, decree or the like affecting the Holding Company or by which the Holding Company is bound, the violation of which could have a material adverse effect on the operations or financial condition of the Holding Company, or (iii) result in a breach of or constitute a default under any indenture or other material agreement to which the Holding Company is a party or by which the Holding Company or any material portion of its properties is bound; 11.4 Regulatory Approvals. -------------------- (a) No authorization, consent approval, license, exemption or other action by, or notice to, or filing with any governmental authority or administrative or regulatory body is required for either the execution, delivery or performance of the Agreement and each Related Agreement by the Assuming Institution or the consummation of the transactions contemplated thereby except such as shall have been made or obtained prior to Association Closing. On or prior to Association Closing, the Assuming Institution shall have satisfied any conditions contained in any such authorizations, consents, approvals, licenses or the like which are required to be satisfied on or prior to Association Closing. (b) No authorization, consent, approval, license, exemption or other action by, or notice to, or filing with any governmental authority or administrative or regulatory body is required for either the execution, delivery or performance of each Related Agreement by the Holding Company or the consummation of the transactions contemplated thereby, except such as shall have been made or obtained prior to Association Closing. On or prior to Association Closing, the Assuming Institution shall have satisfied any conditions contained in any such authorizations, consents, approvals, licenses or the like which are required to be satisfied on or prior to Association Closing. 11.5 Absence of Litigation. --------------------- 57 (a) Except as previously disclosed in writing to the RTC attorney responsible for the transaction contemplated by the Agreement, there are no pending or threatened actions, suits or proceedings before any court, governmental agency, arbitrator or instrumentality affecting the Assuming Institution which purport to affect the legality, validity or enforceability of the Agreement or any Related Agreement. (b) Except as previously disclosed in writing to the RTC attorney responsible for the transaction contemplated by the Agreement, there are no pending or threatened actions, suits or proceedings before any court, governmental agency, arbitrator or instrumentality affecting the Holding Company which purport to affect the legality, validity or enforceability of any Related Agreement. [Note: If Section 4.2(a)(v) is omitted, the following bracketed contemplated references to Servicing Contracts also will be omitted.] 11.6 Certain Other Approvals. The Assuming Institution or its agent is a ----------------------- lender or mortgagee which is approved by each institutional insurer or guarantor that has insured or guaranteed any Loan or other Loan Interest transferred to the Assuming Institution pursuant to the Agreement, including, without limitation and if applicable, the United States Department of Housing and Urban Development[, and is a servicer which is approved by each entity for whom the Failed Association provides Servicing pursuant to any Servicing Contract, including, without limitation, FNMA, FHLMC and GNMA]. The Assuming Institution recognizes that if it or its agent is not so approved, any such insurance, guarantee [or Servicing Contract] may be terminated, and neither the Assuming Institution nor its agent shall have recourse to the Receiver or the Corporation for any such termination. The Assuming Institution hereby assumes, and shall pay, perform and discharge (or shall cause its agent to pay, perform and discharge), all of the Failed Association's obligations under any such contract of insurance or guarantee from and after Association Closing. 11.7 Books and Records; Accounting Method. The Assuming Institution will, ------------------------------------- and will cause its Subsidiaries to, at all times keep proper Books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to the assets, liabilities and business of the Failed Association acquired or assumed pursuant to the Agreement. All such Books and records will be kept in accordance with generally accepted accounting principles, or regulatory accounting principles, whichever is applicable, consistently applied for the periods involved and in a manner such that information necessary to determine compliance with any requirement of the Agreement will be readily obtainable, and in a manner such that the purposes of the Agreement may be effectively accomplished. The obligations in this Section 11.7 shall run for such period as either Party or the Corporation may seek to assert any claim under the Agreement or any Related Agreement and, in any event, for the longer of (i) six (6) years from Association Closing or (ii) that period required by applicable law. 11.8 Access to Properties and Books. The Assuming Institution shall, and ------------------------------ shall cause its Subsidiaries to, permit any authorized representatives of the Receiver to visit and inspect any 58 of the properties purchased by it pursuant to the Agreement; to examine the Books of accounts and records of it and its Subsidiaries related to the assets, liabilities and businesses purchased or assumed by the Assuming Institution under the Agreement; to make copies and extracts therefrom at the expense of the Receiver; to discuss such accounts and business with officers, trustees, directors, employees and independent public accountants of it and its Subsidiaries, subject to the rights of any lessee under an existing lease. The Assuming Institution shall, and shall cause its Subsidiaries to, authorize the foregoing at such reasonable times, intervals and locations as may be requested by any authorized representative of the Receiver, without other limitation or qualification. The obligations in this Section 11.8 shall run for such period as either Party or the Corporation may seek to assert any claim under the Agreement or any Related Agreement. 11.9 Reporting Systems. The Assuming Institution shall establish and ----------------- maintain Books and records which segregate and provide separately for the assets, liabilities and business of the Failed Association acquired or assumed, as the case may be, pursuant to the Agreement for such period as the Assuming Institution may hold such assets prior to put back pursuant to the terms hereof. Such records shall be established and maintained in a manner which will permit the Assuming Institution to prepare, and the Assuming Institution, upon the request of the Receiver, shall promptly prepare and deliver to the Receiver such periodic balance sheets, statements of income and such other statements and schedules related to such assets, liabilities or business as the Receiver may request. Any such statements and schedules shall separately present the financial condition and results of operations with respect to such assets, liabilities and business in accordance with generally accepted accounting principles. 11.10 Other Information and Instruments. The Assuming institution shall --------------------------------- promptly provide to the Receiver such other information, including financial statements and computations, relating to the performance of the provisions of the Agreement or otherwise relating to its business and affairs, as the Receiver may from time to time request in writing. 11.11 Satisfaction of Conditions. The Assuming Institution shall use its -------------------------- best efforts to cause the conditions set forth in Article X to be satisfied as soon as practicable on or after the date of the Agreement and in any event no later than Association Closing. Without limiting the generality of the foregoing, and to the extent it has not previously done so, the Assuming Institution shall promptly prepare and file all applications and other notices required in connection with, and shall use its best efforts to obtain promptly, all authorizations, consents, approvals, licenses, charters, exemptions or other action by any governmental authority or administrative agency required to be obtained by the Assuming Institution or any Holding Company in connection with the performance of the Agreement and the Related Agreements by the Assuming Institution, the performance of each Related Agreement (if any) to which it is a party by each Holding Company (if any), and the consummation of the transactions contemplated by the Agreement and the Related Agreements. 59 ARTICLE XII MISCELLANEOUS 12.1 Entire Agreement. The Agreement and the Related Agreements embody the ---------------- entire agreement of the Parties in relation to the subject matter therein and supersede all prior understandings or agreements, oral or written, between the Parties. 12.2 Headings. The headings and subheadings of the Table of Contents, -------- Articles and Sections contained in these Standard Terms and in the Agreement, except the terms identified for definition in Article I and elsewhere in the Agreement, are inserted for convenience only and shall not affect the meaning or interpretation of the Agreement or any provision thereof. 12.3 Counterparts. The Agreement may be executed in any number of ------------ counterparts and by the duly authorized representative of a different Party on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. 12.4 GOVERNING LAW. THE AGREEMENT AND THE RIGHTS AND OBLIGATIONS UNDER THE ------------- AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE FEDERAL LAW OF THE UNITED STATES OF AMERICA, AND IN THE ABSENCE OF CONTROLLING FEDERAL LAW, IN ACCORDANCE WITH THE LAWS OF THE STATE SPECIFIED IN THE AGREEMENT. 12.5 Successors. Subject to the limitations of Section 12.6, all terms and ---------- conditions of the Agreement shall be binding on the successors and assigns of the Receiver and the Assuming Institution. Except as otherwise specifically provided in the Agreement, nothing expressed or referred to in the Agreement is intended or shall be construed to give any Person other than the Receiver and the Assuming Institution any legal or equitable right, remedy or claim under or in respect of the Agreement or any provisions contained therein, it being the intention of the Parties that the Agreement, the obligations and statements of responsibilities thereunder, and all other conditions and provisions thereof are for the sole and exclusive benefit of the Receiver and the Assuming Institution and for the benefit of no other Person. 12.6 Modification; Assignment. No amendment or other modification, ------------------------ rescission, release, annulment or assignment of any part of the Agreement shall be effective except pursuant to a written agreement subscribed by the duly authorized representatives of the Parties. 12.7 Notice. Any notice, request, demand, consent, approval or other ------ communication to either Party shall be effective when received and shall be given in writing, and delivered in person against receipt therefor, or sent by certified mail, postage prepaid or courier service to its address set forth in the Agreement or at such other address or number as it shall hereafter furnish 60 in writing to the other. All such notices and other communications shall be deemed given on the date received by the addressee. 12.8 Waiver. The Receiver and the Assuming Institution may waive their ------ respective rights, powers or privileges under the Agreement; provided, that such -------- waiver shall be in writing; and provided further, that no failure or delay on -------- ------- the part of the Receiver or the Assuming Institution to exercise any right, power or privilege under the Agreement will operate as a waiver thereof, nor will any single or partial exercise of any right, power or privilege under the Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege by the Receiver or the Assuming Institution under the terms of the Agreement, nor will any such waiver operate or be construed as a future waiver of such right, power or privilege under the Agreement. 12.9 Costs, Fees and Expenses. Each Party shall pay all costs, fees and ------------------------ expenses which it has incurred in connection with the preparation and execution of the Agreement, including without limitation any fees and disbursements to its accountants and counsel; provided, that the Assuming Institution shall pay all -------- fees, costs and expenses (other than attorneys' fees incurred by the Receiver) to effectuate the transfer to it of the assets, liabilities and obligations under the Agreement. 12.10 Severability. If any provision of the Agreement is invalid or ------------ unenforceable then, to the extent possible, all of the remaining provisions of the Agreement shall remain in full force and effect and shall be binding upon the Parties. 12.11 Effectiveness. The Agreement shall become effective upon the ------------- satisfaction or waiver of the conditions set forth in Article X; provided, -------- however, that the provisions of Section 11.11 shall be effective upon the - ------- execution of the Agreement. 61 EX-10.39.1 7 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.39.1 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to Employment Agreement is entered into as of March 25, 1998 by and between United PanAm Financial Corp, formerly known as Pan American Group, Inc. ("PAGI"), Pan American Bank, FSB (the "Bank"; the Bank and PAGI are individually and collectively referred to as "Employer") and Lawrence J. Grill ("Employee") and is intended to amend that certain Employment Agreement between Employer and Employee dated as of October 1, 1997 (the "Employment Agreement"). The parties agree as follows: 1. The provisions to Schedule 4(c) to the Employment Agreement respecting stock option plan benefits is hereby amended in its entirety to provide as follows: "Concurrently with the initial public offering of PAGI, PAGI shall grant to Employee a ten-year option to purchase 60,000 shares of the Common Stock of PAGI at a price per share equal to 100% of the initial public offering price of such shares. Such Option shall vest in four equal annual installments commencing on the first anniversary of the date of grant. The other terms and conditions of such option shall be as provided in a standard form of Stock Option Agreement under the 1997 Employee Stock Incentive Plan of PAGI. " 2. All other terms of the Employment Agreement will remain in full force and effect without further amendment. 1 Executed effective as of March 25, 1998. UNITED PANAM FINANCIAL CORP. By: /s/ Guillermo Bron ----------------------------- Its: Chairman ----------------------------- EMPLOYEE /s/ Lawrence J. Grill ----------------------------- Lawrence J. Grill 2 EX-10.40.1 8 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.40.1 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to Employment Agreement is entered into as of March 25, 1998 by and between United PanAm Financial Corp, formerly known as Pan American Group, Inc. ("PAGI"), Pan American Bank, FSB (the "Bank"; the Bank and PAGI are individually and collectively referred to as "Employer") and Guillermo Bron ("Employee") and is intended to amend that certain Employment Agreement between Employer and Employee dated as of October 1, 1997 (the "Employment Agreement"). The parties agree as follows: 1. The provisions to Schedule 4(c) to the Employment Agreement respecting stock option plan benefits is hereby amended in its entirety to provide as follows: "Concurrently with the initial public offering of PAGI, PAGI shall grant to Employee a ten-year option to purchase 60,000 shares of the Common Stock of PAGI at a price per share equal to 110% of the initial public offering price of such shares. Such Option shall vest in four equal annual installments commencing on the first anniversary of the date of grant. The other terms and conditions of such option shall be as provided in a standard form of Stock Option Agreement under the 1997 Employee Stock Incentive Plan of PAGI." 2. All other terms of the Employment Agreement will remain in full force and effect without further amendment. 1 Executed effective as of March 25, 1998. UNITED PANAM FINANCIAL CORP. By: /s/ Lawrence J. Grill ----------------------------- Its: President ----------------------------- EMPLOYEE By: /s/ Guillermo Bron ----------------------------- Guillermo Bron 2 EX-23.1 9 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 The Board of Directors United PanAm Financial Corp.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. Our report refers to a change in the Company's method of accounting for transfers and servicing of financial assets in 1997. /s/ KPMG Peat Marwick LLP San Francisco, California April 22, 1998 -----END PRIVACY-ENHANCED MESSAGE-----